UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DCD.C. 20549
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
(AMENDMENT No. 2)
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrantþ
Filed by a Party other than the Registrant¨
Check the appropriate box:
Filed by a Party other than the Registrant ☐ | |||||
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☒ | Preliminary Proxy Statement | ||||
☐ | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) | ||||
☐ | Definitive Proxy Statement | ||||
☐ | Definitive Additional Materials | ||||
☐ | Soliciting Material under §240.14a-12 |
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Ecoark Holdings, Inc. | |||||||
Payment of Filing Fee (Check the appropriate box): |
MAGNOLIA SOLAR CORPORATION
(Name of Registrant as Specified in its Charter)
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No fee required. |
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number or the Form or Schedule and the date of its filing. |
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PRELIMINARY PROXY STATEMENT, SUBJECT TO COMPLETION, DATED MARCH __, 2016
MAGNOLIA SOLAR CORPORATION
54 Cummings Park, Suite 316
Woburn, MA, 01801
Dear Magnolia Solar Stockholders:
You are cordially invited to attend a Special
5899 Preston Road #505
Frisco, Texas 75034
(479) 259-2977
www.zestlabs.com
2019 PROXY STATEMENT AND
NOTICE OF ANNUAL MEETING
February 18, 2020 | 10:00 A.M. (Central Time) |
www.virtualshareholdermeeting.com/ZEST |
Virtual Annual Meeting of stockholders of Magnolia Solar Corporation, a Nevada corporation, which is referred to herein as “Magnolia Solar,” “MSC,” the “Company,” “we,” “us” or “our,” to be held at 9 a.m., local time,Stockholders
Online Meeting Only – No Physical Meeting Location
NOTICE OF VIRTUAL ANNUAL MEETING OF STOCKHOLDERS
To Be Held on March [*], 2016, at the corporate offices of MSC, located at 54 Cummings Park, Suite 316, Woburn, MA, 01801.February 18, 2020
On January 29, 2016, we entered into an Agreement and PlanNOTICE IS HEREBY GIVEN that the Annual Meeting of MergerStockholders (the “Merger Agreement”“Annual Meeting”) withof Ecoark Holdings, Inc., a Delaware corporation that we refer to as Ecoark. Pursuant to the Merger Agreement, Ecoark will merge with and into a subsidiary of the Company created for sole purpose of effectuating this Merger (the “Merger Sub”“Company”). Ecoark will be a completely virtual meeting held on February 18, 2020 at 10:00 a.m. (Central Time) for the surviving entity (sometimes referred to as the “Surviving Corporation”). As a result of the Merger, the separate corporate existence of the Merger Sub shall cease. We refer to this transaction as the Merger. Upon the closing of the Merger Agreement, without limiting the generality of the foregoing,following purposes, all of the property, rights, privileges, immunities, powers, and franchises of the Merger Sub and Ecoark shall vestwhich are discussed in greater detail in the Surviving Corporation, and all debts, liabilities, and duties of the Merger Sub and Ecoark shall become the debts, liabilities, and duties of the Surviving Corporation.
The completion of the Merger is subject to a number of conditions, including proposals to amend our articles of incorporation contained in thisaccompanying proxy statement. We are sending you this proxy statement to invite you to attend a Special Meeting of MSC stockholders being held to vote on these proposals and to ask you to vote at the Special Meeting in favor of the proposals.
The proposals that must be approved in order for the Merger to be consummated are the following:statement:
1. | To |
2. | To approve, on an |
3. | To select in a non-binding advisory vote the frequency of future advisory votes to approve |
4. | To |
5. | To approve a proposal to amend the |
We cannot complete the Merger unless the MSC stockholders approve the above proposals (collectively, the “Proposals”) which, with the exception of Proposal 5, we refer to as the Charter Proposals. We are seeking approval of the Proposals at the Special Meeting of stockholders of MSC to be held on March [*], 2016.Your vote is very important, regardless of the number of shares you own. Whether or not you expect to attend the MSC Special Meeting in person, please submit your voting instructions as promptly as possible by signing200,000,000; and, returning all proxy cards that you receive in the postage-paid envelope provided, so that your shares may be represented and voted at the MSC Special Meeting. A failure to vote your shares is the equivalent of a vote against the Charter Proposals and consequently the Merger.
Under Nevada law, if the Proposals are approved, holders of shares of MSC common stock will not have the right to seek appraisal of the fair value of their shares.
Revocation of Proxies or Voting Instructions
You have the power to revoke your proxy at any time before your proxy is voted at the Special Meeting. You can revoke your proxy or voting instructions in one of four ways:
The Annual Meeting will be a completely “virtual meeting” of stockholders. You are invited to virtually attend the Annual Meeting to vote on the proposals described in this proxy statement. However, you do not need to virtually attend the meeting to vote your shares. Instead, you may simply complete, sign and return the enclosed proxy card if you received paper copies of the proxy materials, or follow the instructions below to submit your proxy over the Internet.
BY ORDER OF THE BOARD OF DIRECTORS, | |
Randy May | |
Frisco, Texas | Chairman of |
January [*], 2020 |
The MSC board of directors determined that the Proposals and related matters are advisable and in the best interests of MSC and its stockholders, and the MSC board of directors recommends that the MSC stockholders vote “FOR” each of the Proposals to be submitted to the MSC stockholders at the MSC Special Meeting.PROXY SUMMARY
MoreThis summary highlights certain information about MSC,contained elsewhere in the Proposalsaccompanying proxy statement, but does not contain all of the information you should consider before voting your shares. For more complete information regarding the proposals to be voted upon at the virtual Annual Meeting of Stockholders and our fiscal year 2019 performance, please review the Merger is contained in this proxy statement. We encourage you to read this entire proxy statement carefully.
We thank you for your continued support of MSC and look forward to the successful Merger.
Dr. Ashok K. Sood
Chief Executive Officer and President
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the Proposals or the Merger, passed upon the merits or fairness of the Proposals or the Merger, or determined if this proxy statement is accurate or complete. Any representation to the contrary is a criminal offense.
This proxy statement is dated March [*], 2016, and is first being mailed to MSC stockholders on or about March [*], 2016.
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON MARCH [*], 2016.
Our Proxy Statement,our Annual Report on Form 10-K, for the fiscal year ended DecemberMarch 31, 2015, for2019. Unless the year ended December 31, 2015 are enclosed withcontext indicates otherwise, we use the terms “Ecoark” and “our” in this mailing and are also available at http://www.magnoliasolar.com
summary to refer to Ecoark Holdings, Inc.
PRELIMINARY PROXY STATEMENT, SUBJECT TO COMPLETION, DATED MARCH __, 2016
MAGNOLIA SOLAR CORPORATION
54 Cummings Park, Suite 316
Woburn, MA, 01801
NOTICE OF SPECIAL MEETING OF STOCKHOLDER
TO BE HELD ON MARCH [*], 2016
NOTICE IS HEREBY GIVEN that the SpecialTime of Virtual Annual Meeting of shareholders of Magnolia Solar Corporation, a Nevada corporation, which is often referred to herein as MSC, will be held at 9 a.m., local time, on March [*], 2016 at the corporate offices of MSC, located at 54 Cummings Park, Suite 316, Woburn, MA, 01801, to consider and vote upon the following proposals:
Date: | |
Time: | 10:00 a.m. (Central Time) |
Location: | We will hold a virtual annual meeting of |
Record Date: |
Voting Matters
Proposals | Required Approval | Board of Directors Recommendation | Page Reference | |
1. | Election of directors | Plurality of Votes Present | FOR each nominee | [9] |
2. | Advisory vote to approve executive compensation | Majority of Votes Cast | FOR | [20] |
3. | Majority of Votes Cast | EVERY THREE YEARS | [21] | |
4. | Ratification of auditors | Majority of Votes Cast | FOR | [22] |
5. | Amendment of the articles of incorporation to |
FOR |
Proposals 1 through 4 are at times referred to herein as the Charter Proposals, and all proposals are at times referred to as the Proposals.Director Nominees (see page 9)
These matters are described more fully inThe following table contains information about the accompanying proxy statement, which MSC shareholders are urgedfive candidates who have been nominated for election to read thoroughly. The MSCthe Board of Directors of Ecoark. Each nominee is currently a director of Ecoark.
Director | Principal | Financial | Committee Memberships | ||||
Name | Age | Since | Occupation | Expert | Audit | Compensation | Nominating |
Randy S. May | 55 | 2016* | Chairman of the Board of Ecoark | — | — | — | — |
John P. Cahill | 64 | 2016 | Chief of Staff and Special Counsel to the Archbishop of New York | — | ![]() | ![]() | ![]() |
Peter A. Mehring | 57 | 2017 | President, CEO and President of Zest Labs, Inc. and Director of Ecoark | — | — | — | — |
Gary M. Metzger | 67 | 2016* | Product Developer/Manager of Ravago Americas; Lead Director of Ecoark | — | ![]() | ![]() | ![]() |
Steven K. Nelson | 61 | 2017 | Lecturer for the Department of Accounting at University of Central Arkansas | ![]() | ![]() | ![]() | ![]() |
Member
Chairperson
Financial Expert
* Messrs. May and Metzger served on the board of directors determined thatof Ecoark, Inc. from 2011 and 2013, respectively, until it effected a reverse acquisition of Ecoark Holdings, Inc. (“Ecoark” or “the Company”, formerly known as Magnolia Solar Corporation) on March 24, 2016. Messrs. May and Metzger joined the Charter Proposals and related matters are advisable and in the best interests of MSC and its stockholders, and the MSC board of directors recommends that the MSC stockholders vote “FOR” each of the Charter Proposals to be submitted to the MSC stockholders at the MSC Special Meeting.Board effective on April 11, 2016.
All MSC shareholders are cordially invited to attend this Special Meeting with proper identification and, if applicable, acceptable proof of ownership, although only holders of record of MSC common stock at the close of business on February [10], 2016 (the “Record Date”), will be entitled to receive notice of, and to vote at, the MSC Special Meeting, or any adjournment or postponement thereof. On the Record Date, we anticipate that there were issued and outstanding and entitled to vote 49,004,912 shares of common stock, each of which is entitled to vote one vote on each Proposal at the MSC Special Meeting.
A quorum is necessary to hold a valid Special Meeting. A quorum will be present at the Special Meeting if the holders of a majority of the outstanding shares of our common stock entitled to vote at the Special Meeting are present, in person or by proxy. If a quorum is not present at the Special Meeting, the Company expects the presiding officer to adjourn the Special Meeting in order to solicit additional proxies. Abstentions will be counted as present for purposes of determining whether a quorum is present.5899 Preston Road #505
Frisco, Texas 75034
(479) 259-2977
www.zestlabs.com
A list of shareholders entitled to receive notice of and vote at the MSC Special Meeting will be available in MSC’s offices located at 54 Cummings Park, Suite 316, Woburn, MA, 01801, during ordinary business hours for the ten-day period preceding the date of the MSC Special Meeting. A shareholder list will also be available at the MSC Special Meeting.
Approval of the Charter Proposals requires the affirmative vote of holders of a majority of the outstanding shares of MSC common stock, hereinafter referred to as the MSC Shareholder Approval.
In connection with MSC’s solicitation of proxies for the Special Meeting, MSC began mailing the accompanying proxy statement and proxy card on or about March [*], 2016.Whether or not you expect to attend the MSC Special Meeting in person, please submit your voting instructions as promptly as possible by signing and returning all proxy cards that you receive in the postage-paid envelope provided, so that your shares may be represented and voted at the MSC Special Meeting. This will not prevent you from voting in person, but it will help to secure a quorum and avoid added solicitation costs. Any holder of MSC common stock who is present at the Special Meeting may vote in person instead of by proxy, thereby canceling any previous proxy. In any event, a proxy may be revoked in writing at any time before its exercise at the MSC Special Meeting in the manner described in the accompanying proxy statement.
BY ORDER OF THE BOARD OF DIRECTORS,
Dr. Ashok K. Sood
Chief Executive Officer and President
Magnolia Solar Corporation
March [*], 2016
YOUR VOTE IS VERY IMPORTANT. PLEASE SUBMIT YOUR VOTING INSTRUCTIONS USING ONE OF THE METHODS ABOVE TO ENSURE THAT YOUR VOTE WILL BE COUNTED, REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE MEETING. YOUR PROXY MAY BE REVOKED AT ANY TIME BEFORE THE VOTE AT THE MSC SPECIAL MEETING BY FOLLOWING THE PROCEDURES OUTLINED IN THE ACCOMPANYING PROXY STATEMENT. YOU CAN FIND INSTRUCTIONS FOR VOTING ON THE ENCLOSED PROXY CARD.
INFORMATION ABOUT ATTENDING THE MSC SPECIAL MEETING
Only shareholders of record on the record date of February [10], 2016 are entitled to notice of and to attend or vote at the MSC Special Meeting. If you plan to attend the MSC Special Meeting in person, please bring the following:
Street name means your shares are held of record by brokers, banks or other institutions.
Acceptable Proof of Ownership is either (a) a letter from your broker stating that you beneficially owned MSC stock on the record date or (b) an account statement showing that you beneficially owned MSC stock on the record date.
PRELIMINARY PROXY STATEMENT SUBJECT TO COMPLETION, DATED MARCH __, 2016
MAGNOLIA SOLAR CORPORATION
54 Cummings Park, Suite 316
Woburn, MA, 01801
PROXY STATEMENT
FOR A SPECIAL MEETING OF STOCKHOLDERS
This proxy statement (this “Proxy Statement”) is being furnished to shareholdersholders of common stock, $0.001 par value per share, of Ecoark Holdings, Inc. (“Ecoark,” “the Company,” “we,” “our,” and “us”) beginning on January [*], 2019 in connection with the solicitation of proxies by the Board of Directors of Magnolia Solar Corporation (“MSC”, the “Company”, “we”, “our”, or “us”) in connection with a special meeting of shareholders of the Company (the “Board of Directors” or the “Board”) to be used at the 2019 Annual Meeting of Stockholders (the “Annual Meeting”) to be held on March [*], 2016February 18, 2020 at 9 a.m. (local time)10:00 A.M. (Central Time) and at any postponement or adjournment thereof. The Annual Meeting will be a completely “virtual meeting” of stockholders. You are invited to virtually attend the Company’s corporate offices, 54 Cummings Park, Suite 316, Woburn, Massachusetts, 01801 (the “Special Meeting”).
Additional copies ofAnnual Meeting to vote on the proposals described in this proxy statement, a notice of meeting, form of proxy, and directionsstatement. However, you do not need to be able tovirtually attend the meeting to vote your shares. Instead, you may simply complete, sign and return the enclosed proxy card if you received paper copies of the proxy materials, or follow the instructions below to submit your proxy over the Internet.
Our Board is asking you to vote your shares by completing, signing and returning the accompanying proxy card. If you virtually attend the Annual Meeting online, you may vote at the Annual Meeting even if you have previously returned a proxy card. Please note, however, that if your shares are held of record by a broker, bank or other nominee and you wish to vote at the Annual Meeting, you must obtain a proxy issued in person,your name from that record holder as described in more detail below.
Please read this Proxy Statement carefully then vote your shares promptly by telephone, by Internet or by signing, dating and returning your proxy card.
ABOUT THE ANNUAL MEETING OF STOCKHOLDERS
What is the purpose of the Annual Meeting?
The following matters will be presented for stockholder consideration and voting at the Annual Meeting:
● | the election of directors; |
● | an advisory vote on the compensation of our named executive officers; |
● | an advisory vote on the frequency of future advisory votes to approve the compensation of our named executive officers; |
● | the ratification of RBSM, LLP as our independent registered public accounting firm for the year ending March 31, 2020; |
● | the ratification of the amendment of the articles of incorporation of the Company to increase the number of authorized shares of common stock; and |
● | such other business as may properly come before the meeting or any adjournment thereof. |
Who is entitled to vote?
Only our stockholders of record at the close of business on the record date for the meeting, January 10, 2020, are entitled to vote at the Annual Meeting. As of January 10, 2020, we had [69,146,161] shares of common stock issued and outstanding.
Can I access the proxy materials and annual report electronically?
Yes. This Proxy Statement and our Annual Report on Form 10-K, for the year ended DecemberMarch 31, 2015, may be obtained from the Company's Secretary, 54 Cummings Park, Suite 316, Woburn, Massachusetts, 01801.2019, are available online at www.zestlabs.com.
SOLICITATION AND REVOCABILITY OF PROXIESHow can I attend the Annual Meeting?
The enclosed proxy forStockholders may virtually attend the SpecialAnnual Meeting is being solicited by the directors of the Company. If you choose to vote, please mark, date and sign the proxy card, and then return it in the enclosed envelope (no postage is necessary if mailed within the United States). Any person giving a proxy may revoke it at any time prior to the exercise thereof by filing with the Secretary of the Company a written revocation or duly executed proxy bearing a later date. The proxy may also be revoked by a shareholder attending the Special Meeting, withdrawing the proxy and voting in person.
The expense of preparing, printing and mailing the form of proxy and the material used in the solicitation thereofonline. While all stockholders will be borne bypermitted to virtually attend the Company. In addition to solicitation by mail, proxies may be solicited by the directors, officersAnnual Meeting online, only stockholders of record and regular employeesbeneficial owners as of the Company (who will receive no additional compensation therefor) by means of personal interview, telephone or facsimile. It is anticipated that banks, brokerage houses and other institutions, custodians, nominees, fiduciaries or other record holders will be requested to forward the soliciting material to persons for whom they hold shares and to seek authority for the execution of proxies; in such cases, the Company will reimburse such holders for their charges and expenses.
VOTING SECURITIES
The close of business on February [10], 2016 has been fixed as the record date, for determinationJanuary 10, 2020, may vote and ask questions during the Annual Meeting. Stockholders must return a proxy by one of the shareholders entitled to notice of, and to vote at, the Special Meeting. On that date we anticipate there were issued and outstanding and entitled to vote 49,004,912 shares of common stock, each of which is entitled to one vote on each Proposal at the Special Meeting.
Pursuant to our Articles and bylaws, in addition to Nevada law, the vote of a majority of the shares of common stock issued and outstanding as of the record date will be required to approve an amendment to the Company’s Articles of Incorporation.
The presence, in person or by properly executed proxy, of the holders of shares of common stock entitled to cast a majority of all the votes entitled to be cast at the Special Meeting is necessary to constitute a quorum. Holders of shares of common stock represented by a properly signed, dated and returned proxy will be treated as present at the Special Meeting for purposes of determining a quorum. Proxies relating to “street name” shares that are voted by brokers will be counted as shares present for purposes of determining the presence of a quorum, but will not be treated as votes cast at the Special Meeting as to any proposal as to which the brokers do not have voting instructions and discretion. These missing votes are known as “broker non-votes.”
TABLE OF CONTENTS
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ABOUT THIS DOCUMENT
This document, which was filed with the Securities and Exchange Commission (referred to herein as the “SEC”), constitutes a proxy statement of Magnolia Solar Corporation, sometimes referred to herein as “Magnolia Solar,” “MSC,” “we,” “us” or the “Company,” under Section 14(a) of the Securities Exchange Act of 1934, which is referred to herein as the Exchange Act, and the rules thereunder, and a notice of meeting with respect to the Special Meeting of MSC’s stockholders (the “Special Meeting”) to consider and vote upon the proposals referenced herein.
You should rely onlymethods described on the information containedproxy card or incorporated by reference in this proxy statement. No one has been authorized to provide you with information that is different from that contained in, or incorporated by reference in, this proxy statement. This proxy statement is dated March [*], 2016. You should not assume thatvirtually attend the information contained in this proxy statement is accurate as of any date other than such date, or that the information incorporated by reference in this proxy statement is accurate as of any date other than the date of such incorporated documents. The mailing of this proxy statement to MSC stockholders will not create any implication to the contrary.
This proxy statement does not constitute the solicitation of a proxy in any jurisdiction to or from any person to whom or from whom it is unlawful to make any such solicitation in such jurisdiction.
SUMMARY TERM SHEET
This summary term sheet highlights information contained elsewhere in this proxy statement and may not contain all the information that is important to you. MSC urges you to read carefully the remainder of this proxy statement, including the attached annex, and the other documents to which MSC has referred you because this section does not provide all the information that might be important to you. See also the section entitled “Where You Can Find More Information” beginning on page - 31 -.
Description and Effects of the Merger
On January 29, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ecoark, Inc., a Delaware corporation that we refer to as Ecoark. Pursuant to the Merger Agreement, Ecoark will merge with and into a subsidiary of the Company created for sole purpose of effectuating this Merger (the “Merger Sub”). Ecoark will be the surviving entity (the “Surviving Corporation”). As a result of the Merger, the separate corporate existence of the Merger Sub shall cease. We refer to this transaction as the Merger. Thus, upon the closing of the Merger Agreement, without limiting the generality of the foregoing, all of the property, rights, privileges, immunities, powers, and franchises of the Merger Sub and Ecoark shall vest in the Surviving Corporation, and all debts, liabilities, and duties of the Merger Sub and Ecoark shall become the debts, liabilities, and duties of the Surviving Corporation.
The Merger will have no effect on the market for the tradability of the shares of common stock of MSC, though the current ticker symbol for its shares is expected to be changed if and when its stockholders approve the change in its name (see Proposal 1). The Merger Agreement is attached asAnnex A to this proxy statement.
MSC and Ecoark expect to complete the Merger in the first quarter of 2016. Upon completion of the Merger, MSC will continue the businesses of both MSC and Ecoark. However, the Merger is subject to certain approvals, including but not limited to all the Charter Proposals, and certain other conditions. As a result, it is possible that factors outside the control of MSC and Ecoark could result in the Merger being completed at a later time, or not at all.
The Parties to the Merger
MSC
Magnolia Solar Corporation
54 Cummings Park, Suite 316
Woburn, MA 01801
Attention: Dr. Ashok K. Sood, Chief Executive Officer and President
Telephone: 1 (781) 497-2900
MSC was incorporated as a Nevada corporation on November 19, 2007. On December 31, 2009, MSC entered into an Agreement of Merger and Plan of Reorganization with Magnolia Solar, Inc., a privately held Delaware corporation (“MSI”), whereby MSC acquired MSI. Following the acquisition of MSI, MSC discontinued its former business and adopted the business of MSI as MSC’s sole line of business.
MSC, through its subsidiaries, is principally engaged in the development and commercialization of its nanotechnology-based, high-efficiency, thin-film technology that can be deposited on a variety of substrates, including glass and flexible structures. MSC believes that this technology has the potential to capture a larger part of the solar spectrum to produce high-efficiency solar cells, and incorporates a unique nanostructure-based antireflection coating technology to possibly further increase the solar cell's performance. If these goals are met, there is the potential of significantly reducing the cost per watt. MSC is a development stage company and to date has not generated material revenues or earnings as a result of its activities.
MAGNOLIA SOLAR ACQUISITION CORPORATION
54 Cummings Park, Suite 316
Woburn, MA 01801
Attention: Dr. Ashok K. Sood, Chief Executive Officer and President
Telephone: 1 (781) 497-2900
Magnolia Solar Acquisition Corporation., a Delaware corporation (the “Merger Sub”), was formed on January 28, 2016 for the sole purposes of consummating the Merger.
ECOARK, INC.
3333 Pinnacle Hills Pkwy
Suite 220
Rogers, AR 72758
Telephone: (479) 259-2977
Founded in 2011, Ecoark, Inc. is an innovative and growth-oriented company developing and deploying intelligent technologies and consumer productsAnnual Meeting online in order to meetvote on the demand for sustainable, integrated solutions to contemporary business needs.proposals.
Ecoark consistsWhat is the difference between a stockholder of four subsidiaries. which bring together best-in-class technologies, product solutions,record and industry professionals to address the market opportunitya beneficial owner of reducing wasteshares held in retail and business by offering real-time supply chain analytic solutions. The Company’s operations and acquisitions are guided by a policy emphasizing the “triple bottom line” of social, economic, and environmental responsibility. Ecoark hopes to provide recurring revenue, increased profits, and sustainable growth by bringing a comprehensive suite of proprietary, patented products and services to a ready marketplace estimated to include thousands of businesses and over 300 million consumers.street name?
Ecoark is comprisedStockholder of four operating entities – Intelleflex, Eco360, Eco3D, and Pioneer Products. Collectively, these entities will enable Ecoark to emerge as a leader in sensor based technologies, big data analytics, tethered data solutions, Zero Waste processes, and global waste reduction.
The Merger Agreementrecord
The Merger Agreement is included asAnnex A hereto. The Board encourages you to read carefully the Merger Agreement in its entirety. It is the principal document governing the Merger and the related transactions.
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING
The following are answers to some questions that you, as a shareholder of MSC, may have regarding the Charter Proposals and the other matters being considered at the Special Meeting of shareholders of MSC, which is referred to herein as the Special Meeting or the MSC Special Meeting. MSC urges you to read carefully the remainder of this proxy statement because the information in this section does not provide all the information that might be important to you with respect to the Charter Proposals and the other matters being considered at the Special Meeting. Additional important information is also contained in the annexes to and the documents incorporated by reference into this proxy statement.
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In order to complete the Merger, MSC shareholders must vote to approve the Charter Proposals, and all other conditions to the Merger must be satisfied or waived.
A copy of the Merger Agreement is attached to this proxy statement asAnnex A.
In addition you are also being asked to vote on a proposal to adjourn the MSC Special Meeting, if necessary or appropriate, in the view of the MSC board of directors, to solicit additional proxies in favor of any one or more of the Charter Proposals if there are not sufficient votes at the time of such adjournment to approve any of the Charter Proposals, which is referred to herein as the adjournment proposal.
Shareholders of Record
If your shares of MSC common stock are registered directly in your name with MSC’sour transfer agent, IslandPhiladelphia Stock Transfer, you are considered the shareholderstockholder of record with respect to those shares, and we sent a Notice of Annual Meeting and a printed set of the proxy materials, together with a proxy card, directly to you.
Beneficial owner of shares held in street name. If your shares are held in an account at a broker, bank or other nominee, then you are the beneficial owner of those shares held in “street name,” and thesea Notice of Annual Meeting and a printed set of the proxy materials, have been mailedtogether with a voting instruction form, was forwarded to you by MSC. Youryour broker, bank or other nominee who is considered the stockholder of record with respect to those shares. As a beneficial owner, you have the right to instruct your broker, bank or other nominee on how to vote authorizes Yash Puri,the shares held in your account by following the instructions in the Notice of Annual Meeting or on the voting instruction form you received.
How can I vote my shares?
The process for voting your shares depends on how your shares are held. Generally, as discussed above, you may hold shares as a “record holder” (that is, in your own name) or in “street name” (that is, through a nominee, such as a broker or a bank). As explained above, if you hold shares in “street name,” you are considered to be the “beneficial owner” of those shares.
Voting by Record Holders. If you are a record holder, you may vote by proxy withprior to the powerAnnual Meeting or you may vote during the virtual Annual Meeting online. If you are a record holder and would like to appoint his substitute, to represent and vote your shares asby proxy prior to the Annual Meeting, you directed. Please complete, date and sign your proxy card and return it in the postage-paid envelope provided.have three ways to vote:
● |
● | Call [1-800-690-6903] and follow the instructions provided on the call; or |
Beneficial Owners
● | If you received a proxy card in the mail, complete, sign, date, and mail the proxy card in the return envelope provided to you. |
Please note that telephone and Internet proxy voting will close at 10:59 p.m. (Central Time) on February 17, 2020. If you received a proxy card in the mail and wish to vote by completing and returning the proxy card via mail, please note that your completed proxy card must be received before the polls close for voting at the Annual Meeting.
Voting by beneficial owners of shares held in “street name.”If your shares of MSC common stock are held in the name of a stock brokerage account, by abroker, bank, broker or other nominee (that is, your shares are held in “street name”), you should receive separate instructions from the record holder of your shares describing how to vote.
How are proxies voted?
All shares represented by valid proxies received prior to the Annual Meeting will be voted, and where a stockholder specifies by means of the proxy a choice with respect to any matter to be acted upon, the shares will be voted in accordance with the stockholder’s instructions.
What happens if I do not give specific voting instructions?
Stockholders of record. If you are considereda stockholder of record and you sign and return a proxy card without giving specific voting instructions or you indicate when voting on the Internet or by telephone that you wish to vote as recommended by the Board, then the proxy holders will vote your shares in the manner recommended by the Board on all matters presented in this Proxy Statement and as the proxy holders may determine in their discretion with respect to any other matters properly presented for a vote at the Annual Meeting.
Beneficial owners of shares held in street name. If you are a beneficial owner of shares held in street name and these proxy materials are being forwarded to you by your bank, broker or nominee that is considered the holder of record of those shares. As the beneficial owner, you have the right to direct your bank, broker, trustee or nominee to signdo not join and return a proxy card. Your bank, broker, trustee or nominee will send you instructions for voting your shares. Please note that you may not vote shares held in street name by returning a proxy card directly to MSC or by voting in person at the SpecialAnnual Meeting unless youor provide a “legal proxy,” which you must obtain from yourthe broker, bank or nominee. Further, brokers, banks and nominees who holdother nominee that holds your shares of MSC common stockwith specific voting instructions, then the broker, bank or other nominee that holds your shares may generally vote on routine matters but cannot vote on non-routine matters. If the broker, bank or other nominee that holds your behalf mayshares does not give a proxy to MSC to vote those shares without specificreceive instructions from you.
For a discussion of the rules regarding the voting of shares held by beneficial owners, please see the question below entitled “If I am a beneficial owner of shares of MSC common stock, what happens if I don’t provide voting instructions? What is discretionary voting? What is a broker non-vote?”
Approval of the adjournment proposal requires the affirmative vote of the holders of a majority of the shares of MSC common stock present in person or represented by proxy at the Special Meeting.
We expect that your broker will have discretionary authority to vote your shares on a non-routine matter, the adjournment proposal, basedbroker, bank or other nominee that holds your shares will inform the inspector of election that it does not have the authority to vote on this proposal being a routine matter but not on any of the Charter Proposals, all of which are non-routine matters. Brokers holding shares beneficially owned by their clients no longer have the ability to cast votes with respect to non-routine matters unless they have received instructions from the beneficial owneryour shares. This is generally referred to as a “broker non-vote.”
Which ballot measures are considered ’‘routine’’ or ’‘non-routine’’?
The ratification of the shares. Asappointment of RBSM, LLP as our independent registered public accounting firm for the fiscal year ending March 31, 2020 (Proposal No. 4) is considered a result,“routine” matter. Your broker, therefore, may vote your shares in its discretion if you do not provide specific voting instructions to your record holder, that record holder will not be ableon how to vote on any proposal butthis routine matter, and no broker non-votes are expected in connection with this proposal.
The election of directors (Proposal No. 1), the adjournment proposal. It is therefore important that you provide voting instructionsapproval of the compensation of our named executive officers (Proposal No. 2), the frequency of future advisory votes on named executive officer compensation (Proposal No. 3), Amendment of the articles of incorporation to your broker if yourincrease the number of authorized shares of common stock (Proposal No. 5) are held byconsidered “non-routine” matters. Accordingly, a broker so that yourmay not vote on these proposals without instructions from its customer and broker “non-votes” may occur with respect to all proposals but the adjournment proposal.
these proposals.
IfCan I change my vote or revoke my proxy after I return my proxy card or vote online?
Yes. You may revoke your proxy and change your vote at any time before the final vote at the Annual Meeting. After you choose either of the first two methods, you must submit your notice of revocationproxy or vote online, you may change your vote via the Internet or by telephone (in which case only your latest Internet or telephone proxy submitted prior to the Annual Meeting will be counted), by signing and returning a new proxy card or voting instruction form with a later date, or by virtually attending the Annual Meeting and voting. However, your virtual attendance at the Annual Meeting will not automatically revoke your proxy unless you properly vote during the Annual Meeting or specifically request that your prior proxy be revoked by delivering written notice to the Secretary of MSC, as specified in this proxy statement, no later than the beginning of the Special Meeting. If your shares are held in street name by your broker, bank or nominee, you should contact them to change your vote.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This proxy statement and the documents incorporated by reference in this proxy statement contain “forward-looking statements.” These statements may be made directly in this proxy statement or may be incorporated in this proxy statement by reference to other documents and may include statements for periods following the Merger. Forward-looking statements are all statements other than statements of historical facts, such as those statements regarding general economic and business conditions; industry capacity; industry trends; competition; changes in business strategy or development plans; project performance; availability, terms, and deployment of capital; and availability of qualified personnel. The words “anticipates,” “may,” “can,” “plans,” “believes,” “estimates,” “expects,” “projects,” “intends,” “likely,” “will,” “should,” “to be,” and any similar expressions and/or statements that are not historical facts are intended to identify those assertions as forward-looking statements. Although the Company believes the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. The underlying expected actions or the Company’s results of operations involve risks and uncertainties, many of which are outside the Company’s control, and any one of which, or a combination of which, could materially affect the Company’s results of operations and whether the forward-looking statements ultimately prove to be correct. These forward-looking statements speak only as of the date on which the statements were made and the Company undertakes no obligation to update or revise any forward-looking statements made in this proxy statement or elsewhere as a result of new information, future events or otherwise, except as required by law.
In addition to other factors and matters contained or incorporated in this document, we believe the following factors could cause actual results to differ materially from those discussed in the forward-looking statements:
MSC cautions readers that forward-looking statements are not guarantees of future performance or exploration and development success, and its future financial results may differ materially from those anticipated, projected or assumed in the forward-looking statements. In addition to those items set forth above, important factors that may cause MSC’s actual results to differ materially from those anticipated by the forward-looking statements include, but are not limited to, those factors described in Part I, Item 1A. “Risk Factors” included in MSC’s annual report on Form 10-K for the year ended December 31, 2014, as updated by MSC’s subsequent filings with the SEC. The risks and uncertainties identified in this proxy statement should be read in conjunction with the other information in this proxy statement and MSC’s other filings with the SEC. The forward-looking statements included in this proxy statement are made only as of the date of this proxy statement and MSC undertakes no obligation to update any forward-looking statements except as required by law.
SPECIAL FACTORS
Description and Effects of the Merger
Pursuantprior to the Merger Agreement, Ecoark will merge intoAnnual Meeting at 5899 Preston Road #505, Frisco, Texas 75034.
What constitutes a subsidiary of the Company created for sole purpose of effectuating this Merger (the “Merger Sub”). Ecoark will be the surviving entity (the “Surviving Corporation”). As a result of the Merger, the separate corporate existence of the Merger Sub shall cease. We refer to this transaction as the Merger. Thus, upon the closing of the Merger Agreement, without limiting the generality of the foregoing, all of the property, rights, privileges, immunities, powers, and franchises of the Merger Sub and Ecoark shall vest in the Surviving Corporation, and all debts, liabilities, and duties of the Merger Sub and Ecoark shall become the debts, liabilities, and duties of the Surviving Corporation.quorum?
The Merger will have no effect on the market for the tradability of the shares of common stock of MSC, though the current ticker symbol for its shares is expected to be changed if and when its stockholders approve the change in its name (see Proposal 1). Additionally, the Financial Industry Regulatory Authority (“FINRA”) will also need to approve the transaction. The Merger Agreement is attached asAnnex A to this proxy statement.
MSC and Ecoark expect to complete the Merger in the first quarter of 2016. However, the Merger is subject to certain approvals, including but not limited to all the Proposals, and certain other conditions. As a result, it is possible that factors outside the control of MSC and Ecoark could result in the Merger being completed at a later time, or not at all.
Background of the Merger
The following is a discussion of the Merger, including the process undertaken by the Company and the board of directors in identifying and determining whether to engage in the proposed transaction. This discussion of the Merger is qualified by reference to the Merger Agreement, which is attached to this proxy statement asAnnex A. You should read the entire Merger Agreement carefully as it is the legal document that governs the Merger.
On January 29, 2016, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ecoark, Inc., a Delaware corporation that we refer to as Ecoark. Pursuant to the Merger Agreement, Ecoark will merge with and into Magnolia Solar Acquisition Corporation, a wholly-owned Delaware subsidiary corporation of the Company created for sole purpose of effectuating this Merger (“Magnolia Solar Acquisition” or the “Merger Sub”). Ecoark will be the surviving entity (the “Surviving Corporation”). As a result of the Merger, the separate corporate existence of the Merger Sub shall cease. We refer to this transaction as the Merger. Thus, upon the closing of the Merger Agreement, without limiting the generality of the foregoing, all of the property, rights, privileges, immunities, powers, and franchises of the Merger Sub and Ecoark shall vest in the Surviving Corporation, and all debts, liabilities, and duties of the Merger Sub and Ecoark shall become the debts, liabilities, and duties of the Surviving Corporation.
The Merger will have no effect on the market for the tradability of the shares of common stock of MSC, though the current ticker symbol for its shares is expected to be changed if and when its stockholders approve the change in its name (see Proposal 1). The Merger Agreement is attached asAnnex A to this proxy statement.
MSC and Ecoark expect to complete the Merger in the first quarter of 2016. However, the Merger is subject to certain approvals, including but not limited to all the Charter Proposals, and certain other conditions. As a result, it is possible that factors outside the control of MSC and Ecoark could result in the Merger being completed at a later time, or not at all.
MSC’s Reasons for the Charter Proposals and the Merger, and the Recommendation of the Board of Directors
MSC believes that the Merger with Ecoark will provide access to new markets that have a potential of significant growth in the future. The Board of Directors has unanimously voted in favor of the Merger.
Accounting Treatment
MSC prepares its financial statements in accordance with GAAP. The Merger will be accounted for using the acquisition method of accounting with Ecoark treated as the acquirer of Magnolia Solar Acquisition for accounting purposes. Under the acquisition method of accounting assets acquired and liabilities assumed will be recorded as of the acquisition date, at their respective fair values and added to those of Ecoark.
Regulatory Approvals Required for the Merger
The Merger does not require the filing of a notification and report form under the Hart–Scott–Rodino Antitrust Improvements Act.
THE MERGER AGREEMENT
The following is a summary of the material terms and conditions of the Merger Agreement. The description in this section and elsewhere in this proxy statement is qualified in its entirety by reference to the complete text of the Merger Agreement, a copy of which is attached asAnnex A, and is incorporated by reference into this proxy statement. This summary does not purport to be complete and may not contain all of the information about the Merger Agreement that is important to you. We encourage you to read the Merger Agreement carefully and in its entirety because it is the legal document that governs the Merger.
The Merger Agreement and this summary of its terms have been included to provide you with information regarding the terms of the Merger Agreement. Factual disclosures about the Company contained in this proxy statement or in the Company’s public reports filed with the SEC may supplement, update or modify the factual disclosures about the Company contained in the Merger Agreement and described in this summary. The representations, warranties and covenants were qualified and subject to important limitations agreed to by the parties to the Merger Agreement in connection with negotiating the terms of the Merger Agreement. In particular, in your review of the representations and warranties contained in the Merger Agreement and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purposes of establishing the circumstances in which a party to the Merger Agreement may have the right not to close the Merger if the representations and warranties of the other party prove to be untrue due to a change in circumstance or otherwise and allocating risk between the parties to the Merger Agreement, rather than establishing matters as facts. The representations and warranties may also be subject to a contractual standard of materiality different from those generally applicable to stockholders and reports and documents filed with the SEC and in some cases were qualified by disclosures that were made by Company to Ecoark, which disclosures are not reflected in the Merger Agreement. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this proxy statement, may have changed since the date of the Merger Agreement and subsequent developments or new information affecting a representation or warranty may not have been included in this proxy statement.
In reviewing the Merger Agreement, please remember that it is included to provide you with information regarding its terms and conditions. The Merger Agreement contains representations and warranties by each of the parties to the Merger Agreement, made as of specific dates. These representations and warranties were made solely for the benefit of the other parties to the Merger Agreement and:
Accordingly, the representations and warranties and other provisions of the Merger Agreement should not be read alone as characterizations of the actual state of facts about the Company or Ecoark, but instead should be read together with the information provided elsewhere in this proxy statement and in the other documents incorporated by reference herein. For information regarding the Company, see the sections entitled “Important Information Regarding the Company” and “Where You Can Find More Information.”
The Merger
Pursuant to the Merger Agreement, Ecoark will merge into a subsidiary of the Company created for sole purpose of effectuating this Merger (the “Merger Sub”). Ecoark will be the surviving entity (the “Surviving Corporation”). As a result of the Merger, the separate corporate existence of the Merger Sub shall cease. We refer to this transaction as the Merger. Thus, upon the closing of the Merger Agreement, without limiting the generality of the foregoing, all of the property, rights, privileges, immunities, powers, and franchises of the Merger Sub and Ecoark shall vest in the Surviving Corporation, and all debts, liabilities, and duties of the Merger Sub and Ecoark shall become the debts, liabilities, and duties of the Surviving Corporation.
Prior the effective time, the articles of incorporation of MSC shall be amended in accordance with the Charter Proposals described herein, provided that such Charter Proposals are approvedpresence at the MSC SpecialAnnual Meeting, until amended in accordance with their termsvirtually or by applicable law.
Closing and Effective Time of the Merger
The Closing of the Merger will take place as soon as reasonably practicable after the date on which the conditions to closing of the Merger (described in “Conditions to the Completion of the Merger” below) have been satisfied or waived (other than the conditions that by their nature are to be satisfied at the closing of the Merger, but subject to the satisfaction or waiver of those conditions), unless another date is agreed to in writing by the parties to the Merger Agreement.
At the Effective Time, which shall occur as soon as practicable after the Closing, MSC shall cause to be filed Articles of Merger with the State of Delaware.
MSC Stockholder Approval
The Company’s stockholders are not being asked to vote on the Merger Agreement as such approval is not necessary. However, approval of the Charter Proposals is a condition of closing of the Merger Agreement. For additional information regarding the Proposals to be considered at the MSC Special Meeting and the applicable vote requirements, see the sections entitled “The Special Meeting” beginning on page- 15 -and “Proposals to be Considered at the Special Meeting” beginning on page- 17 -.
Ecoark Stockholder Approval
Shareholders holding a majority of Ecoark’s shares entitled to vote have approved the merger.
Representations and Warranties
The Merger Agreement contains representations and warranties made by MSC, on the one hand, and Ecoark, on the other hand, to each other as of specific dates. The statements embodied in representations and warranties made were for purposes of the Merger Agreement and are subject to qualifications and limitations agreed to by the parties in connection with negotiating the terms of the Merger Agreement. In addition, some of those representations and warranties made as of a specific date may be subject to a contractual standard of materiality different from that generally applicable to stockholders or may have been used for the purpose of allocating risk between the parties to the Merger Agreement rather than establishing matters as facts. For the foregoing reasons, you should not rely on the representations and warranties as statements of factual information.
The representations and warranties made by the Company to Ecoark include representations and warranties relating to, among other things:
The representations and warranties made by Ecoark to the Company include representations and warranties relating to, among other things:
Pre-Closing Covenants
The Merger Agreement contains certain pre-closing covenants between the parties to the Merger Agreement relating to, among other things:
Conditions to the Completion of the Merger
The obligation of Ecoark to consummate the Merger is subject to the satisfaction or waiver of the following further conditions:
The obligation of the Company to consummate the Merger is subject to the satisfaction or waiver of the following further conditions:
Termination
The Merger Agreement may be terminated and the Merger may be abandoned at any time prior to the Closing:
Termination Fees
If the Merger Agreement is terminated by the Company other than for the specified circumstances provided in the Merger Agreement, the Company will be required to pay Ecoark a termination fee of $10,000.
Expenses
The Company shall pay for all costs and termination expenses incurred by itself in negotiating and preparing the Merger Agreement and in closing and carrying out the transactions contemplated by the Merger Agreement.
THE SPECIAL MEETING
Date, Time and Place
The Special Meeting is scheduled to be held at 9 a.m., local time on March [*], 2016 at the corporate offices of the Company, located at 54 Cummings Park, Suite 316, Woburn, MA, 01801.
Purpose of the Special Meeting
The Special Meeting of the Company’s stockholders is being held:
We refer to these five proposals as the “Proposals.”
Recommendations of the Board of Directors of the Magnolia Solar Corporation
The board of directors of the Company has determined that the Proposals are fair to, advisable and in the best interests of the Company and its stockholders.
Record Date; Stock Entitled to Vote
Only holders of record of shares of our common stock at the close of business on February [10], 2016 are entitled to notice of, and to vote at, the Special Meeting and at an adjournment of the meeting. The Company refers to this date as the record date for the Special Meeting.
As of February [10], 2016, the record date, the directors and executive officers of the Company as a group owned and were entitled to vote 16,400,000 shares of the common stock of the Company, representing approximately 33.47% of the outstanding shares of our common stock on that date. The Company currently expects that its directors and executive officers will vote their shares in favor of the Proposals, but none of the Company’s directors or executive officers have entered into any agreement obligating them to do so.
Quorum
A quorum is necessary to hold a valid Special Meeting. A quorum will be present at the Special Meeting if the holders of a majority of the outstanding shares of our common stock entitled to vote at the Special Meeting are present, in person or by proxy. If a quorum is not present at the Special Meeting, the Company expects the presiding officer to adjourn the Special Meeting in order to solicit additional proxies. Abstentions will be counted as present for purposes of determining whether a quorum is present.
Required Vote
Approval of each of the Proposals requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock.
Abstentions, Failures to Vote and Broker Non-Votes
Your failure to vote will have the same effect as a vote against each of the Proposals. Your abstention from voting will have the same effect as a vote against each of the Proposals. A broker non-vote will have the same effect as a vote against each of the Proposals. Because none of the Proposals being voted upon at the Special Meeting are of the nature that brokers have discretionary authority to vote on, the Company does not expect any broker non-votes on any of the Proposals.
Voting at the Special Meeting
Whether or not you plan to attend the Special Meeting, please promptly submit your voting instructions to vote your shares of common stock by proxy to ensure your shares are represented at the meeting. You may also vote in person at the Special Meeting.
Voting in Person
If you plan to attend the Special Meeting and wish to vote in person, you will be given a ballot at the Special Meeting. Please note, however, that if your shares of common stock are held in street name, which means your shares of common stock are held of record by a broker, bank or nominee, and you wishentitled to vote at the SpecialAnnual Meeting you must bring towill constitute a quorum at the SpecialAnnual Meeting for the transaction of any business. If a legal proxy from the record holder (your broker, bank or nominee) of the shares of common stock authorizing youquorum is established, each stockholder entitled to vote at the Special Meeting.
VotingAnnual Meeting will be entitled to one vote, virtually or by Proxy
You should submit your voting instructionsproxy, for each share of stock entitled to vote your shares of common stockheld by proxy even if you plan to attendsuch stockholder on the Special Meeting. You can always change your vote at the Special Meeting.
Your enclosed proxy card includes specific instructions for submitting your voting instructions for your shares of common stock. When the accompanying proxy is returned properly executed, the shares of common stock represented by itrecord date, January 10, 2020. Proxies received but marked as abstentions and broker “non-votes” will be voted at the Special Meeting or any adjournment thereof in accordance with the instructions containedincluded in the proxy.
If you return your signed proxy card without indicating how you want your sharescalculation of common stockthe number of votes considered to be voted with regard to a particular Proposal, your shares of common stock will be voted in favor of each such Proposal. Proxy cards that are returned without a signature will not be counted as present at the SpecialAnnual Meeting and cannotwill be voted.counted for quorum purposes. If a quorum is not present, the Annual Meeting may be adjourned until a quorum is obtained.
If your sharesWhat are the Board of common stock are held in an account with a broker, bank or other nominee, you have received a separate voting instruction card in lieu of a proxy card and you must follow those instructions in order to submit your voting instructions.Directors’ recommendations?
RevocationThe recommendations of Proxies or Voting Instructions
You have the power to revoke your proxy at any time before your proxy is voted atBoard of Directors are set forth under the Special Meeting. You can revoke your proxy or voting instructionsdescription of each proposal in onethis Proxy Statement. In summary, the Board of four ways:Directors recommends that you vote:
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If you choose either of the first two methods, your notice of revocation or your new proxy must be received by the Company’s Secretary at 54 Cummings Park, Suite 316, Woburn, MA, 01801 no later than the beginning of the Meeting.
Solicitation of Proxies
The cost of proxy solicitation for the Special Meeting will be borne by the Company. This proxy solicitation is being made by the Company on behalf of the Company’s board of directors. In addition to the use of the mail, proxies may be solicited by executive officers and directors and regular employees of the Company, without additional remuneration, by personal interview, facsimile or otherwise.
Adjournments and Postponements
Only stockholders of record at the close of business on February [10], 2016 are entitled to receive notice of and to vote at the Special Meeting or any adjournments or postponements thereof. Whether or not you expect to attend the Special Meeting, we encourage you to vote your shares as soon as possible. Please sign, date and mail the included proxy card in the envelope provided. It is important that your shares be represented at the Special Meeting, whether your holdings are large or small.
PROPOSALS TO BE CONSIDERED AT THE SPECIAL MEETING
The following Proposals will be considered and voted upon at the Special Meeting:
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Each ProposalWhat vote is described in greater detail below.required to approve each Proposal?
PROPOSAL NO. 1
THE CHANGE IN THE COMPANY’S NAME
The Company intends to change its name to Ecoark Holdings Inc. (the “Name Change”) by filing an amendment to its Articles of Incorporation (the “Articles”) with the Nevada Secretary of State. The Board of Directors of the Company has approved the Name Change and is presently seeking stockholder approval thereof.
The Board of Directors believes the Name Change will be in our best interests as the new name better reflects our long-term strategy and identity in that we have entered into the Merger Agreement. While the “Magnolia Solar Corporation” name has served us over time, our management believes this opportunity presented the right timing to change our name. Our management also believes that the new name effectively conveys our business direction.
No Appraisal Rights
Under Nevada law and our charter documents, holders of our common stock are not entitled to dissenter’s rights of appraisal rights withWith respect to the Name Change.election of directors (Proposal No. 1), our bylaws require that each director be elected by a plurality of the votes present at the meeting, either virtually or by proxy. In other words, the five nominees receiving the greatest number of votes will be elected. You may vote for or abstain from voting for any or all of the director nominees nominated for election at the Annual Meeting and named in this Proxy Statement.
NumberApproval of Votes Required
Thethe compensation of our named executive officers (Proposal No. 2), the frequency of future advisory votes on named executive officer compensation (Proposal No. 3) and ratification of the appointment of RBSM, LLP as our independent registered public accounting firm for the fiscal year ending March 31, 2020 (Proposal No. 4), and Amendment of the articles of incorporation to increase the number of authorized shares of common stock (Proposal No. 5) require the affirmative vote of a majority of all shares entitled tovotes cast. You may vote thereon shall be required for, approvalagainst or abstain from voting for these proposals. Proposals No. 2 and No. 3, however, are merely advisory and are not binding on the Company, the Board, or the Compensation Committee of the proposed amendment toBoard. Despite the Articles. Sincefact that Proposals No. 2 and No. 3 are not binding, the Board and the Compensation Committee will take the voting results of the proposals under advisement when making future decisions regarding the Company’s executive compensation program and the frequency of future advisory votes on named executive officer compensation.
Will abstentions and broker non-votes are not affirmative votes, they will“non-votes” have an impact on the effect of votes against the Name Change.proposals contained in this Proxy Statement?
THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE PROPOSAL TO APPROVE THE NAME CHANGE.
PROPOSAL NO. 2:
APPROVAL OF A REVERSE STOCK SPLIT
Shareholders are being asked to approve, subject to final action of the Board of Directors, a proposed amendment of our Articles of Incorporation under which the CompanyAbstentions and broker non-votes will effect a 1-for-250 Reverse Stock Split (the “Reverse Split”) of the issued and outstanding shares of Common Stock of the Company, such that shareholders of record who hold fewer than 250 shares will have such shares cancelled and converted into the right to receive $0.03 for each share of stock held of record prior to the Reverse Stock Split. The text of the proposed amendment to effect the Reverse Split is set forth in the form of the proposed Certificate of Amendment to the Articles of Incorporation attached to this proxy statement as Exhibit A.
The Reverse Split is intended to take effect, subject to Shareholder approval and subsequent final action by our Board of Directors, on the date the Company files the proposed Articles of Amendment with the Secretary of State of the State of Nevada, or on any later date that the Company may specify in such Articles of Amendment. Our Board of Directors has retained authoritybe counted to determine whether and when to filethere is a quorum present at the proposed Articles of Amendment to effect the Reverse Split, notwithstanding the authorization of the Reverse Split by our shareholders. We presently anticipate that the effect time of the Reverse Split will occur on or around March [*], 2016, subject to shareholder approval and final action by the Board of Directors.
Following the effective date of the Reverse Split, transmittal materials will be sent to those shareholders entitled to cash payment that will describe how to turn in their stock certificates and receive the cash payments. Those shareholders entitled to a cash payment should not turn in their stock certificates at this time.
No Appraisal Rights
Under Nevada law and our charter documents, holders of our common stock are not entitled to dissenter’s rights of appraisal rights with respect to the Reverse Split.
Number of Votes Required
The affirmative vote of a majority of all shares entitled to vote thereon shall be required for approval of the Reverse Split. Since abstentions and broker non-votes are not affirmative votes, they will have the effect of votes against the Reverse Split.
THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE PROPOSAL TO APPROVE THE REVERSE SPLIT.
PROPOSAL NO. 3:
THE INCREASE IN THE COMPANY’S AUTHORIZED COMMON STOCK
The Company intends to increase its authorized shares of capital stock to provide for 100,000,000 shares of common stock (the “Common StockIncrease”) by filing an amendment to its Articles with the Nevada Secretary of State. The Board of Directors of the Company has approved the Common Stock Increase and is presently seeking stockholder approval thereof.
Outstanding Shares and Purpose of the Amendment
Prior to the Common Stock Increase, our Articles authorized us to issue 75,000,000 shares of common stock, par value $0.001 per share.
The Board of Directors believes that the Common Stock Increase is necessary in order to permit us to issue shares of common stock.
Effects of the Increase in Authorized Common Stock
The additional shares of common stock will have the same rights as the presently authorized shares, including the right to cast one vote per share of common stock. Although the authorization of additional shares will not, in itself, have any effect on the rights of any holder of our common stock, the issuance of additional shares of common stock (other than by way of a stock split or dividend) will have the effect of diluting the voting rights of existing stockholders.
No Appraisal Rights
Under Nevada law and our charter documents, holders of our common stock are not entitled to dissenter’s rights of appraisal rights with respect to the Common Stock Increase.
Number of Votes Required
The affirmative vote of a majority of all shares entitled to vote thereon shall be required for approval of the proposed amendment to the Articles of Incorporation. Since abstentions and broker non-votes are not affirmative votes, they will have the effect of votes against the Common Stock Increase.
THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE PROPOSAL TO APPROVE THE COMMON STOCK INCREASE.
PROPOSAL NO. 4:
THE CREATION OF BLANK CHECK PREFERRED STOCK
The Board has adopted resolutions approving an amendment to the Articles to provide for 5,000,000 shares of “blank check preferred” stock by filing Articles of Amendment with the Nevada Secretary of State.
Outstanding Shares and Purpose of the Amendment
Our Articles do not currently authorize us to designate and issue shares of preferred stock.
The Board of Directors believes that the creation of a preferred class of stock will provide us with greater flexibility with respect to our capital structure for purposes including additional equity financings and stock based acquisitions.
Effects of the Increase in Authorized Capital Stock
The addition of shares of preferred stock will potentially have different rights as the presently authorized common stock shares, including the right to accrued dividends, if any, and a different voting structure. The Board will be authorized, from time to time, to designate classes of preferred stock with various rights and preferences.
At present, the Board has no plans to issue the preferred shares other than to enable us to close the Merger Agreement. However, it is possible that some of these preferred shares could be used in the future for various other purposes without further stockholder approval, except as such approval may be required in particular cases by our charter documents, applicable law or the rules of any stock exchange or other quotation system on which our securities may then be listed. These purposes may include: raising capital, providing equity incentives to employees, officers or directors, establishing strategic relationships with other companies, and expanding our business or product lines through the acquisition of other businesses or products.
We could also use the preferred shares that will become available to oppose a hostile takeover attempt or to delay or prevent changes in control or management of our company. Although the Board’s approval was not prompted by the threat of any hostile takeover attempt (nor is the Board currently aware of any such attempts directed at us), nevertheless, stockholders should be aware that the creation of a preferred class of stock could facilitate future efforts by us to deter or prevent changes in control of our company, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices.
No Appraisal Rights
Under Nevada law and our charter documents, holders of our common stockAnnual Meeting, but will not be entitled to dissenter’s rights of appraisal rights with respect to the Subsequent Increase.
Number of Votes Required
The affirmative vote of a majority of all shares entitled to vote thereon shall be requiredconsidered votes cast for approval of the proposed amendment to the Articles of Incorporation. Since abstentionsvoting purposes and broker non-votes are not affirmative votes, theythus will have theno effect of votes against the Proposal.
THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE PROPOSAL TO APPROVE THE CREATION OF A CLASS OF “BLANK CHECK” PREFERRED STOCK.
PROPOSAL NO. 5
THE ADJOURNMENT
Shareholders are being asked to vote on whether or not to adjourn the MSC Special Meeting, if necessary or appropriate, in the view of the MSC board of directors, to solicit additional proxies in favor of any one or more of the Charter Proposals if there are not sufficient votes at the time the Special Meeting is held to approve any of the Charter Proposals.
No Appraisal Rights
Under Nevada law and our charter documents, holders of our common stock will notproposals to be entitled to dissenter’s rights of appraisal rights with respect to the Adjournment.
Number of Votes Required
The affirmative vote of a majority of all shares presentpresented at the special meeting shall be required for approvalAnnual Meeting.
Where can I find the voting results of the proposed adjournment, if necessary.
THE BOARD RECOMMENDS THAT YOU VOTE “FOR” THE PROPOSAL TO APPROVE THE ADJOURNMENT.
IMPORTANT INFORMATION REGARDING MAGNOLIA SOLAR CORPORATION
Business
Magnolia Solar Corporation, through its wholly-owned subsidiary, Magnolia Solar, Inc., is principally engaged in the development and commercialization of its nanotechnology-based, high-efficiency, thin-film technology that can be deposited on a variety of substrates, including glass and flexible structures. This technology has the potential to capture a larger part of the solar spectrum to produce high-efficiency solar cells, and incorporates a unique nanostructure-based antireflection coating technology to possibly further increase the solar cell's performance. If these goals are met, there is the potential of significantly reducing the cost per watt.
Our research and development effort is located at the Albany Nanotech Center of the College of Nanoscale Science and Engineering (CNSE) in Albany. We are also part of the Photovoltaic Manufacturing Initiative (PVMI) funded by the U.S. Department of Energy under the Sun Shot program. In addition, State of New York and the New York State Energy Research and Development Agency (NYSERDA) have invested approximately $100 million to build a new facility for the Photovoltaic Manufacturing Initiative next generation Copper Indium Selenide (CIGS) based manufacturing process development. Due to our membership in PVMI, we also have access for our research and development activity to the CNSE’s Solar Energy Development Center in Halfmoon, New York. This is a 100 kilowatt prototyping facility which we believe is ideal for our development effort. We believe that our use of this facility for development presently eliminates the capital needed to develop a dedicated facility to refine, evaluate, and finalize our technology program.
We are a development stage company and to date have not generated material revenues or earnings as a result of our activities.
Executive Officers and Directors of the Company
Dr. Ashok Sood is President, Chief Executive Officer and as a Director of Magnolia Solar since its inception. Prior to joining Magnolia Solar, Dr. Sood had over 35-years’ experience in developing and managing solar cells, optical, and optoelectronics technology and products for a start-up company and several major corporations, including Lockheed-Martin, BAE Systems, Loral, Honeywell, and Mobil-Tyco Solar Energy Corporation ( Joint Venture between Mobil Oil and Tyco). Dr. Sood was instrumental in development and managed optical and optoelectronics technology/ Programs.
Recently, Dr. Sood has managed the development of new technologies for anti-reflective coatings for solar cells and defense applications. He has also been actively engaged in working with several solar cell technologies that broaden the solar spectrum absorption and improve both voltage and current output of the cells to enhance their efficiency. Previously, he has been leading design and development of optoelectronics devices using CdS, CdTe, HgCdTe, GaN, AlGaN, InGaN and ZnO for various defense applications, solar cells for space, and commercial applications. Dr. Sood has led many efforts resulting in DoD/NASA programs developing the technology / products and supporting their transition to manufacturing. He also led various industry and university teams bridging centers of excellence across the United States with industry led programs.
Since joining Magnolia, Dr. Sood has focused his efforts on using nanotechnology for developing high performance thin film detectors and solar cells. His understanding of technology and funding opportunities is an asset to Magnolia Solar.
Dr. Sood received his Ph.D. and M.S. in Engineering from the University of Pennsylvania and has an M.S. and a B.S. in Physics (Honors) from Delhi University in India. At the University of Pennsylvania, he attended Physics courses given by two Nobel Laureates. His Ph.D. dissertation was on the study of optoelectronic properties of PbS/CdS for detector and laser applications in the visible to near infrared spectral bands. Dr. Sood has also taken several management courses and also attended professional development programs organized by the Wharton School at the University of Pennsylvania.
Dr. Sood is a member of IEEE and the SPIE. He has chaired sessions on optical and nanotechnology at conferences of those organizations. He has also been on several expert panels for future direction of Thin Film solar cells. As a co-founder of Magnolia Solar, and expert in the thin-film solar area, Dr. Sood’s experience and qualifications are essential to the Board of Directors.
As a founder of our subsidiary, Magnolia Solar, and expert in the thin-film solar area, Mr. Sood’s experience and qualifications are essential to the Board of Directors.
Dr. Yash R. Puri, Executive Vice President, Chief Financial Officer, and Director
Dr. Yash R. Puri was appointed our Executive Vice President, Chief Financial Officer and as a Director on December 31, 2009. He brings many years of photovoltaic technology and applications experience both in the private sector and in the academia. Dr. Puri brings experience in startup environment and growth management to the Magnolia team.
Previously from 1997 until 1999 Dr. Puri was VP of Finance for GT Equipment Technologies, Inc., (presently known as GT Advanced Technologies, Inc., NASDAQ: GTAT), equipment manufacturer serving the semiconductor and the photovoltaic industries. He helped this high technology startup, formed in 1994, to grow to revenue of about $20 million. The company won many rewards and much recognition; it was a New England finalist in the Ernst & Young Entrepreneur of the Year award. In this position, he was actively involved in running a high-technology business, and he successfully negotiated a $3.5 million line of credit with a major bank, established an audit relationship with one of the big-five accounting firms, established a foreign sales corporation, implemented a R&D credit program to reduce tax liabilities, and established company-wide management software to integrate manufacturing and financial operations. Near the end of his term there, he also successfully negotiated the company’s first subordinated debt issue.
Dr. Puri is also a Professor of Finance and Chairman of the Finance Department at the University of Massachusetts. Dr. Puri was Principal Investigator of a photovoltaic commercialization project as well as several other grants, and has been a director of a technology commercialization program for engineering students, Chairman of the Management and Finance Department, and acting Associate Dean. In these positions, he successfully managed several externally funded projects and developed many years of experience in technology and growth management.
Dr. Puri holds a B.S. in Physics, a M.S. in Solid State Physics, and a M.B.A. from the University of Delhi. He also holds a M.B.A. in Finance and a D.B.A. in International Business from Indiana University, Bloomington. He has published many papers and has made numerous conference presentations.
As a founder of our subsidiary, Magnolia Solar, and many years of financial expertise in the photovoltaic industry, Mr. Puri’s experience and qualifications are essential to the Board of Directors.
Legal Proceedings
We are not a party to any pending legal proceeding, nor is our property the subject of a pending legal proceeding, that is not in the ordinary course of business or otherwise material to the financial condition of our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
Market for Common Equity and Related Stockholder Matters
Our common stock was quoted on the over the counter market from September 5, 2008 through February 5, 2010 under the symbol MBSV.OB. Since February 6, 2010, our common stock has been listed on the over the counter market under the symbol MGLT. Prior to February 8, 2010, there was no active market for our common stock. The following table sets forth the high and low prices for our common stock for the periods indicated, as reported by the OTCQB.
2016 | HIGH | LOW | ||||||
First Quarter (through February 29, 2016) | $ | 0.10 | $ | 0.0346 |
2015 | HIGH | LOW | ||||||
First Quarter | $ | 0.075 | $ | 0.027 | ||||
Second Quarter | $ | 0.0725 | $ | 0.03 | ||||
Third Quarter | $ | 0.05 | $ | 0.015 | ||||
Fourth Quarter | $ | 0.07 | $ | 0.01 |
FISCAL YEAR 2014 | HIGH | LOW | ||||||
First Quarter | $ | 0.08 | $ | 0.03 | ||||
Second Quarter | $ | 0.07 | $ | 0.03 | ||||
Third Quarter | $ | 0.08 | $ | 0.03 | ||||
Fourth Quarter | $ | 0.08 | $ | 0.02 |
Certain Relationships and Related Transactions
The Company has entered into a 10-year, renewable, exclusive license with Magnolia Optical Technologies, Inc. (“Magnolia Optical”) on April 30, 2008 for the exclusive rights of the technology related to the application of Optical’s solar cell technology. Magnolia Optical shares common ownership with the Company.
The Company is amortizing the license fee of $356,500 over the 120 month term of the Agreement. Accumulated amortization as of September 30, 2015 and December 31, 2014 was $264,405 and $237,667, respectively. Amortization expense for each of the nine months ended September 30, 2015 and 2014 was $26,738, respectively. The Company’s management has determined that the fair value of the license exceeds the book value and thus no further impairment or amortization is necessary as of September 30, 2015 or December 31, 2014.
Description of Securities
GeneralOur authorized capital stock consists of 75,000,000 shares of common stock, with a par value of $0.001 per share. As of January 29, 2016 there were 49,004,912 shares of our common stock issued and outstanding held by 154 stockholders of record. There are no preferred shares authorized or issued.
Common Stock
Our common stock is entitled to one vote per share on all matters submitted to a vote of the stockholders, including the election of directors. Except as otherwise required by law, the holders of our common stock possess all voting power. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all shares of our common stock that are present in person or represented by proxy. Holders of our common stock representing thirty three and one-third percent (33 1/3%) of our capital stock issued, outstanding and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of our stockholders. A vote by the holders of a majority of our outstanding shares is required to effectuate certain fundamental corporate changes such as liquidation, merger or an amendment to our Articles. Our Articles do not provide for cumulative voting in the election of directors.
Holders of our common stock have no pre-emptive rights, no conversion rights and there are no redemption provisions applicable to our common stock.
Dividend Policy
We have never declared or paid any dividends on our common stock. We currently intend to retain future earnings, if any, to finance the expansion of our business. As a result, we do not anticipate paying any dividends in the foreseeable future.
Pre-emptive Rights
Holders of common stock are not entitled to pre-emptive or subscription or conversion rights, and there are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding shares of common stock are, and the shares of common stock offered hereby will be when issued, fully paid and non-assessable.
Share Purchase Warrants
We have issued and have outstanding warrants to purchase 3,785,300 shares of our common stock at an exercise prices ranging from $0.10 to $0.50 per share.
OptionsWe have issued and have outstanding options to purchase 3,450,000 shares of our common stock at an exercise price of $0.05 per share.
Convertible Securities
We have issued and have outstanding securities convertible into 9,600,000 shares of our common stock or any rights convertible or exchangeable into shares of our common stock.
Nevada Anti-Takeover laws
The Nevada Revised Statutes (the “NRS”) sections 78.378 to 78.3793 provide state regulation over the acquisition of a controlling interest in certain Nevada corporations unless the articles of incorporation or bylaws of the corporation provide that the provisions of these sections do not apply. Our articles of incorporation and bylaws do not state that these provisions do not apply. The statute creates a number of restrictions on the ability of a person or entity to acquire control of a Nevada company by setting down certain rules of conduct and voting restrictions in any acquisition attempt, among other things. The statute is limited to corporations that are organized in the state of Nevada and that have 200 or more stockholders, at least 100 of whom are stockholders of record and residents of the State of Nevada; and does business in the State of Nevada directly or through an affiliated corporation. Because of these conditions, the statute does not apply to our company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of the Record Date, there were approximately 49,004,912 shares of our common stock outstanding. The following table sets forth certain information regarding our common stock, beneficially owned as of the Record Date, by each person known to us to beneficially own more than 5% of our common stock, each executive officer and director, and all directors and executive officers as a group. We calculated beneficial ownership according to Rule 13d-3 of the Exchange Act as of that date. Shares issuable upon exercise of options, warrants or other securities that are exercisable, exchangeable or convertible within 60 days after the Record Date are included as beneficially owned by the holder. Beneficial ownership generally includes voting and dispositive power with respect to securities. Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole dispositive power with respect to all shares beneficially owned.
Dr. Ashok K. Sood President, Chief Executive Officer and Director | 8,300,000 | (1) | 16.94 | % | ||||
Dr. Yash R. Puri Executive Vice President, Chief Financial Officer and Director | 8,100,000 | 16.53 | % | |||||
Alan Donenfeld Paragon Capital Advisors LLC 110 East 59th Street, 22nd fl New York, NY 10022 | 9,560,639 | (2) | 18.21 | % | ||||
Larry Butz Daybreak Special Situations Fund Ltd. 143 E. Main St Suite 150 Lake Zurich, IL 60047 | 10,071,130 | (3) | 19.99 | % | ||||
Marilyn Phillips Debt Opportunity LLLP 20711 Sterlington Drive Land O' Lakes, FL 34638 | 5,746,059 | (4) | 11.27 | % | ||||
All executive officers and directors as a group (two persons) | 41,778,828 | 74.76 | % |
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Financial Statements
For information regarding our most recent financial information and statements, which are herein incorporated by reference and are attached asAnnex B hereto, you are urged to review the Company’s most recent Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission (“SEC”).
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We are a development stage company focused on developing and commercializing thin film solar cell technologies that employ nanostructured materials and designs. We are pioneering the development of thin film, high efficiency solar cells for applications such as power generation for electrical grids as well as for local applications, including lighting, heating, traffic control, irrigation, water distillation, and other residential, agricultural and commercial uses.Meeting?
We intend to becomeannounce preliminary voting results at the Annual Meeting and disclose final results in a highly competitive, low cost provider of terrestrial photovoltaic cells for both civilianCurrent Report on Form 8-K filed with the U.S. Securities and military applications. These cells will be based on low cost substrates such as glass and flexible substrates such as stainless steel. Our primary goal is to introduce a product which offers significant cost savings per watt over traditional silicon based solar cells. To date, we have not generated material revenues or earnings as a result of our activities.Exchange Commission (the “SEC”) within four business days after the Annual Meeting.
Results of Operations
Our revenues are derived from research and development grants and contracts awarded toWho pays the company by government and private sector.
Year Ended December 31, 2015 Compared to the Year Ended December 31, 2014
Revenues
Currently we are in an early stage in our development and have recorded $159,882 of revenuecost for the year ended December 31, 2015 compared to $218,270 of revenue for the year ended December 31, 2014 a decrease of $58,388 or 26.75%. We anticipate emerging from the development stage in fiscal 2017. The revenue recorded is from research and development grants or contracts to develop solar cells using Magnolia’s technology.
Cost of Revenues
Cost of revenues for the year ended December 31, 2015 were $102,069 as compared to $135,356 for the year ended December 31, 2014, a decrease of $33,287 or 24.59%. Cost of revenues were comprised of direct labor, direct travel, materials, and subcontractors for the solar cell development. The decrease in cost of revenues for this period was attributable to reductions in direct labor due to work on some contracts being completed.
Operating Expenses
Indirect and Administrative Labor
Indirect and administrative labor expense for the year ended December 31, 2015 was $160,483 as compared to $198,800 for the year ended December 31, 2014, a decrease of $38,317 or 19.27%. Indirect labor and benefits were comprised of wages for the administrative staff, payroll taxes, health insurance, disability insurance, indirect travel, other administrative expenses, provision for vacation time, and stock compensation expense. The decrease in indirect and administrative expenses for this period was primarily attributable to a decrease in indirect labor, benefits and travel costs.
Professional Fees
Professional fees for the year ended December 31, 2015 were $150,179 as compared to $138,260 for the year ended December 31, 2014, an increase of $11,919 or 8.62%. Professional fees were comprised of accounting, business services, public relations, audit, and legal fees. The increase in professional fees for this period was attributable primarily to an increase in legal counsel costs incurred with the Ecoark transaction.
Depreciation and Amortization Expense
Depreciation and amortization expense for the year ended December 31, 2015 was $35,962 as compared to $35,962 for the year ended December 31, 2014, representing no increase or decrease. Depreciation and amortization expense was comprised of amortization of the license fee paid for the technology license, amortization of the debt issue, and depreciation on the property and equipment.
General and Administrative
General and administrative expense for the year ended December 31, 2015 was $37,145 as compared to $43,629 for the year ended December 31, 2014, a decrease of $6,484 or 14.86%. General and administrative expense was comprised of expenses for office lease, computer, office supplies, dues and subscriptions, worker’s compensation, disability insurance, printing, telephone, business meals, repairs and maintenance, public relations, advertising, state taxes, business gifts and other miscellaneous items. The decrease in general and administrative expense for this period was attributable to general costs cuts, offset by bad debts expenses incurred.
Interest Expense
Interest expense for the year ended December 31, 2015 was $240,000 as compared to $240,000 for the year ended December 31, 2014. Interest expense was comprised of interest incurred on outstanding long-term debt.
Net Loss
As a result of the aforesaid, our net loss was $565,941for the year ended December 31, 2015, as compared to a loss of $573,718 for the year ended December 31, 2014, a decrease of $7,777 or 1.36%.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.
To date we have financed our operations through government grants, the sale of our common stock and the issuance of debt.
At December 31, 2015 and December 31, 2014 we had cash of $45,870 and $25,127, respectively, and working capital deficit of $3,025,606 and $2,766,811, respectively. The decrease in working capital was due to decrease in accounts receivable and an increase in accrued expenses. The opinion of our independent registered public accounting firm on our audited financial statements as of and for the year ended December 31, 2015 contains an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon raising capital from financing transactions.
Net cash provided by operating activities was $20,743 for the year ended December 31, 2015, as compared to net cash used in operating activities of $93,045 for the year ended December 31, 2014. The increase in net cash provided by operating activities was attributable to a decrease in accounts receivable and an increase in accounts payable.
There were no investing activities for the year ended December 31, 2015 or December 31, 2014. There was no cash used in investing activities because we did not add to plant and equipment.
There were no financing activities for the year ended December 31, 2015 or December 31, 2014. There were no capital raising transactions during the reporting period.
Since our inception, we have experienced negative cash flow from operations and expect to experience significant negative cash flow from operations in the future. In addition, we have $2,400,000 of original issue discount senior secured convertible notes that originally matured on December 31, 2014. On January 29, 2016, the Company entered into an agreement with holders of the notes to extend the maturity to June 30, 2016. Also on January 29, 2016, we entered into a Merger Agreement with Ecoark providing, among other things, for the acquisition of Ecoarksoliciting proxies by the Company in a share for share exchange pursuant to which it is contemplated that, immediately following the closing, Ecoark shareholders will own approximately 95%Board of the outstanding share of the Company. The Company filed a preliminary 14A Proxy Statement informing its shareholders of the Company’s intent to hold a shareholder meeting to vote on certain proposals to amend the Articles of Incorporation to increase of the authorized shares of common stock to 100,000,000 shares, to effect the creation of 5,000,000 shares of "blank check" preferred stock, to approve a reverse stock split of the common stock 1 for 250, and to change the name of the corporation to “Ecoark Holdings Inc.” Subject to the approval of the Company’s shareholders, it is anticipated that the Merger will be completed in March 2016. Under the January 29, 2016 agreement with their holders, the notes will convert to equity when the Merger is completed. However, there can be no assurance that the Company will successfully complete and disseminate the proxy statement or that the proposals therein will be approved by the shareholders. Furthermore, no assurances can be made that the Merger will be completed, as anticipated. In addition, if the Merger does not close, there can be no assurance that we will be successful in reaching a satisfactory agreement with holders of the notes or that we will reach an agreement at all to further extend the notes or convert them into equity.Directors?
We will needbear the cost of soliciting proxies, including the cost of preparing, printing and mailing the materials in connection with the solicitation of proxies. We will reimburse brokerage firms and other custodians, nominees and fiduciaries for reasonable expenses incurred by them in sending the proxy materials to raise additional funds in the future so that we can expand our operations and repay our indebtedness due under the original issue senior secured notes. Therefore our continuation as a going concern is dependent on our ability to obtain necessary equity funding to continue operations. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, government grants or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holdersbeneficial owners of our common stock. The inabilityIn addition to obtain additional capitalsolicitations by mail, our officers and regular employees may, restrict our ability to growwithout being additionally compensated, solicit proxies personally and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we may have to curtail our development plans and possibly cease our operations altogether. by mail, telephone, facsimile or electronic communication.
Off-Balance Sheet Arrangements
Since our inception, except for standard operating leases, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
We have had no changes in or disagreements with our independent registered public accountants
IMPORTANT INFORMATION REGARDING ECOARK INC.
BusinessWho is Ecoark?
Ecoark is a Delaware corporation incorporated by Randy May on November 28, 2011, under the provisions of The Delaware General Corporation Law, as amended. Ecoark Inc.Holdings is an innovative emerging growthAgTech company focused on the developmentsolutions that reduce food waste and deploymentimprove delivered freshness and product margins for fresh and perishable foods for a wide range of intelligent technologiesorganizations including growers, processors, distributors and consumer products to retailers, agriculture, food service, and commercial real estate.retailers. Ecoark has assembled a team and portfolio of proprietary, patented technologies to address the waste in supply and food chain. Ecoark accomplishesHoldings addresses this through four main operating subsidiaries – Intelleflex 100% ownership,its indirect wholly-owned subsidiary: Zest Labs, Inc. (“Zest Labs” or “Zest”). The Company committed to a plan to focus its business on Zest Labs and divested non-core assets in 2019 that included assets of Pioneer Products, 100% ownership, Eco3D 65% ownershipLLC (“Pioneer Products” or “Pioneer”) and Eco360 100% ownership.Magnolia Solar, Inc. (“Magnolia Solar”). Those assets are reported as held for sale and their operations are reported as discontinued operations in the consolidated financial statements. The subsidiary Eco3d, LLC (“Eco3d”) was sold on April 14, 2017, and is also reported as held for sale and discontinued operations in the consolidated financial statements. All discontinued operations have been sold or ceased operations by September 30, 2019, so there are no remaining assets or liabilities of the discontinued operations. The Company has 13 employees of continuing operations and no employees of discontinued operations as of the date of this filing.
ProductsOur principal executive offices are located at 5899 Preston Road #505, Frisco, Texas 75034, and Servicesour telephone number is (479) 259-2977. Our website address is http://zestlabs.com/. Our website and the information contained on, or that can be accessed through, our website will not be deemed to be incorporated by reference in and are not considered part of this report.
Intelleflex®Ecoark Holdings’ continuing operations focus on solutions offered by Zest Labs.
Intelleflex's ZEST Data ServicesZest Labs offers freshness management solutions for fresh food growers, suppliers, processors, distributors, grocers, and restaurants. Its Zest Fresh solution is a secure, multi-tenant cloud-based data collection platform for aggregatingpost-harvest shelf-life and real-time permission-based sharing of information. ZEST Fresh, a fresh foodfreshness management solution that utilizesimproves delivered freshness of produce and protein and reduces post-harvest losses at the ZEST Data Service platform,retailer due to temperature handling and processing by 50% or more by intelligently matching customer freshness requirements with actual product freshness. It focuses on threefour primary value propositions – operational efficiency, consistent food quality,freshness, reduced waste, and improved food safety. ZESTZest Fresh empowers workers with real-time analytic tools and alerts that improve efficiency while driving quality consistency through best practice adherence on every pallet. ZESTat a pallet level. Zest Labs also offers its Zest Delivery solution that provides real-time monitoring and control for prepared food delivery containers, helping delivery and dispatch personnel ensure the quality and safety of delivered food.
Eco3D™Zest Labs was previously known as Intelleflex Corporation. Effective on October 28, 2016, Intelleflex Corporation changed its name to Zest Labs, Inc. to align its corporate name with its mission and the brand name of its products and services.
The Zest Fresh value proposition is to reduce fresh food loss by improving quality consistency. In the U.S. produce market, it is reported that roughly 30% of post-harvest fresh food is lost or wasted and therefore not consumed. Both fresh food producers and retailers bear significant expense when harvested food is either rejected due to early spoilage or reduced in value due to early ripening. Zest Labs believes that a significant portion of this waste can be attributed to inconsistent quality or freshness based on variable post-harvest processing and handling. Fresh food producers and retailers manage food distribution and inventory based on the harvest date, with the assumption that all food harvested on the same day will have the same freshness. However, studies have shown that harvest conditions and post-harvest handling can have a significant effect on the actual remaining freshness and, if not properly accounted for, can result in food loss or spoilage ahead of expectations. Zest Fresh empowers fresh food producers and retailers to significantly reduce the post-harvest loss by providing real time guidance to process adherence, intelligent distribution, and best handling practices, with a goal of providing significant financial savings to fresh food producers and retailers.
Eco3DZest Labs has developed the industry’s first freshness metric called the Zest Intelligent Pallet Routing Code (“ZIPR Code”). The ZIPR Code has three main components: Harvest Quality which sets total freshness capacity (for example, 12 days for strawberries), Handling Impact which reflects aging acceleration due to improper handling, and Future Handling which accurately reflects how the product will be handled (for example, store shelf temperature may be 40 degrees Fahrenheit instead of the ideal 34 degrees Fahrenheit).
Zest Fresh is focusedoffered to fresh food producers, processors, distributors, restaurants, and grocers with pricing based on transitioning businessesthe number of pallets managed by Zest Fresh, typically from 2D technologythe field harvest through retail grocery delivery. The Zest Fresh service includes a re-usable wireless Internet of Things (“IoT”) condition sensor that has existed for hundredstravels with the pallet of years, to a worldfresh food from the field or processor through retail delivery, continuously collecting product condition data. The collected pallet product data is analyzed, using artificial intelligence-based predictive analytics in real-time by the Zest Fresh cloud-based solution, with the fresh food producers and retailers accessing data through Zest Fresh web and mobile applications. Zest Fresh provides workers with real-time feedback on the current handling or processing of digital 3D. Eco3D incorporates a variety of 3D technologieseach pallet, empowering best practice adherence to achieve customer goalsmaximum freshness. Zest Fresh also provides dynamic updates as to actual product freshness for each pallet, enabling intelligent routing and objectives. Usinginventory management of each pallet in a variety of instruments, Eco3D can capture existing conditions – topography, buildings, exterior/interior spaces, etc. – in highly accurate detailmanner that allows for 2Densures optimum delivered freshness. Zest Fresh also includes integrated blockchain support to grower and 3D measurement. These measurements formshipper customers via the basis for analysis, design, documentation, and quality control. Eco3D offers solutions in multiple industries throughout the Americas, including construction and remodeling; big box retail; forensics; healthcare; and facilities maintenance.Zest Fresh platform.
Pioneer ProductsZest Labs’ Zest Delivery solution helps to manage prepared food delivery from the restaurant through to the customer. Zest Delivery manages the delivery container environment, both monitoring and controlling the product condition. The value of Zest Delivery is to manage prepared meals in an ideal state for consumption, while accommodating extended pre-staging or delivery times. Extended pre-staging times are associated with “instant delivery” services of prepared meals, where the meals are often pre-staged in a delivery area ahead of demand. While pre-staging enables fast demand response time, it can result in prepared meals being staged for extended periods, which can potentially impact quality, value, and safety. Zest Delivery monitors and controls the delivery container environment to preserve the prepared meal in ideal, ready to consume condition. Zest Delivery also provides the dispatcher with real-time remote visibility to the condition of available meals and confirming quality prior to dispatch. Zest Delivery provides automated, real-time visibility for a very distributed fleet of drivers, reflecting prepared meal food safety, quality and availability. Zest Delivery is offered to meal delivery companies based on the quantity of delivery containers and frequency of use.
Pioneer Products acts as the sales arm for EcoarkZest Labs currently holds rights to 69 U.S. patents (with additional patents pending), numerous related foreign patents, and U.S. copyrights relating to certain aspects of its subsidiaries.Zest software, hardware devices including Radio-Frequency Identification (“RFID”) technology, software, and services. In addition, Zest Labs has registered, and/or has applied to register trademarks and service marks in the U.S. and a strongnumber of foreign countries for “Intelleflex,” the Intelleflex logo, “Zest,” “Zest Data Services,” and successful relationship with the world’s largest retailer, Pioneer Products also has vendor relationships (and Vendor Numbers) withZest, Zest Fresh and Zest Delivery logos, and numerous other trademarks and service marks. Many of Zest Labs’ products have been designed to include licensed intellectual property obtained from third-parties. Laws and regulations related to wireless communications devices in the jurisdictions in which Zest Labs operates and seeks to operate are extensive and subject to change. Wireless communication devices, such as RFID readers, are subject to certification and regulation by governmental and standardization bodies. These certification processes are extensive and time consuming, and could result in additional testing requirements, product modifications or delays in product shipment dates.
Although most components essential to Zest Labs’ business are generally available from multiple sources, certain key components including, but not limited to, microprocessors, enclosures, certain RFID or other wireless custom integrated circuits, and application-specific integrated circuits are currently obtained by Zest Labs from single or limited sources, principally in Asia.
Zest Labs is part of a very competitive industry that markets solutions to fresh food supply chain users, such as fresh food growers, producers, and retailers. As such, Pioneer strategically leverages its role as a trusted supplier to these retailers with existingMany other companies that are both more established and command much greater resources compete in this market. While Zest Fresh and Zest Delivery offer new technical approaches and new products.
Eco360
Eco360user value, it remains uncertain if Zest Labs will gain sufficient adoption of its products to make them viable in the market. Further, it is cloud-based software acquiredunclear what industry competitors are developing that might address similar user needs. Zest Labs’ products provide a new approach for industry participants, and as with any new approach, adoption is uncertain as many in the industry can be slow to expandembrace new technology and/or new approaches. These market challenges can lead to extended sales cycles that may include extended pilot testing often at Zest Labs’ expense, for which the endoutcome remains unclear until the completion of each test. For these reasons, and others, forecasting new business adoption and future revenue can be very difficult and volatile. However, the Company believes that Zest Fresh offers fresh food retailers, growers, shippers, processors, and distributors an opportunity to end solutiondifferentiate their businesses in ways that the shipment of canned and boxed food products cannot, as competition in the agriculture, grocery, food service and restaurant markets continues to customers.
Competitionaccelerate.
The marketacquisition of 440labs in May 2017 allowed Zest Labs to internally maintain its software development and information solutions for cloud-based, real-time supply chain analyticcloud, mobile, and IoT applications. 440labs had been a key development partner with Zest Labs for more than four years prior to the May 2017 acquisition, contributing its expertise in scalable enterprise cloud solutions is rapidly evolvingand mobile applications.
On May 31, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with new competitorsTrend Discovery Holdings Inc., a Delaware corporation (“Trend Holdings”) for the Company to acquire 100% of Trend Holdings pursuant to a merger of Trend Holdings with competing technologies, including companies that have greater resources than Ecoark. Some of these companies have brand recognition, established relationships with retailers, and owninto the manufacturing process. There are currently hundreds of sustainability programs availableCompany (the “Merger”). The Merger was completed on the May 31, 2019 and as agreed in the market. These programs are offered through retailers, manufacturers,Merger Agreement, the Company is the surviving entity in the Merger and service providers. Ecoark believes that, analyzing the competitive factors affecting the market for its solutions, its products compete favorably by offering an integrated supply chain solution, with other companies offering real-time supply chain analytic solutions.separate corporate existence of Trend Holdings has ceased to exist.
CustomersTrend Holding’s primary asset is Trend Discovery Capital Management. Trend Discovery Capital Management manages several entities including Trend Discovery LP and Suppliers
One customer made up approximately 66%, 72% and 12%Trend Discovery SPV I. Trend Discovery LP is a hybrid hedge fund with a since inception track record of Ecoark’s revenue foroutperforming the nine months ended September 30, 2015 andS&P 500. Trend Discovery LP primarily invests in early-stage startups. In the years ended December 31, 2014 and 2013. Ecoark generally sources its components and raw materials locally. Most of the materials required are readily available from multiple sources. While multiple suppliers are available, one supplier accounted for approximately 73%, 68% and 17% of Ecoark’s cost of goods sold for the nine months ended September 30, 2015 and the years ended December 31, 2014 and 2013.
Intellectual Property
Ecoark and its subsidiaries have had more than 50 patents issued by the United States Patent and Trademark Office, with morethan an additional 15 patents currently pending.
Government Regulation
Ecoark does not believe its productsnear-term, Trend Discovery LP’s performance will be subjectdriven by its investment in Volans-i, a fully autonomous vertical takeoff and landing (“VTOL”) drone delivery platform. Trend Discovery LP currently owns approximately 1% of Volans-i, and has participation rights to any government regulation or,future financings to the extent applicable, willmaintain its ownership at 1% indefinitely. More information can be material. Ecoark does not know the extent to which any existing or new regulations may affect its ability to conduct its business.
Employees
As of January 31, 2016, Ecoark employed approximately 50 employees. None of the employees are subject to a collective bargaining agreement. It considers its relations with our employees to be good.
Properties
Ecoark does not own any properties. It currently leases a 4,086 square feet of combined office and production space locatedfound at 3333 Pinnacle Hills Parkway, Suite 220, Rogers, Arkansas 72758.
Legal Proceedings
Ecoark is not a party to any lawsuit or administrative proceeding as of the date hereof. Its management is not aware of any lawsuits or administrative proceedings are threatened or anticipated, and we are not considering the institution or prosecution of any legal proceeding as of the date hereof.
Financial Statements
For our most recent financial information and statements, Annex C contains Ecoark’s unaudited financial statements prepared by Ecoark’s management for the year ended December 31, 2015 and Annex D contains Ecoark’s audited financial statements for the years ended December 31, 2014 and 2013.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014 (dollars in thousands)
Net Sales
Net sales for the year ended December 31, 2015 were $7,880 as compared to $5,932 for the year ended December 31, 2014. The 33% increase was related to expanded operations, including a significant increase in service revenues and product sales.
Cost of Sales
Cost of sales for the year ended December 31, 2015 was $6,882 as compared to $6,077 for the year ended December 31, 2014. The increase was directly related to the increase in net sales. The improvement in gross profit was achieved as a result of higher margin service revenues.
Operating Expenses
Salaries and Salary Related Costs
Salaries for the year ended December 31, 2015 were $3,914, up 38% from $2,836 for the year ended December 31, 2014. The increase was related to the expanded operations referred to above regarding the increase in sales and an increase in stock based compensation. In addition, a number of individuals became employees compared with previous contractor status.
Professional Fees
Professional fees for the year ended December 31, 2015 of $3,910, were down 38% from $5,311 incurred for the year ended December 31, 2014 as a result of the conversion of contractors to employees and a decrease in consulting expense.
Other General and Administrative
Other general and administrative expenses for the year ended December 31, 2015 were $1,636 in line with $1,630 for the year ended December 31, 2014.
Depreciation, Amortization and Impairment
Depreciation, amortization and impairment for the year ended December 31, 2015 were $1,226, compared to $1,708 for the year ended December 31, 2014. The 28% decrease resulted from certain customer list intangibles becoming fully amortized in September 2015 while 2014 included a full year of amortization.
Interest Expense
Interest expense, net of interest income, for the year ended December 31, 2015 was $785 as compared to $1,270 for the year ended December 31, 2014. The 38% decrease was a result of lower interest accruing on the related party debt in 2015 because of a decrease in interest rates.
Net Loss
Net loss for the year ended December 31, 2015 was $10,473 as compared to $14,264 for the year ended December 31, 2014. The $3,791 decrease in net loss was primarily from an increase of $1,143 in gross profit, a decrease in total operating expenses of $799, a decrease in interest expense of $485 and an increase as a result of a loss from discontinued operations in 2014.
Discontinued Operationsflyvoly.com.
In November 2014,May 2018, the Ecoark sold its subsidiary, SA Concepts. InHoldings Board of Directors (the “Board”) approved a plan to sell Pioneer Products (“Pioneer”) and Sable Polymer Solutions, LLC (“Sable”). Pioneer concluded operations in February 2019, and the sale of Sable assets was completed in March 2019. Relevant assets and liabilities are classified as held for sale and operations are classified as discontinued in the consolidated financial statements.
In May 2018, the Board also approved a plan to sell Magnolia Solar, and the sale was completed in May 2019. Prior to the sale, relevant assets and liabilities were classified as held for sale and operations are classified as discontinued in the consolidated financial statements.
PROPOSAL NO. 1 – ELECTION OF DIRECTORS
The number of directors that serve on the Board of Directors is currently set at five and may be fixed from time to time by the Board in the manner provided in our bylaws. In accordance with our bylaws, directors are elected to serve until the next annual meeting of stockholders or until their successors are duly elected and qualified or until their earlier removal, resignation or death.
Director Nominees
Name | Age | Positions Held with the Company | Director of the | |||
Randy S. May | 55 | Chairman of the Board and Chief Executive Officer | 2016* | |||
John P. Cahill | 64 | Director | 2016 | |||
Peter A. Mehring | 57 | President, CEO and President of Zest Labs, Inc. and Director | 2017 | |||
Gary M. Metzger | 67 | Lead Director | 2016* | |||
Steven K. Nelson | 61 | Director | 2017 |
* Messrs. May and Metzger served on the board of directors of Ecoark, soldInc. from 2011 and 2013, respectively, until it effected a reverse acquisition of Ecoark Holdings, Inc. (“Ecoark” or “the Company”, formerly known as Magnolia Solar Corporation) on March 24, 2016. Messrs. May and Metzger joined the net assets in exchange for 2,000,000 Class A shares of stock. The valueBoard effective on April 11, 2016.
Each of the treasury stock in this transactionfive director nominees listed above currently serves as a director of $616the Company and was equalrecommended by the Corporate Governance and Nominating Committee of the Board (the “Nominating Committee”) and nominated by the Board to stand for election at the Annual Meeting.
There are no arrangements or understandings between Ecoark and any person pursuant to which such person has been elected a director.
Vote Required
Pursuant to our bylaws, directors are elected by a plurality of the votes cast at a meeting at which a quorum is present. The five nominees receiving the greatest number of votes will be elected.
Unless contrary instructions are given, shares represented by proxies solicited by the Board of Directors will be voted for the election of each of the nominees to the valueBoard of Directors. If the person named as nominee should be unable or unwilling to stand for election at the time of the net assetsAnnual Meeting, proxies will be voted for a replacement nominee designated by the Board of SA Concepts sold. Therefore, there wasDirectors or, in the event no gain or loss attributablesuch designation is made, proxies will be voted for a lesser number of nominees. At this time, the Board knows of no reason why the nominees listed above may not be able to serve as a director if elected. Ages of the disposal of this subsidiary. The operations of SA Conceptsnominees are reflected as loss from discontinued operations inof August 19, 2019. Proxies cannot be voted for a greater number of persons than the consolidated statements of operations in accordance with ASC 205-50.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Net Sales
Net sales for the year ended December 31, 2014 was $5,932,093 as compared to $1,370,689 for the year ended December 31, 2013. The 333% increase was related to a significant increase in product sales and including a full year of operations for the consulting services business in 2014.
Cost of Sales
Cost of sales for the year ended December 31, 2014 was $6,077,157 as compared to $1,519,502 for the year ended December 31, 2013. The increase was directly related to the increase in net sales. Research and development expenses prevented Ecoark from achieving gross profit in both years.
Operating Expenses
Salaries and Salary Related Costs
Salaries for the year ended December 31, 2014 were $2,836,305, up 125% from $1,259,833 for the year ended December 31, 2013. The increase was related to the expanded operations referred to above regarding the increase in sales and an increase in stock based compensation.
Professional Fees
Professional fees for the year ended December 31, 2014 of $5,310,795 were in line with $5,401,428 incurred for the year ended December 31, 2013.
Other General and Administrative
Other general and administrative expenses for the year ended December 31, 2014 were $1,630,577 compared to $803,476 for the year ended December 31, 2013. The 103% increase was related to having a full year of operations for certain subsidiaries in 2014 compared with a partial year in 2013.
Depreciation, Amortization and Impairment
Depreciation, amortization and impairment for the year ended December 31, 2014 was $1,708,568, compared to $1,486,532 for the year ended December 31, 2013. The 15% increase resulted from additions to property and equipment.
Interest Expense
Interest expense for the year ended December 31, 2014 was $1,270,228 as compared to $574,925 for the year ended December 31, 2013. The 121% increase was a result of several notes issued, principally to related parties.
Net Loss
Net loss for the year ended December 31, 2014 was $14,263,985 as compared to $10,240,026 for the year ended December 31, 2013. The $4,023,959 increase in net loss was primarily from an increase in operating expenses of $2,534,976, an increase in interest expense of $695,303 and an increase in losses from discontinued operations of $787,591.
Discontinued Operations
In November 2014, Ecoark sold its subsidiary, SA Concepts. In the sale, Ecoark sold the net assets in exchange for 2,000,000 Class A shares of stock. The value of the treasury stock in this transaction of $616,276 was equal to the value of the net assets of SA Concepts sold. Therefore, there was no gain or loss attributable to the disposal of this subsidiary. The operations of SA Concepts are reflected as loss from discontinued operations in the consolidated statements of operations in accordance with ASC 205-50.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.
To date we have financed our operations through sales of common stock and the issuance of debt.
At December 31, 2015 and December 31, 2014 we had cash of $1,962 and $2,220, respectively, and working capital deficit of $913 and $6,636, respectively. The increase in working capital was due to the decrease in the current portion of long-term debt-related parties resulting from to the conversion of debt to equity. Ecoark is dependent upon raising capital from financing transactions.
Net cash used by operating activities was $7,671 for the year ended December 31, 2015, as compared to net cash used in operating activities of $8,012 for the year ended December 31, 2014. Cash used in operating activities is related to Ecoark’s net loss partially offset by non-cash expenses.
Net cash provided in financing activities was $7,387 from the sale of common stock less net repayments of long-term debt for the year ended December 31, 2015 and $5,143 from the sale of common stock and $5,034 from net issuances of long-term debt for the year ended December 31, 2014.
Since our inception, Ecoark has experienced negative cash flow from operations and expects to experience significant negative cash flow from operations in the future. It will need to raise additional funds in the future so that it can expand its operations and repay its indebtedness. The inability to obtain additional capital may restrict its ability to grow and may reduce its ability to continue to conduct business operations.
At December 31, 2015 maturities of Ecoark’s long-term debt-related parties and long-term debt are due in 2016.
Off-Balance Sheet Arrangements
Ecoark does in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable interest entities.
MANAGEMENT OF MAGNOLIA SOLAR FOLLOWING THE MERGER
The following table sets forth information regarding Magnolia Solar’s executive officers and directors as of the date of this proxy statement and three director nominees that will be elected directors effective upon completion of Merger and the executive officers after the Merger.named herein.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” EACH OF THE FOREGOING NOMINEES. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE VOTED “FOR” EACH OF THE FOREGOING NOMINEES UNLESS STOCKHOLDERS SPECIFY A CONTRARY VOTE. | ||||||
INFORMATION REGARDING THE BOARD AND ITS COMMITTEES
Director Nominees
Set forth below is biographical information for each director nominee listed above, including a brief listing of principal occupations for at least the past five years and other major affiliations. The following descriptions also outline the specific experience, qualifications, attributes, and skills that qualify each person to serve on the Board of Directors.
Randy S. May:May.
Ecoark is a Delaware corporation incorporated by Randy May on November 28, 2011. Since then, Randy Mr. May has served as CEO and Chairman of the Board of Ecoark. As CEO, Randy leads a strong management team that is workingEcoark Holdings, Inc. since March 2016 and served as Chief Executive Officer of the Company from March 2016 through March 28, 2017, and then from September 21, 2017, to deliver Ecoark’s missionthe present. He previously served as chairman of sustainable solutions throughthe board of directors and as chief executive officer of Ecoark, Inc. from its subsidiaries and strategic partners. Under his leadership, Ecoark has completed three strategic acquisitions since 2012. Randyincorporation until its reverse acquisition with Magnolia Solar in March 2016. Mr. May is a 25-year retail and supply-chain veteran with extensive experience in marketing, operational and executive roles.
Prior to Ecoark, RandyMr. May held a number of roles with Wal-Mart Stores, Inc. (“Walmart”), the world'sworld’s largest retailer based in Bentonville, Arkansas. From 1998-2004 Randy1998 to 2004, Mr. May served as Divisional Manager for half the United States for one of such company’sWalmart’s specialty divisions. There,divisions, where he was responsible for all aspects of strategic planning, finance, and operations for more than 18001,800 stores. He had complete P&Lprofit and loss responsibility for more than $4 Billion dollarsbillion of sales at the time. Under Randy’sMr. May’s leadership, the business grew sales and market share in a strong competitive market. As founder of EcoarkMr. May’s qualifications and Ecoark’s primary innovator, it is essentialbackground that qualify him to have Mr. Mayserve on the Board include his strong managerial and leadership experience, his extensive knowledge of Directors.
strategic planning, finance and operations, as well his ability to guide the Company.
Greg Landis:
John P. Cahill.Mr. LandisCahill has served on the Board of Directors since May 2016. Mr. Cahill is currently Chief of EcoarkStaff and Special Counsel to the Archbishop of New York. He has held this position since 2011. Mr. Landis is a Certified Public AccountantApril of 2019. Previously he was Senior Counsel at the law firm of Norton Rose Fulbright (formerly Chadbourne & Parke LLP) and since August 2009, has served asin that capacity since 2007. He is also a principal at the principalPataki-Cahill Group LLC, a strategic consulting firm focusing on the economic and policy implications of domestic energy needs, which he co-founded in March 2007. He served in various capacities in the administration of the accounting firmGovernor of Landis & Associates, PLLCNew York, George E. Pataki from 1997 to 2006, including Secretary and Chief of Staff to the Governor from 2002 to 2006. He also serves on the board of directors of Sterling Bancorp, Inc., a bank holding company listed on the New York Stock Exchange (“NYSE”). Mr. Cahill’s extensive experience as an attorney in Bentonville, Arkansas. Mr. Landis is licensedgovernment and in business, as a CPAwell as his extensive knowledge of and high-level experience in Arkansasenergy and iseconomic policy, qualifies him as a member of the American Institute of Certified Public Accountants and the Arkansas Society of Certified Public Accountants. Previously,Board.
Peter A. Mehring. Mr. LandisMehring has served as the Chief FinancialExecutive Officer of banks in Kansas, Arkansas and Texas including organizations with over $2 billion in assets. Prior to these positions, he was a manager in the largest CPA firm in Kansas. Mr. Landis graduated from Wichita State University in 1985 with a Bachelor’s degree in Business Administration and a major in Accounting. With Mr. Landis’s financial expertise and knowledgePresident of Ecoark’s operations, Mr. Landis’s experiencesubsidiary, Zest Labs, Inc. since 2009 and qualifications are essential tobecame a member of the Board of Directors.Directors in January 2017. He was elected President of Ecoark on September 25, 2017. Mr. Mehring brings extensive experience in engineering, operations and general management at emerging companies and large enterprises. As Chief Executive Officer of Zest Labs, Inc., he has led the Company’s efforts in pioneering on-demand data visibility and condition monitoring solutions for the fresh produce market. Prior to joining Zest Labs, Inc., from 2004 to 2006, Mr. Mehring was the Vice President of Macintosh hardware group at Apple Computer, Senior Vice President of Engineering at Echelon, and founder, General Manager and Vice President of R&D at UMAX. Mr. Mehring held Engineering Management positions at Radius, Power Computing Corporation, Sun Microsystems and Wang Laboratories. Mr. Mehring’s knowledge and experience in engineering, operations, management, product and service development, and technological innovation are among the many qualifications that have led to the conclusion that Mr. Mehring is qualified to serve on the Board.
Gary Metzger:M. Metzger.
Mr. Metzger has served on the Board of Directors since March 2016 and served on the Board of Directors of Ecoark, since 2013.Inc. from 2013 until its reverse acquisition with Magnolia Solar in March 2016. Mr. Metzger offers 40 years of product development, strategic planning, management, business development and operational expertise.expertise to the Board. He had served as an executive at Amco International, Inc. and Amco Plastics Materials, Inc., where in 1986 he was named President and served in such role for 24 years until Amco was sold to global resin distribution giantcompany, Ravago Americas, in December of 2011.2011, where he remains a product developer and product manager. Mr. Metzger was co-owner of Amco Plastics Materials, Inc. Since the sale ofand Amco International. Mr. Metzger has been serving as General Manager of Amco/Ravago.
Mr. MetzgerMetzger’s leadership and knowledge of manufacturing companies, product development, strategic planning, management, and business development are an asset to the Board of Directors. In addition to his leadership functions, Mr. Metzger spearheaded research and development for recycled polymers, new alloy and bio-based polymer development, and introducingintroduced fragrance into polymer applications. He also developed encrypted item level bar code identification technology, anti- counterfeitinganti-counterfeiting technologies, and antimicrobial technologies. Taken together, these are among the many qualifications and the significant experience that have led to the conclusion that Mr. Metzger is qualified to serve on the Board.
10
Steven K. Nelson. Mr. Nelson has served on the Board of Directors since April 2017. Since 2015, Mr. Nelson has been a lecturer for the Department of Accounting at the University of Central Arkansas. In 2015, Mr. Nelson retired as Vice-President, Controller of Dillard’s, Inc., where he was responsible for administering all aspects of financial accounting and reporting. Mr. Nelson began his career in 1980 as a staff accountant for Ernst & Young and attained the title of audit manager by the time he left the firm in 1984. Mr. Nelson maintains an active license as a Certified Public Accountant (“CPA”) in the State of Arkansas. Mr. Nelson’s 35-year career as a CPA and his extensive experience as controller of a publicly traded company qualify him to serve on the Board and its Audit Committee. His broad experience as the former controller of a public company uniquely qualifies Mr. Nelson to advise Ecoark not only on general accounting and financial matters but also on various technical accounting, corporate governance and risk management matters that the Board may address from time to time. He possesses key insight on financial reporting processes and external reporting issues. The Board has determined that Mr. Nelson qualifies as an “audit committee financial expert,” as defined by the rules of the SEC.
Director Independence
While our common stock is not listed on a national securities exchange that requires our independent board members, a majority of our directors and each member of our audit, compensation and nominating and governance committees are independent. A director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.
After reviewing all relevant relationships, the Board of Directors concluded that Cahill, Metzger, and Nelson are independent under the SEC rules adopted pursuant to the requirements of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and in accordance with NYSE Corporate Governance Rules. No director or executive officer of the Company is related to any other director or executive officer of the Company by blood, marriage or adoption, except that Mr. Metzger is Mr. Hoagland’s stepfather-in-law. In making its independence determination, the Board considered all relevant transactions, relationships, or arrangements, including those disclosed under the section titled “Certain Relationships and Related Transactions.”
Board Leadership Structure and Role in Risk Oversight
Roshan Weerasinghe –Board Leadership Structure. The Board of Directors has no fixed policy with respect to the separation of the offices of Chairman of the Board and Chief OperationsExecutive Officer. The Board retains the discretion to determine, at any time, whether to combine or separate the positions as it deems to be in the best interests of the Company and its stockholders. The roles of the Chairman of the Board and Chief Executive Officer are currently performed by one individual.
Mr. Weerasinghe started with Ecoark in 2014 and was promoted to Chief Operations Officer in 2015. He has experience that spans over 18 years at Wal-Mart, Ingersoll Rand Asia Pacific and Climate Control Technologies. Prior to joining Ecoark, he was the Senior Director of Compliance and Food Safety for Walmart China, working out of an office in Shenzhen, China. In 2011 and 2012, Mr. Weerasinghe had his own consulting business advising big box and small regional retailers.
HeOur bylaws provide that the Chairman of the Board may be elected by a majority vote of the Board of Directors and shall serve until the meeting of the Board following the next annual meeting of stockholders at which such Chairman is re-elected. The Chairman of the Board shall preside at all meetings. Otherwise, the Company’s Corporate Governance Guidelines (the “Guidelines”) provide that a lead director selected by the non-management directors (the “Lead Director”) shall preside at meetings of the Board at which the Chairman of the Board is not present. The Guidelines require that the Lead Director shall preside at executive sessions of the non-management directors. The non-management directors will meet in executive session, no less frequently than quarterly, as determined by the Lead Director, or when a director makes a request of the Lead Director. Gary M. Metzger currently serves as the Lead Director.
The Board believes that maintaining a healthy mix of qualified independent and management directors on the Board is an innovative, assertiveintegral part of effective corporate governance and goal oriented executive who offers a distinguished backgroundmanagement of successfully propelling quality programsthe Company. The Board also believes that the current leadership structure strikes an appropriate balance between independent directors and initiatives that spur operational growth and profitability. Mr. Weerasinghe has excellent cross-cultural communication skills honed through yearsdirectors, which allows the Board to effectively represent the best interests of experience operating in diverse countries including United States, China, Brazil, India, Thailand, Malaysia, Mexico, and Vietnam.the Company’s entire stockholder base.
Role of the Board in Risk Oversight. The Board of Directors believes that risk management is an important part of establishing, updating and executing our business strategy. The Board has oversight responsibility relating to risks that could affect the corporate strategy, business objectives, compliance, operations, and the financial condition and performance of the Company, and focuses its oversight on the most significant risks facing us and, on our processes, to identify, prioritize, assess, manage and mitigate those risks. The Board receives regular reports from members of the Company’s senior management on areas of material risk to us, including strategic, operational, financial, legal and regulatory risks. While the Board has an oversight role, management is principally tasked with direct responsibility for management and assessment of risks and the implementation of processes and controls to mitigate their effects on us.
Committees and Meetings of the Board of Directors of the Company
The Board of Directors meets on a quarterly basis but may have additional special meetings. The Board held [*] meetings during the year ended March 31, 2019. For the year ended March 31, 2019, all of our current directors attended at least [75%] of the total number of board meetings or committee meetings on which they served during their period of service. In addition, our guidelines provide that members of the Board are expected to attend the annual meeting of stockholders, when such meetings are held. We held an annual meeting of stockholders in 2017.
The Board of Directors has established an audit committee (the “Audit Committee”), the Compensation Committee and the Corporate Governance and Nominating (“Nominating”) Committee. Each of the committees has adopted a written charter, all of which are available in the Investor Relations section of our website at www.zestlabs.com.
Committee Memberships | ||||
Board Member | Audit | Compensation | Nominating | |
Randy S. May,Chairman | — | — | — | |
John P. Cahill | ![]() | ![]() | ![]() | |
Peter A. Mehring | — | — | — | |
Gary M. Metzger | ![]() | ![]() | ![]() | |
Steven K. Nelson | ![]() | ![]() | ![]() | |
Michael J. Green | ![]() | ![]() | ![]() | |
Number Of Meetings Held In Fiscal 2019 | 9 | [0] | [4] | |
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MANAGEMENT OWNERSHIP AFTER THE MERGERAudit Committee. The current members of our Audit Committee are Messrs. Nelson, as chair, Cahill, Metzger, and Green, each of whom is a non-employee member of our board of directors. Mr. Nelson is our audit committee chairman and financial expert, as that term is defined under the SEC rules implementing Section 407 of the Sarbanes-Oxley Act of 2002, and possesses financial sophistication, as defined under the rules of The Nasdaq Global Select Market.
The duties and responsibilities of the Audit Committee are set forth in the charter of the Audit Committee adopted by the Board. The Audit Committee generally assists the Board in its oversight of the relationship with our independent registered public accounting firm, financial statement and disclosure matters, the internal audit function, and our compliance with legal and regulatory requirements. In accordance with its charter, the Audit Committee meets as often as it determines necessary, and at least four times each year.
Management has the primary responsibility for our financial statements and the reporting process, and our independent registered public accounting firm is responsible for auditing the financial statements and expressing an opinion as to their conformity with accounting principles generally accepted in the United States. The Audit Committee also monitors our financial reporting process and internal control system, retains and pre-approves audit and any non-audit services to be performed by our independent registered accounting firm, directly consults with our independent registered public accounting firm, reviews and appraises the efforts of our independent registered public accounting firm, and provides an open avenue of communication among our independent registered public accounting firm, financial and senior management and the Board. The Audit Committee has the authority to retain independent legal, accounting, and other advisors.
The Board has determined that each member of the Audit Committee qualifies as an independent director under the Sarbanes-Oxley Act, related SEC rules and NASDAQ listing standards related to audit committees, and that each satisfies all other applicable standards for service on the Audit Committee. The Board has determined that Mr. Nelson meets the requirements adopted by the SEC for qualification as an audit committee financial expert. The identification of a person as an audit committee financial expert does not impose on such person any duties, obligations or liability that are greater than those that are imposed on such person as a member of the Audit Committee and the Board in the absence of such identification. Moreover, the identification of a person as an audit committee financial expert for purposes of the regulations of the SEC does not affect the duties, obligations or liability of any other member of the Audit Committee or of the Board. Finally, a person who is determined to be an audit committee financial expert will not be deemed an “expert” for purposes of Section 11 of the Securities Act of 1933.
The Audit Committee held nine meetings in fiscal 2019. The Audit Committee was established in accordance with Section 3(a)(58)(A) of the Exchange Act and operates under a written charter that satisfies the applicable standards of the SEC A copy of the audit committee charter is available on our website athttps://www.zestlabs.com/downloads/Audit-Commitee.pdf.
Compensation Committee. The duties and responsibilities of the Compensation Committee are set forth in the charter of the Compensation Committee adopted by the Board. The Compensation Committee is generally responsible for discharging the Board’s responsibilities relating to the compensation of our executive officers and other compensation matters. The Compensation Committee annually reviews the compensation of the Chief Executive Officer, other executive officers, and other employees, reviews and administers executive and equity compensation plans, other compensation and benefits plans, including perquisites, and establishes stock ownership guidelines. The Compensation Committee is also responsible for developing a management succession plan and overseeing management evaluations. In accordance with its charter, the Compensation Committee meets as often as it determines necessary, and at least four times each year.
The Compensation Committee currently consists of Messrs. Green as chair, Cahill, Metzger, and Nelson. The Board has determined that each member of the Compensation Committee qualifies as an independent director under the Sarbanes-Oxley Act, related SEC rules and NASDAQ listing standards related to compensation committees, and that each satisfies all other applicable standards for service on the Compensation Committee.
Although the Compensation Committee does not delegate any of its authority for determining executive compensation, the Compensation Committee may engage compensation consultants, independent legal counsel or other advisers in connection with its responsibilities. Additionally, the Compensation Committee periodically reviews our compensation strategy and its effect on the achievement of the Company’s goals with the Chief Executive Officer. The Compensation Committee exercises complete discretion in making all compensation decisions regarding cash compensation and equity awards for all of our executive officers.
Corporate Governance and Nominating Committee (“Nominating Committee”). The duties and responsibilities of the Nominating Committee are set forth in the charter of the Nominating Committee adopted by the Board. The Nominating Committee is responsible for identifying individuals qualified to serve on the Board and recommending individuals to be nominated by the Board for election by stockholders or appointed by the Board to fill vacancies. Among its duties and responsibilities, the Nominating Committee is responsible for shaping corporate governance, reviewing and assessing the Guidelines, recommending Board compensation, and overseeing the annual evaluation of the Board. The Nominating Committee has the authority to retain compensation or other consultants as well as search firms for director candidates. In accordance with its charter, the Nominating Committee meets as often as it determines necessary, but at least four times each year.
The Nominating Committee currently consists of Messrs. Cahill, as chair, Metzger, Nelson, and Green. The process followed by the Nominating Committee to identify and evaluate candidates includes (i) requesting recommendations from the Board, the Chief Executive Officer, and other parties, (ii) meeting to evaluate biographical information and background material relating to potential candidates and their qualifications, and (iii) interviewing selected candidates. The Nominating Committee also considers recommendations for nomination to the Board submitted by stockholders. A stockholder who desires to recommend a prospective nominee for the Board should notify the Secretary of the Company or any member of the Nominating Committee in writing with supporting material the stockholder considers appropriate. The Nominating Committee has the authority and ability to retain compensation or other consultants and search firms to identify or evaluate director candidates.
In evaluating the suitability of candidates to serve on the Board, including stockholder nominees, the Nominating Committee seeks candidates who are independent, as defined by the Sarbanes-Oxley Act, related SEC rules and NYSE listing standards, and who meet certain selection criteria established by the Nominating Committee. The selection criteria include many factors, including a candidate’s general understanding of elements relevant to the success of a publicly traded company in the current business environment, understanding of our business, and educational and professional background. The Nominating Committee also considers a candidate’s judgment, competence, anticipated participation in Board activities, experience, geographic location and special talents or personal attributes. The guidelines provide that the composition of the Board should encompass a broad range of skills, expertise, industry knowledge, diversity, and contacts relevant to our business. Moreover, with respect to incumbent directors, the Nominating Committee also considers past performance, including attendance at meetings and participation in and contributions to the activities of the Board, and the director’s ability to make contributions after any significant change in circumstances (including changes in employment or professional status).
Code of Ethics
We have a Code of Ethics as defined in Item 406 of Regulation S-K, which code applies to all of our directors and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. All directors, officers, and other employees are expected to be familiar with the Code of Ethics and to adhere to the principles and procedures set forth therein. The Code of Ethics forms the foundation of a comprehensive program that requires compliance with all corporate policies and procedures and seeks to foster an open relationship among colleagues that contributes to good business conduct and an abiding belief in the integrity of our employees. Our policies and procedures cover all areas of professional conduct, including employment policies, conflicts of interest, intellectual property, and the protection of confidential information, as well as strict adherence to all laws and regulations applicable to the conduct of our business.
Directors, officers, and other employees are required to report any conduct that they believe in good faith to be an actual or apparent violation of the Code of Ethics. The full text of the Code of Ethics is available on our website at https://www.zestlabs.com/downloads/Code-of-Ethics-2016.pdf. We intend to satisfy the disclosure requirements of Form 8-K regarding any amendment to, or a waiver from, any provision of our Code of Ethics by posting such amendment or waiver on our website.
Corporate Governance Guidelines
The Guidelines are designed to help ensure effective corporate governance and cover topics including, but not limited to, board composition and selection, director qualification standards, retirement policy, director responsibilities, selection of the lead director, executive sessions of non-management directors, communications from stockholders to the Board, Board committees, director orientation and continuing education, director compensation, management succession, annual evaluations of the Board and its committees, and public interactions. The Guidelines are reviewed by the Nominating Committee and revised when appropriate. The full text of the Guidelines is available on our website at www.zestlabs.com.
Director Compensation
During 2016, the Board of Directors adopted a non-employee director compensation program that consists of (i) quarterly grants of unrestricted common stock valued at $25,000, which are granted promptly following the close of each fiscal quarter and (ii) cash payments of $1,500 for attendance at Board of Directors meetings and $1,000 for attendance at committee meetings. The number of shares granted to the non-employee directors each quarter is based on the average closing price of our common stock as quoted on the OTC Markets for each trading day in the quarter. During the year ended March 31, 2018, the Company made grants of 5,591 shares, 7,508 shares, 9,960 shares and 12,691 shares to the non-employee directors for board service for the quarters ended June 30, 2017, September 30, 2017, December 31, 2017, and March 31, 2018, respectively. The grants vested immediately. For the year ended March 31, 2019, the Company made grants of 127,281 Non-Qualified Stock Options to each independent director.
The following table sets forth shows the compensation paid to our non-employee directors for service during the year ended March 31, 2019:
Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | Total ($) | |||||||||
John P. Cahill | 16,000 | 100,000 | 116,000 | |||||||||
Gary M. Metzger | 19,000 | 100,000 | 119,000 | |||||||||
Steven K. Nelson | 17,000 | 100,000 | 117,000 | |||||||||
Michael J. Green | 14,000 | 100,000 | 114,000 |
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and beneficial owners of greater than 10% of our common stock to file reports of holdings and transactions in Ecoark common stock with the SEC.
Based solely on its review of the copies of such forms furnished to Ecoark and written representations from certain reporting persons, Ecoark believes that all Section 16(a) filing requirements were met during our fiscal year ended March 31, 2019.
BENEFICIAL OWNERSHIP OF COMMON STOCK BY CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table provides information as of January 10, 2020, concerning beneficial ownership of the MGLT’sour capital stock held by (1) each of our affiliates, assuming the completiondirectors, (2) each of the transactions contemplatedour named executive officers, (3) all of our current directors and executive officers as a group, and (4) each group, person or entity known by the Merger Agreement.
Beneficial Owner | Beneficial Ownership | Percentage Voting Power | ||||||
Randy S. May | 10,504,462 | 36.2 | % | |||||
Greg Landis | 505,248 | 1.7 | % | |||||
Gary Metzger | 4,668,043 | 16.1 | % | |||||
Dr. Ashok Sood | 115,300 | * | ||||||
Dr. Yash R. Puri | 128,300 | * | ||||||
Total | 15,921,353 | 54.8 | % |
Percentage ownership is determined based on shares owned together with securities exercisable or convertible into sharesus to beneficially own more than 5% of common stock within 60 daysany class of February [10], 2016, for each stockholder.our voting securities. Beneficial ownership is determined in accordance withunder the rules of the SEC and generally includes voting or investment power with respect to securities. The aforementioned voting power percentage wasPercentages are calculated based on 29,049,42869,146,161 shares of MGLTour common stock projectedoutstanding as of January 10, 2020.
The amounts and percentages of common stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be issued and outstanding aftera “beneficial owner” of a security if that person has or shares “voting power,” which includes the consummationpower to vote or to direct the voting of transactions contemplated by the Merger Agreement but not including any Unitssecurity, or “investment power,” which includes the power to dispose of or to direct the disposition of the security. A person is also deemed to be solda beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days of of January 10, 2020. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which that person has no economic interest.
Except as otherwise noted, the persons and entities listed in this Offering.the table below have sole voting and investing power with respect to all of the shares of our common stock beneficially owned by them, subject to community property laws where applicable. Except as otherwise set forth below, the address of the beneficial owner is c/o Ecoark Holdings, Inc., 5899 Preston Road #505, Frisco, Texas, 75034.
Independent Registered Public Accounting FirmSecurity Ownership of 5% or Greater Beneficial Owners
Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent | ||||||
Nepsis Capital Management, Inc. (4) | 13,976,688 | 20.2 | % | |||||
Sabby Volatility Warrant Master Fund, Ltd. (5) | 4,321,087 | 6.2 | % | |||||
Strategic Planning Group, Inc. (6) | 4,545,666 | 6.6 | % |
Security Ownership of Directors and Executive Officers
Name and Address of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent | ||||||
Randy S. May | 3,050,000 | 4.4 | % | |||||
John P. Cahill (1) | 402,643 | 0.6 | % | |||||
Peter A. Mehring (2) | 2,441,254 | 3.5 | % | |||||
Gary M. Metzger (3) | 4,234,336 | 6.1 | % | |||||
Steven K. Nelson (4) | 431,365 | 0.6 | % | |||||
Michael J. Green (5) | 373,009 | 0.5 | % | |||||
William B. Hoagland | 2,750,000 | 4.0 | % | |||||
Directors & Executive Officers as a Group (7 persons) | 11,699,785 | 19.8 | % |
(1) | Includes 4,591 shares held by the Pataki-Cahill Group, LLC and options to purchase 350,358 shares. |
(2) | Includes options to purchase 395,615 shares. |
(3) | Includes options to purchase 2,345,000 shares. |
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(4) | Includes options to purchase 395,615 shares. |
(5) | Includes options to purchase 350,358 shares. |
(6) | The address to this shareholder is 8692 Eagle Creek Circle, Minneapolis, MN 55378. Based solely upon the information contained in a Schedule 13D filed on January 24, 2019. According to that Schedule 13D, Nepsis Capital Management, Inc. disclaims all dispositive power and voting power over all reported shares. |
(7) | Sabby Management, LLC serves as the investment manager of Sabby Healthcare Master Fund, Ltd. (“SHMF”) and Sabby Volatility Warrant Master Fund, Ltd. (“SVWMF”). Hal Mintz is the manager of Sabby Management, LLC and has voting and investment control of the securities held by SHMF and SVWMF. Each of Sabby Management, LLC and Hal Mintz disclaims beneficial ownership over the securities beneficially owned by SHMF and SVWMF except to the extent of their respective pecuniary interest therein. The address of SHMF and SVWMF is c/o Sabby Mgt. LLC, 10 Mountainview Rd., Suite 205, Upper Saddle River, NJ 07458. Includes 1,761,971 shares owned by SHMF and 2,559,116 shares owned by SVWMF. Based solely upon the information contained in a Schedule 13G filed on January 9, 2020. Additionally, SHMF and SVWMF own preferred shares that can be converted into 344,828and 344,828common shares, respectively; and warrants that can be converted into 344,828 and 344,828 common shares, respectively. The beneficial ownership limitation shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of the warrants and preferred shares. |
(8) | The address to this shareholder is 57 River Street Suite 306, Wellesley, MA 02481. Based solely upon the information contained in a Schedule 13G filed on January 14, 2020. According to that Schedule 13G, Strategic Planning Group, Inc. has sole dispositive power, but no voting power, over all reported shares. |
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
RepresentativesThe Board of Directors has adopted a written policy regarding the review and approval of any related party transaction required to be disclosed under SEC rules. The Audit Committee of the Board of Directors is responsible for the review and approval of transactions covered by the policy. As provided in the policy, in reviewing the proposed transaction, the Audit Committee will consider all relevant facts and circumstances, including without limitation the commercial reasonableness of the terms, the benefit and perceived benefit, or lack thereof, to the Company, opportunity costs of alternate transactions, the materiality, and character of the related party’s direct or indirect interest, and the actual or apparent conflict of interest of the related party.
The Audit Committee will not approve or ratify a related party transaction unless it will have determined that, upon consideration of all relevant information, the proposed transaction is in, or not inconsistent with, the best interests of the Company and its shareholders. Except as noted below, there were no commercial transactions between related parties and the Company that required disclosure in this Proxy Statement.
There were no transactions occurring since April 1, 2018, or that are currently proposed, (i) in which the Company was or is to be a participant, (ii) where the amount involved exceeds $120,000, and (iii) in which the Company’s executive officers, directors, principal stockholders, and other related parties had a direct or indirect material interest.
Other Transactions
We have entered into employment agreements with our executive officers that, among other things, provide for certain severance and change of control benefits.
We have granted stock options to our executive officers. Pursuant to our outside director compensation policy, we have paid cash compensation and granted restricted stock units to our non-employee directors.
We have entered into indemnification agreements with our directors and executive officers.
Policies and Procedures for Related Party Transactions
All future transactions between us and our officers, directors or five percent stockholders, and respective affiliates will be on terms no less favorable than could be obtained from unaffiliated third parties and will be approved by a majority of our independent directors who do not have an interest in the transactions and who had access, at our expense, to our legal counsel or independent legal counsel.
AUDIT COMMITTEE REPORT
The Audit Committee has reviewed and discussed the audited consolidated financial statements of the Company with management. The Audit Committee has discussed with the independent registered public accounting firm KBL, LLP,the matters required to be discussed by Auditing Standard No. 1301, Communications with Audit Committees. The Audit Committee has received the written disclosures and the letter from the independent registered public accounting firm required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the Audit Committee concerning independence, and has discussed with the independent accountant the independent accountant’s independence. Based on the review and discussions referred to above in this report, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K, for the year ended March 31, 2019, for filing with the SEC.
The Audit Committee | |
Steven K. Nelson,Chair | |
John P. Cahill | |
Gary M. Metzger |
INFORMATION REGARDING THE EXECUTIVE OFFICERS OF THE COMPANY
Set forth below is biographical information with respect to each current executive officer of the Company. Mr. May and Mr. Mehring also serve as directors of the Company. Officers are elected by the board of directors to hold office until their successors are elected and qualified.
Name | Age | Positions Held with the Company | ||
Randy S. May | 55 | Chairman of the Board and Chief Executive Officer | ||
Peter A. Mehring | 57 | President, CEO and President of Zest Labs, Inc. and Director | ||
William B. Hoagland | 37 | Principal Financial Officer |
Jay Oliphant resigned as Principal Financial Officer and Principal Accounting Officer on May 15, 2019. Pursuant to a Separation Agreement with the Company (the “Separation Agreement”), Mr. Oliphant received his normal monthly salary through May 15, 2019. In connection with his resignation, Mr. Oliphant entered into a consulting agreement with the Company for a term of six months beginning May 16, 2019. Under the consulting agreement, Mr. Oliphant has agreed to assist the Company with financial reporting and related matters. William B. Hoagland was appointed as the Principal Financial Officer to succeed Mr. Oliphant. Mr. Hoagland has served as the Managing Member of Trend Discovery Capital Management, an investment fund, since 2011.
There are no family relationships among any of the directors or executive officers, except that Mr. Metzger is Mr. Hoagland’s stepfather-in-law.
Executive Officers
Randy May. See “—Board of Directors” above for Mr. May’s biographical information.
Peter A. Mehring. See “—Board of Directors” above for Mr. Mehring’s biographical information.
William B. Hoagland. Mr. Hoagland is Principal Financial Officer of the Company. Immediately prior to joining Ecoark, Inc. in 2019, Mr. Hoagland spent the previous eight years as Managing Member of Trend Discovery Capital Management (“Trend Discovery”), a hybrid hedge fund since inception with a track record of outperforming the S&P 500. Prior to founding Trend Discovery in 2011, Mr. Hoagland spent six years as a Senior Associate at Prudential Global Investment Management (PGIM), working in both PGIM’s Newark, NJ and London, England offices. He has a Bachelor of Economics degree from Bucknell University. Mr. Hoagland holds the Chartered Financial Analyst designation and is a Level III candidate in the Chartered Market Technician Program.
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PROPOSAL NO. 2 – advisory vote to approve the compensation of the Company’s named executive officers
In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and Rule 14a-21 under the Exchange Act, the Company requests that our stockholders cast a non-binding, advisory vote to approve the compensation of our named executive officers identified in the “Summary Compensation Table” set forth in this Proxy Statement. This proposal, commonly known as a “say-on-pay” proposal, gives our stockholders the opportunity to express their views on our named executive officers’ compensation. This vote is not intended to address any specific item of compensation, but rather the overall compensation of our named executive officers and the philosophy, policies, and practices described in this Proxy Statement. Accordingly, we ask our stockholders to vote “FOR” the following resolution at the Annual Meeting:
“RESOLVED, that the Company’s stockholders hereby approve, on an advisory basis, the compensation of the Company’s named executive officers, as disclosed in this Proxy Statement pursuant to the compensation disclosure rules of the SEC, the Summary Compensation Table and the other related tables and disclosures.”
As part of our compensation philosophy and the structure of our compensation programs, in order to meet the objectives of our compensation programs, the Company seeks to design performance-based compensation programs and set compensation targets and other objectives to maintain a close correlation between executive pay, stockholder interests, and Company performance.
Vote Required
Approval of the resolution regarding the compensation of our named executive officers requires the affirmative vote of a majority of the votes cast at the Annual Meeting. This vote is merely advisory and will not be binding upon the Company, the Board or the Compensation Committee, nor will it create or imply any change in the fiduciary duties of the Board or the Compensation Committee. The Compensation Committee will, however, take into account the outcome of the vote when considering future executive compensation decisions. The Board values constructive dialogue on executive compensation and other significant governance topics with the Company’s stockholders and encourages all stockholders to vote their shares on this important matter.
BOARD RECOMMENDATION THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” PROPOSAL NO. 2. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE VOTED “FOR” PROPOSAL NO. 2 UNLESS STOCKHOLDERS SPECIFY A CONTRARY VOTE. |
PROPOSAL NO. 3 –advisory vote on the frequency of future advisory votes to approve the compensation of the Company’s named executive officers
In accordance with the Dodd-Frank Act, we request that our stockholders cast a non-binding, advisory vote regarding the frequency with which we should include in future annual proxy statements a stockholder advisory vote to approve the compensation of our named executive officers, similar to Proposal No. 2 above. By voting on this proposal, stockholders may indicate whether they would prefer that we provide for such a stockholder advisory vote at future stockholder meetings every year, every two years or every three years.
After careful consideration, the Board determined that providing a stockholder advisory vote to approve the compensation of our named executive officers every three years is the most appropriate alternative for the Company at this time. In formulating its recommendation, the Board determined that an advisory vote on named executive officer compensation every three years will allow stockholders to provide their direct input on our compensation philosophy, policies, and practices as disclosed in the proxy statement on a timely and consistent basis than if the vote were held less frequently. Additionally, a three-year advisory vote on executive compensation is consistent with our policy of seeking regular dialogue with our stockholders on corporate governance matters and our executive compensation philosophy, policies and practices.
Our stockholders will have the opportunity to specify one of four choices for this proposal: (1) every year, (2) every two years, (3) every three years or (4) abstain. Stockholders are not voting to approve or disapprove of the Board’s recommendation. Rather, stockholders are being asked to express their preference regarding the frequency of future advisory votes on executive compensation. If none of the frequency options receives majority support, the option receiving the greatest number of votes cast will be presentconsidered the frequency recommended by our stockholders.
Vote Required
Approval of a specific frequency of future advisory votes regarding the compensation of our named executive officers requires the affirmative vote of a majority of the votes cast at the special meetingAnnual Meeting. This vote is merely advisory and will not be binding upon the Company, the Board or the Compensation Committee, nor will it create or imply any change in the fiduciary duties of the stockholders.Board or the Compensation Committee. The representativesBoard values constructive dialogue on executive compensation and other significant governance topics with the Company’s stockholders and encourages all stockholders to vote their shares on this important matter.
BOARD RECOMMENDATION THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” PROPOSAL NO. 2. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE VOTED “FOR” PROPOSAL NO. 2 UNLESS STOCKHOLDERS SPECIFY A CONTRARY VOTE. |
PROPOSAL NO. 4 – Ratification of RBSM, LLP as the Company’s independent registered public
accounting firm for the FISCAL year ending MARCH 31, 2020
The Audit Committee appointed RBSM, LLP (“RBSM”) to serve as the Company’s independent registered public accounting firm for the fiscal year ending March 31, 2020, and further directed that the selection of the independent registered public accounting firm be submitted for ratification by the stockholders at the Annual Meeting. Stockholders are asked to ratify the appointment of RBSM at the Annual Meeting. Representatives of RBSM are expected to be available during the Annual Meeting, will have thean opportunity to make a statement if they desire to do so, desire and they are expected to be available to respond to appropriate questions.questions from stockholders.
MULTIPLE STOCKHOLDERS SHARING ONE ADDRESS
Some banks, brokers,Accounting Fees and other nominee record holders may be participating in the practice of “house holding” proxy statements and annual reports. This means that only one copy of this proxy statement may have been sent to multiple stockholders in your household. If you would prefer to receive separate copies of a proxy statement either now or in the future, please contact your bank, broker or other nominee. Upon written or oral request to Magnolia Solar Corporation., Attn: Corporate Secretary Magnolia Solar Corporation, Attn: Corporate Secretary, 54 Cummings Park, Suite 316, Woburn, MA 01801, we will provide copies of these materials.
OTHER MATTERSServices
The Boardfollowing table sets forth the aggregate fees paid by us to RBSM for professional services rendered in connection with the audit of Directors does not intendthe Company’s consolidated financial statements for the year ended March 31, 2019.
Audit fees(1) | $ | 55,000 | ||
Audit-related fees | - | |||
Tax Fees | - | |||
All other fees(2) | - | |||
Total | $ | 55,000 |
The Audit Committee selects the Company’s independent registered public accounting firm and separately pre-approves all audit services to presentbe provided by it to the Special Meeting any businessCompany. The Audit Committee also reviews and separately pre-approves all audit-related, tax and all other than the item stated in the “Notice of Special Meeting of Stockholders” and does not know of any other matters to be brought before or voted upon at the meeting other than those referred to above. If any other matters properly come before the meeting, it is the intention of the proxies named in the enclosed Proxy to vote the shares represented thereby with respect to such mattersservices rendered by our independent registered public accounting firm in accordance with their best judgment.the Audit Committee’s charter and policy on pre-approval of audit-related, tax and other services. In its review of these services and related fees and terms, the Audit Committee considers, among other things, the possible effect of the performance of such services on the independence of our independent registered public accounting firm. None of the services described above were approved pursuant to the de minimis exception provided in Rule 2-01(c)(7)(i)(C) of Regulation S-X promulgated by the SEC.
WHERE YOU CAN FIND MORE INFORMATIONThe Audit Committee appointed RBSM to serve as the Company’s independent registered public accounting firm for the fiscal year ending March 31, 2019.
We file annual, quarterlyPolicy on Audit Committee Pre-Approval of Audit and current reports, proxy statementsPermissible Non-Audit Services of Independent Registered Public Accounting Firm
Pursuant to its charter, the Audit Committee must review and other informationapprove, in advance, the scope and plans for the audits and the audit fees and approve in advance (or, where permitted under the rules and regulations of the SEC, subsequently) all non-audit services to be performed by the independent auditor that are not otherwise prohibited by law and any associated fees. The Audit Committee may delegate to one or more members of the committee the authority to pre-approve audit and permissible non-audit services, as long as this pre-approval is presented to the full committee at scheduled meetings. In accordance with the SEC. You may readforegoing, the committee has delegated to the chair of the Audit Committee the authority to pre-approve services to be performed by our independent registered public accounting firm and copyassociated fees, provided that the chair is required to report any document we filedecision to pre-approve such audit-related or non-audit services and fees to the full audit committee for ratification at its next regular meeting.
Vote Required
Approval of the ratification of the appointment of RBSM as the Company’s independent registered public accounting firm for the fiscal year ending March 31, 2020, requires the affirmative vote of a majority of the votes cast at the SEC public reference room locatedAnnual Meeting. If the appointment of RBSM is ratified, the Audit Committee, in its sole discretion, may change the appointment at 100 F Street, N.E., Washington, D.C. 20549. Please callany time during the SEC at 1-800-SEC-0330 for further information onyear if it determines that such a change would be in the public reference room. Our SEC filings are also available to the public at the SEC website at www.sec.gov. You also may obtain free copiesbest interests of the documents we file withCompany and its stockholders. Conversely, if stockholders fail to ratify the SEC, including this Proxy Statement, by going toappointment, the Investors page of our corporate website at www.magnoliasolar.com. The information provided on our website is not part of this Proxy Statement, and therefore is not incorporated herein by reference.Audit Committee will reconsider the appointment.
BOARD RECOMMENDATION THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” PROPOSAL NO. 4. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE VOTED “FOR” PROPOSAL NO. 4 UNLESS STOCKHOLDERS SPECIFY A CONTRARY VOTE. |
Any person, including any beneficial owner, to whom this Proxy Statement is delivered, may request copies of proxy statements or other information concerning us, without charge, by written or telephonic request directed to Magnolia Solar Corporation, Attn: Corporate Secretary, 54 Cummings Park, Suite 316, Woburn, MA 01801. Such information is also available under the Investors section of our website and from the SEC through the SEC website at the address provided above.21
THIS PROXY STATEMENT DOES NOT CONSTITUTEPROPOSAL NO. 5 – AMENDMENT TO THE SOLICITATIONCOMPANY’S ARTICLES OF A PROXY IN ANY JURISDICTIONINCORPORATION TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS UNLAWFUL TO MAKE A PROXY SOLICITATION IN THAT JURISDICTION. YOU SHOULD RELY ONLY ONINCREASE THE INFORMATION CONTAINED IN THIS PROXY STATEMENT TO VOTE YOURNUMBER OF AUTHORIZED SHARES OF THE COMPANY’S COMMON STOCK AT THE SPECIAL MEETING. WE HAVE NOT AUTHORIZED ANYONEFROM 100,000,000 SHARES TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY STATEMENT. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE OF THE PROXY STATEMENT, AND THE MAILING OF THIS PROXY STATEMENT TO STOCKHOLDERS DOES NOT CREATE ANY IMPLICATION TO THE CONTRARY.200,000,000 SHARES
March [*], 2016
Background
MAGNOLIA SOLAR CORPORATIONOn January 7, 2020, the Board approved, and recommended that shareholders approve an amendment to the Company’s articles of incorporation, to increase its authorized common stock from 100,000,000 shares to 200,000,000 shares.
REVOCABLE PROXY SOLICITED BY THE BOARD OF DIRECTORS
SPECIAL MEETING OF STOCKHOLDERSTo increase the number of shares of authorized common stock, the Board proposes to amend Paragraph 1 of Article IV of the Company’s Articles of Incorporation (the “Articles”) to read in its entirety as follows:
“The total authorized shares:
1. Common Shares: 200,000,000”
The undersigned stockholderBoard believes that the current level of Magnolia Solar Corporation (the “Company”) hereby revokes all previously granted proxies and appoints Dr. Yash R. Puri as his, her or its attorneys, agents and proxies, withauthorized common stock constrains the powerCompany’s ability to appoint his substitute, and hereby authorizes himconduct business in a manner intended to representsupport growth and to vote asenhance shareholder value. The Board considers the undersigned has designated, allproposed increase in the number of authorized shares of common stock desirable because it would give the Company the necessary flexibility to issue common stock for capital raising purposes, and to issue common stock upon the exercise of warrants outstanding and upon the exercise of warrants that may be granted in the future in connection with capital raising transactions or otherwise. Furthermore, an increase in the number of shares of authorized common stock gives the Company the ability to acquire other businesses in exchange for shares of common stock.
The proposed amendment to the Company’s Articles will ensure that the Company will continue to have an adequate number of authorized and unissued shares of common stock available for future use. As of January 10, 2010, there were 69,146,161 shares of the common stock issued and outstanding.
As is the case with the shares of common stock which are currently authorized but unissued, if this proposal to amend the Company’s Articles to increase the authorized number of the undersigned at the Special Meetingshares of stockholders of the Company (the “Meeting”)to be held at the offices of the Company, 54 Cummings Park, Suite 316, Woburn, MA, 01801, at __:00 a.m., local time on _________ __, 2016, and at any and all postponements or adjournments thereof.
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THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTED FOR ALL OF THE PROPOSALS.
This Proxy revokes any proxy to vote such shares at the Special Meeting heretofore givencommon stock is approved by the undersigned. Please sign and date below.
The undersigned hereby ratifies and confirms all that said attorneys and proxies,shareholders, the Board will have authority to issue additional shares of common stock from time to time without further action on the part of shareholders, except as may be required by applicable law or by the rules of any of them,stock exchange or their substitutes, shall lawfully domarket on which the Company’s securities may then be listed or cause to be done because of this proxy, and hereby revokes any and all proxies the undersigned has given before to vote at the Special Meeting. The undersigned acknowledges receipt of the Notice of Special Meeting and the Proxy Statement which accompanies the notice.
Sign exactly as name(s) appear(s) on stock certificate(s). If stock is held jointly, each holder must sign. If signing is by attorney, executor, administrator, trustee or guardian, give full title as such. A corporation or partnership must sign by an authorized officer or general partner, respectively.
PLEASE SIGN, DATE AND RETURN THIS PROXY IN THE ENVELOPE PROVIDED TO _____________________ AT ____________________________.
EXHIBIT A
CERTIFICATE OF AMENDMENT
TO
ARTICLES OF INCORPORATION
FOR NEVADA PROFIT CORPORATIONSfor quotation.
(PursuantOur Articles do not include any preemptive or other rights of shareholders to Sections 78.385 and 78.390 – After Issuancesubscribe for any shares of Stock)common stock which may in the future be issued by the Company, which means that current shareholders do not have a prior right to purchase any new issue of common stock in order to maintain their proportionate ownership of common stock.
We do not have any specific plans, arrangements or understandings for the newly authorized but unissued shares of common stock that would be available following the increase in authorized shares, we view the issuance of common stock and warrants to purchase common stock as our principal source of operating capital until such time as we may begin to generate positive cash flow from operations. |
Article 4The additional shares of common stock that we are seeking authorization for may be used for such corporate purposes as the Board may determine from time to time to be necessary or desirable. These purposes may include, without limitation: issuing shares under our incentive plans, raising capital through the sale of common stock and/or warrants to purchase common stock and acquiring other businesses in exchange for shares of common stock.
The authorization of the additional shares of common stock by this proposal would not have any immediate dilutive effect on the proportionate voting power or other rights of existing shareholders, but, to the extent that the additional authorized shares are issued in the future, it will decrease the existing shareholders’ percentage equity ownership and, depending on the price at which they are issued, could be dilutive to existing shareholders and have a negative effect on the trading price of our common stock.
Implementation
If the amendment is hereby amendedapproved by our shareholders, we must file an amendment with the Nevada Secretary of State in order for the amendment to become effective. If we obtain shareholder approval of the amendment, we intend to file the amendment as soon as practicable.
Effect of Failure to Obtain Shareholder Approval
If we do not obtain shareholder approval for this proposal to amend our Articles to increase the authorized number of shares of our common stock from 100,000,000 to 200,000,000 we may not have the ability to raise sufficient capital to continue to operate our business or have sufficient shares authorized to effect strategic transactions in the future where the consideration would otherwise be capital stock.
No Appraisal Rights
Under Nevada law, our stockholders are not entitled to appraisal rights with respect to the increase in the number of authorized shares of common stock.
Vote Required
Approval of the proposal to amend the Articles to increase the number of authorized shares of capital stock to 105,000,000, consisting of 100,000,000 shares ofthe Company’s common stock , par valuerequires an affirmative vote of $0.001 per share,a majority of the votes cast on the matter.
If you do not hold your shares in street name and 5,000,000 sharesrespond but do not indicate how you want to vote on the amendment, your proxy will be counted as a vote in favor of preferred stock, par value $0.001 per share.such proposal.
BOARD RECOMMENDATION THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE “FOR” PROPOSAL NO. 5. PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE VOTED “FOR” PROPOSAL NO. 5 UNLESS STOCKHOLDERS SPECIFY A CONTRARY VOTE. |
EXECUTIVE COMPENSATION
The boardfollowing table provides information regarding the compensation of directorsour named executive officers during the fiscal years ended March 31, 2019, 2018 and 2017.
Name and Principal Position | Year | Salary(1) | Stock Awards(2) | Option Awards(2) | Total | |||||||||||||
Randy S. May(3) | 2019 | $ | 200,000 | $ | - | $ | - | $ | 200,000 | |||||||||
Chairman of the Board | 2018 | $ | 100,000 | $ | - | $ | - | $ | 100,000 | |||||||||
and Chief Executive Officer | ||||||||||||||||||
Peter A. Mehring | 2019 | $ | 200,000 | $ | - | $ | - | $ | 200,000 | |||||||||
President, Chief Executive Officer | 2018 | $ | 276,677 | $ | 759,500 | $ | 2,414,948 | $ | 3,451,115 | |||||||||
and President of Zest Labs, Inc. | ||||||||||||||||||
Jay Oliphant | 2019 | $ | 170,000 | $ | - | $ | - | $ | 170,000 | |||||||||
Former Principal Financial Officer | 2018 | $ | 170,000 | $ | 152,459 | $ | 238,155 | $ | 560,614 |
(1) | We periodically review, and may increase, base salaries in accordance with the Company’s normal annual compensation review for each of our named executive officers. |
(2) | Stock and option awards are based on the grant date fair values and are calculated utilizing the provisions of Accounting Standards Codification 718 “Compensation—Stock Compensation.” See Notes 1 and 13 to the consolidated financial statements of the Company contained in Item 8 of the Company’s Annual Report on Form 10-K for the year ended March 31, 2019, for further information regarding assumptions underlying valuation of equity awards. |
(3) | Mr. May served as Chief Executive Officer of Ecoark from March 2016 through March 28, 2017, and then from September 21, 2017, to the present. |
Employment, Severance, Separation, and Change in Control Agreements
Executive Employment Arrangements
Peter A. Mehring
The terms of Mr. Mehring’s employment with Ecoark are set forth in an offer letter accepted on August 15, 2013. Pursuant to the offer letter, Mr. Mehring received an annual base salary of $300,000 (subsequently adjusted and accepted) and is hereby expressly authorizedeligible to provide, outparticipate in regular health insurance, bonus, and other employee benefit plans established by Ecoark. The offer letter also includes standard confidentiality and non-compete obligations. The parties are permitted to terminate employment for any reason, at any time, with or without notice and without cause. The offer letter also contains severance benefit provisions in the event that Mr. Mehring’s employment is terminated without “Cause” (as defined in the offer letter) or Mr. Mehring terminates his employment for “Good Reason” within 12 months following a “Change in Control” (as defined in the offer letter). If Mr. Mehring is terminated without “Cause,” then he is entitled to receive an amount equal to six months base salary. If he terminates his employment for “Good Reason” within 12 months following a “Change in Control,” then Mr. Mehring is entitled to receive an amount equal to six months base salary and accelerated vesting of a portion of the unissuednon-vested options or shares. In order to receive severance benefits under the offer letter, Mr. Mehring is required to sign a release and waiver of all claims. Finally, Ecoark reserves the right to change or otherwise modify, in its sole discretion, the terms of the offer letter.
Potential Payments Upon Change of Control
We have no liabilities under termination or change in control conditions. We do not have a formal policy to determine executive severance benefits. Each executive severance arrangement is negotiated on an individual basis.
Option Grants and Outstanding Equity Awards on March 31, 2019
Effective October 13, 2017, the Compensation Committee issued new options awards (the “Replacement Options”) in replacement of existing restricted stock and restricted stock unit awards (the “Existing Awards”) previously granted to Peter A. Mehring and Jay Oliphant. In addition, the Committee approved new option awards to Messrs. Mehring and Oliphant that vest over a four-year period (the “New Options”) to induce them to accept the Replacement Options; to compensate them for diminution in value of their Existing Awards as compared to the Replacement Options; and in consideration of a number of other factors, including each individual’s role and responsibility with the Company, their years of service to the Company, and market precedents and standards for modification of equity awards.
The Replacement Options and New Options are designed to better align Messrs. Mehring and Oliphant’s potentially realizable equity compensation with Company performance. Because the incentive value of stock options is tied to future appreciation in stock price, the Committee believes stock option grants will better align our executive officers and employees’ interests with those of the Company and its stockholders and, as a result, the Compensation Committee intends to continue to utilize options to a greater extent in our equity compensation program on a going forward basis.
With respect to the Replacement Options, Messrs. Mehring and Oliphant have agreed to forfeit Existing Awards covering 1,345,000 and 132,640 shares of preferredthe Company’s common stock, respectively, and each was granted Replacement Options to purchase an equal number of shares of Company common stock. The exercise price for onethe Replacement Options was set at 100% of the fair market value of the Company’s stock price on the effective date of the grants (October 13, 2017). In consideration of Messrs. Mehring and Oliphant’s agreements to forfeit their Existing Awards, the Committee, after careful deliberation, determined that (i) 100% of Mr. Mehring’s Replacement Options would vest immediately upon grant, and (ii) 50% of Mr. Oliphant’s Replacement Options would vest immediately upon grant. The remaining portion of Mr. Oliphant’s Replacement Options will vest in 12 equal installments, with the first installment vesting on January 15, 2018, and additional installments vesting on the last day of each of the eleven successive three-month periods, subject to Mr. Oliphant’s continued employment by the Company. The Replacement Options were issued under the Company’s 2017 Omnibus Incentive Plan or 2013 Incentive Stock Plan to correspond with the plan under which the Existing Awards were issued.
With respect to the New Options, Messrs. Mehring and Oliphant were granted options to purchase 2,017,500 and 66,320 shares of Company common stock, respectively, that vest at a rate of 25% per year on October 13th of each year from 2018 to 2021, subject to Messrs. Mehring and Oliphant’s continued employment by the Company. As with the Replacement Options, the New Options have an exercise price set at 100% of the fair market value of the Company’s stock price on the effective date of the grant. The New Options were not granted under any of the Company’s existing equity compensation plans.
The following table presents information concerning equity awards held by our named executive officers as of March 31, 2019.
Number of Securities | Number of Securities | Option Awards | ||||||||||||||
Name | Vesting Commencement Date | Underlying Options (#) Exercisable | Underlying Options (#) Unexercisable | Option Exercise Price ($) | Option Expiration Date | |||||||||||
Peter A. Mehring | 10/13/2017 | 1,345,000 | (1) | — | 2.60 | 10/23/2027 | ||||||||||
10/13/2018 | — | 2,017,500 | (2) | 2.60 | 10/23/2027 | |||||||||||
Jay Oliphant | 10/13/2017 | 71,796 | (3) | 60,844 | (3) | 2.60 | 10/23/2027 | |||||||||
10/13/2018 | — | 66,320 | (4) | 2.60 | 10/23/2027 |
(1) | This option was fully vested on October 13, 2017. |
(2) | This option vests at a rate of 25% per year on October 13th of each year from 2018 to 2021. |
(3) | 50% of this option vested immediately upon grant. The remaining portion vests in 12 equal installments, with the first installment vesting on January 15, 2018, and additional installments vesting on the last day of each of the eleven successive three-month periods. |
(4) | This option vests at a rate of 25% per year on October 13th of each year from 2018 to 2021. |
(5) | The options in (3) and (4) above were replaced by options exercisable for 198,960 shares immediately vested and exercisable through December 31, 2020. |
STOCKHOLDER PROPOSALS
Stockholders who intend to present proposals at the next annual meeting of stockholders, and who wish to have those proposals included in Ecoark’s proxy statement for such meeting, must be certain that those proposals are received by the Corporate Secretary at 5899 Preston Road #505, Frisco, Texas, 75034 no later than December [*], 2020.
In addition, under Ecoark’s bylaws, stockholders who intend to submit a proposal regarding a director nomination or other matter of business at the next annual meeting of stockholders, and who do not intend to have such proposal included in Ecoark’s proxy statement for such meeting, must ensure that notice of any such proposal is received by Corporate Secretary at 5899 Preston Road #505, Frisco, Texas, 75034, at the address set forth above no earlier than November [*], 2020, and no later than December [*], 2020. If, as described above, the next annual meeting of stockholders occurs on a date that is more seriesthan 30 days after the date of preferred stockthe Annual Meeting, then, in accordance with our bylaws, the deadline will be five days after the earlier of the date the Company (i) mailed notice, (ii) issued a press release, (iii) reported in an SEC filing or (iv) otherwise publicly disseminated notice that an annual meeting of stockholders will be held. The stockholder notice must comply with the information requirements set forth in Ecoark’s bylaws.
STOCKHOLDER COMMUNICATIONS WITH THE BOARD OF DIRECTORS
Stockholders and other interested parties may make their concerns known confidentially to the Board of Directors or the independent directors by sending an email to [*]. Each communication should specify the applicable addressee or addressees to be contacted as well as the general topic of the communication. We will initially receive and process communications before forwarding them to the addressee. We generally will not forward to the directors a communication that it determines to be primarily commercial in nature or related to an improper or irrelevant topic, or that requests general information about the Company.
ANNUAL REPORTS
A copy of the Company’s Annual Report to Stockholders for the year ended March 31, 2019 accompanies this Proxy Statement. Such annual report is not part of the proxy solicitation materials.
Upon receipt of a written request, the Company will furnish to any stockholder without charge a copy of the Company’s Annual Report on Form 10-K, for the year ended March 31, 2019, without exhibits required to be filed under the Exchange Act. Such written requests should be directed to William B. Hoagland, 5899 Preston Road #505, Frisco, Texas, 75034. The Annual Report on Form 10-K, is not part of the proxy solicitation materials. The Annual Report on Form 10-K is not part of the proxy solicitation materials.
OTHER MATTERS
Each proxy solicited hereby also confers discretionary authority on the proxies named therein to vote the proxy with respect to eachthe election of any person as a director if a nominee is unable to serve or for good cause will not serve, matters incident to the conduct of the meeting, and upon such series, to fixother matters as may properly come before the numberAnnual Meeting. Management is not aware of shares constituting such series andany business that may properly come before the designation of such series,Annual Meeting other than the voting powers,matters described above in this Proxy Statement. However, if any other matters should properly come before the meeting, it is intended that the proxies solicited hereby will be voted with respect to those other matters in accordance with the judgment of the shares of such series, andpersons voting the preferences and relative, participating, optional or other special rights, if any, and any qualifications, limitations or restrictions thereof, of the shares of such series. The powers, preferences and relative, participating, optional and other special rights of each series of preferred stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding.proxies.
Article 4 shall also be amended by adding the following section to the end of such Article, subject to compliance with applicable law:
Effective at the date this Certificate of Amendment is filed with the Secretary of State of the State of Nevada (the "Effective Date"), each Two Hundred Fifty (250) shares of voting Common Stock issued and outstanding immediately prior to the Effective Date shall be converted and combined into one (1) share of the Corporation's voting Common Stock, with any fractional interest rounded up to the nearest whole share.YOUR VOTE IS IMPORTANT! WE URGE YOU TO SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT TODAY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
Randy S. May | ||
Frisco, Texas |
|
Annex B
MAGNOLIA SOLAR CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Directors of
Magnolia Solar Corporation
We have audited the accompanying consolidated balance sheets of Magnolia Solar Corporation (the "Company") as of December 31, 2015 and 2014, and the related consolidated statements of operations, changes in stockholders' deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Magnolia Solar Corporation as of December 31, 2015 and 2014, and the results of its consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company is in process of completing a merger with another entity while they are continuing their development of their thin film solar cell technology and has incurred substantial losses as a result of this. The lack of profitable operations raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in this regard are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
KBL, LLP
/s/KBL, LLP
New York, NY
February 26, 2016
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2015 AND 2014
DECEMBER 31, | DECEMBER 31, | |||||||
2015 | 2014 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash | $ | 45,870 | $ | 25,127 | ||||
Accounts receivable | 10,513 | 185,455 | ||||||
Prepaid expense | - | 1,417 | ||||||
Total current assets | 56,383 | 211,999 | ||||||
Fixed assets, net | 311 | 623 | ||||||
OTHER ASSETS | ||||||||
License with related party, net of accumulated amortization | 83,183 | 118,833 | ||||||
Total other assets | 83,183 | 118,833 | ||||||
TOTAL ASSETS | $ | 139,877 | $ | 331,455 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable and accrued expenses | $ | 682,029 | $ | 578,810 | ||||
Current portion of Original Issue Discount Senior Secured Convertible Promissory Note, net of discount | 2,400,000 | 2,400,000 | ||||||
Total current liabilities | 3,082,029 | 2,978,810 | ||||||
TOTAL LIABILITIES | 3,082,029 | 2,978,810 | ||||||
STOCKHOLDERS' DEFICIT | ||||||||
Common stock, $0.001 par value, 75,000,000 shares authorized, 47,434,231 and 39,727,316 shares issued and outstanding | 47,434 | 39,727 | ||||||
Additional paid-in capital | 2,491,804 | 2,228,367 | ||||||
Additional paid-in capital - warrants | 962,297 | 962,297 | ||||||
Accumulated deficit | (6,443,687 | ) | (5,877,746 | ) | ||||
Total stockholders' deficit | (2,942,152 | ) | (2,647,355 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 139,877 | $ | 331,455 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
YEAR ENDED DECEMBER 31, 2015 | YEAR ENDED DECEMBER 31, 2014 | |||||||
REVENUE - net | $ | 159,882 | $ | 218,270 | ||||
COST OF REVENUES | 102,069 | 135,356 | ||||||
GROSS PROFIT | 57,813 | 82,914 | ||||||
OPERATING EXPENSES | ||||||||
Indirect and administrative labor | �� | 160,483 | 198,800 | |||||
Professional fees | 150,179 | 138,260 | ||||||
Depreciation and amortization expense | 35,962 | 35,962 | ||||||
General and administrative | 37,145 | 43,629 | ||||||
Total operating expenses | 383,769 | 416,651 | ||||||
OTHER (INCOME) EXPENSE | ||||||||
Interest expense | 239,985 | 239,981 | ||||||
Total other (income) expense | 239,985 | 239,981 | ||||||
LOSS BEFORE PROVISION FOR INCOME TAXES | (565,941 | ) | (573,718 | ) | ||||
PROVISION FOR INCOME TAXES | - | - | ||||||
NET LOSS | $ | (565,941 | ) | $ | (573,718 | ) | ||
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING | 42,982,899 | 37,469,963 | ||||||
NET LOSS PER SHARE | $ | (0.01 | ) | $ | (0.02 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
Additional | ||||||||||||||||||||||||
Additional | Paid-In | |||||||||||||||||||||||
Common Stock | Paid-In | Capital - | Accumulated | |||||||||||||||||||||
Shares | Amount | Capital | Warrants | Deficits | Total | |||||||||||||||||||
Balance - December 31, 2013 | 33,835,268 | $ | 33,836 | $ | 1,957,574 | $ | 962,297 | $ | (5,304,028 | ) | $ | (2,350,321 | ) | |||||||||||
Common shares issued for payment of interest | 5,636,597 | 5,636 | 234,364 | - | - | 240,000 | ||||||||||||||||||
Common shares issued for services rendered | 255,451 | 255 | 8,745 | - | - | 9,000 | ||||||||||||||||||
Stock based compensation | - | - | 27,684 | - | - | 27,684 | ||||||||||||||||||
Net loss for the year ended December 31, 2014 | - | - | - | - | (573,718 | ) | (573,718 | ) | ||||||||||||||||
Balance - December 31, 2014 | 39,727,316 | 39,727 | 2,228,367 | 962,297 | (5,877,746 | ) | (2,647,355 | ) | ||||||||||||||||
Common shares issued for payment of interest | 7,706,915 | 7,707 | 232,293 | - | - | 240,000 | ||||||||||||||||||
Common shares issued for services rendered | - | - | - | - | - | - | ||||||||||||||||||
Stock based compensation | - | - | 31,144 | - | - | 31,144 | ||||||||||||||||||
Net loss for the year ended December 31, 2015 | - | - | - | - | (565,941 | ) | (565,941 | ) | ||||||||||||||||
Balance - December 31, 2015 | 47,434,231 | $ | 47,434 | $ | 2,491,804 | $ | 962,297 | $ | (6,443,687 | ) | $ | (2,942,152 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
YEAR ENDED DECEMBER 31, 2015 | YEAR ENDED DECEMBER 31, 2014 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (565,941 | ) | $ | (573,718 | ) | ||
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization expense | 35,962 | 35,962 | ||||||
Stock based compensation | 31,144 | 27,684 | ||||||
Common stock issued for services rendered | - | 9,000 | ||||||
Common stock issued for payment of interest | 240,000 | 240,000 | ||||||
Change in assets and liabilities: | ||||||||
Decrease in accounts receivable | 174,942 | 41,170 | ||||||
Decrease in prepaid expenses | 1,417 | - | ||||||
Increase in accounts payable and accrued expenses | 103,219 | 126,857 | ||||||
Total adjustments | 586,684 | 480,673 | ||||||
Net cash provided by (used in) operating activities | 20,743 | (93,045 | ) | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 20,743 | (93,045 | ) | |||||
CASH - BEGINNING OF YEAR | 25,127 | 118,172 | ||||||
CASH - END OF YEAR | $ | 45,870 | $ | 25,127 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | - | $ | - | ||||
Income taxes | $ | 912 | $ | 1,222 | ||||
NON-CASH SUPPLEMENTAL INFORMATION: | ||||||||
Stock issued for services rendered | $ | - | $ | 9,000 | ||||
Stock issued for payment of interest | $ | 240,000 | $ | 240,000 | ||||
Stock based compensation | $ | 31,144 | $ | 27,684 |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 1 – Organization and Nature of Business
Magnolia Solar Corporation (the “Registrant”) through its wholly-owned subsidiary, Magnolia Solar, Inc. (“Magnolia Solar” and together with the Registrant, “we,” “our,” “us,” or the “Company”) is focused on developing and commercializing thin film solar cell technologies that employ nanostructured materials and designs.
The Company is pioneering the development of thin film, high efficiency solar cells for applications such as power generation for electrical grids as well as for local applications, including lighting, heating, traffic control, irrigation, water distillation, and other residential, agricultural and commercial uses.
The Company’s technology takes multiple approaches to bringing cell efficiencies close to those realized in silicon based solar cells while also lowering manufacturing costs. The technology uses a different composition of materials than those used by competing thin film cell manufacturers; incorporates additional layers of material to absorb a wider spectrum of light; uses inexpensive substrate materials, such as glass and polymers, lowering the cost of the completed cell compared to silicon based solar cells; and is based on non-toxic materials that do not have adverse environmental effects.
Since 2010, the Company filed a series of U.S. utility patents relating to the technologies under development.
Reverse Merger
On November 19, 2007, the Registrant, formerly known as Mobilis Relocation Services, Inc. (“Mobilis”), was organized under the laws of the State of Nevada. Mobilis formed Magnolia Solar Acquisition Corp., a wholly-owned subsidiary incorporated in the State of Delaware. Mobilis filed a Certificate of Change to its Articles of Incorporation in order to affect a forward split of the number of authorized shares of common stock which they were authorized to issue, and of the then issued and outstanding shares in a ratio of 1.3157895:1. The forward split occurred in February 2010. All share and per share amounts have been reflected herein post-split.
On December 31, 2009, Mobilis entered into an Agreement of Merger and Plan of Reorganization (the “Merger Agreement”) with Magnolia Solar, Inc., a privately held Delaware corporation incorporated on January 8, 2008, and Magnolia Solar Acquisition Corp. (“Acquisition Sub”). Upon closing of the transaction, under the Merger Agreement, Acquisition Sub merged with and into Magnolia Solar, and Magnolia Solar, as the surviving corporation, became a wholly-owned subsidiary of Mobilis. Thereafter, Mobilis changed its name to Magnolia Solar Corporation. The transaction was accounted for as a reverse merger, and the historical financial information is that of Magnolia Solar, Inc.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 1 – Organization and Nature of Business (continued)
Going Concern
These consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The Company has been generating revenues from various development contracts with governmental agencies; however the Company has generated losses totaling $565,941 and $573,718 for the years ended December 31, 2015 and 2014, respectively. While the Company raised funds in a private placement that it consummated in 2009 (raising $990,000 in $2,660,000 of Original Issue Discount Senior Secured Convertible Promissory Notes (the “2009 Notes”)), at December 31, 2015 and December 31, 2014, it had cash of $45,870 and $25,127, respectively, and will need to raise additional funds to carry out its business plan.
The continuation of the Company as a going concern is dependent upon the ability of the Company to obtain necessary equity financing to continue operations.
On December 29, 2011, the 2009 Notes in the aggregate principal amount of $2,660,000 were amended. Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $260,000 converted into an aggregate of 1,040,000 shares of common stock of the Company at an adjusted conversion price of $0.25 per share, (ii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to extend the maturity dates from December 31, 2011 to December 31, 2012 and 2009 Notes in the aggregate principal amount of the remaining $400,000 were amended to extend the maturity date from December 31, 2011 to December 31, 2013, (iii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to adjust the conversion price of such notes from $1.00 per share to $0.25 per share, (iv) 2009 Notes in the aggregate principal amount of $400,000 were amended to provide that such notes shall, from January 1, 2012 onwards, bear interest at the rate of 10% per annum payable on a quarterly basis, upon conversion and at maturity and that such interest may, at the option of the Company, be paid in cash or in shares of common stock of the Company at the interest conversion rate of 90% of the volume weighted average price of the common stock of the Company during the 20 trading days prior to the interest payment date, (v) an aggregate of 1,300,000 shares of common stock of the Company were issued to certain holders of the 2009 Notes, and (vi) the exercise price of the warrants to purchase an aggregate of 3,385,300 shares of common stock was adjusted from $1.25 per share to $0.50 per share.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 1 – Organization and Nature of Business (continued)
Going Concern (continued)
On December 21, 2012 and June 27, 2013 the 2009 Notes as described in the preceding paragraph were amended. Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to extend the maturity dates from December 31, 2012 to December 31, 2013, (ii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to provide that such notes shall, from January 1, 2013 onwards, bear interest at the rate of 10% per annum payable on a quarterly basis, upon conversion and at maturity and that such interest may, at the option of the Company, be paid in cash or in shares of common stock of the Company at the interest conversion rate of 90% of the volume weighted average price of the common stock of the Company during the 20 trading days prior to the interest payment date, and (iii) the exercise price of warrants to purchase an aggregate of 3,385,300 shares of common stock was adjusted from $0.50 per share to $0.25 per share.
On December 29 and 31, 2013, the 2009 Notes as described in the preceding paragraphs were amended. Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $2,400,000 were amended to extend the maturity dates from December 31, 2013 to December 31, 2014, and (ii) the exercise price of the warrants to purchase an aggregate of 3,385,300 shares of common stock was adjusted from $0.25 per share to $0.10 per share. Additionally, the Company also agreed to extend the expiration date of the warrants to purchase an aggregate of 2,660,000 shares of common stock from December 31, 2014 to December 31, 2016.
There can be no assurance that additional funds will be available when needed from any source or, if available, will be available on terms that are acceptable to the Company. If the Company were to default on its indebtedness, then holders of the notes may foreclose on the debt and seize the Company's assets which may force the Company to suspend or cease operations altogether. These consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. These factors raise substantial doubt regarding the ability of the Company to continue as a going concern.
On January 29, 2016, the Company entered into a Merger Agreement with Ecoark, Inc. ("Ecoark") providing, among other things, for the acquisition of Ecoark by the Company in a share for share exchange pursuant to which it is contemplated that at the closing Ecoark shareholders will own approximately 95% of the outstanding shares of the Company. The Company filed a preliminary 14A Proxy Statement informing its shareholders of the Company’s intent to hold a shareholder meeting in order to vote on certain proposals to amend the Articles of Incorporation to increase of the authorized shares of common stock to 100,000,000 shares, to effect the creation of 5,000,000 shares of "blank check" preferred stock, to approve a reverse stock split of the common stock 1 for 250, and to change the name of the corporation to Ecoark Holdings Inc., the approval of which are conditions to closing the merger with Ecoark. Subject to the approval of the Company’s shareholders, it is anticipated that the merger will be completed in March 2016.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 1 – Organization and Nature of Business (continued)
Going Concern (continued)
Should the Company fail to complete the merger, the Company may need to raise additional capital to expand operations to the point at which the Company can achieve profitability. The terms of equity or debt that may be raised may not be on terms acceptable by the Company. If adequate funds cannot be raised outside of the Company, the Company may suspend or cease operations altogether.
The development of renewable energy and energy efficiency marks a new era of energy exploration in the United States. The Company continues to explore low cost alternatives for energy solutions which are in line with United States government initiatives for renewable energy sources. The Company hopes that these factors will mitigate the current unstable factors in the United States economy.
Note 2 – Summary of Significant Accounting Policies
Basis of Accounting
The financial statements have been prepared on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles.
Principles of Consolidation
The Company applies the guidance of Topic 810 “Consolidation” of the FASB Accounting Standards Codification to determine whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all entities in which a parent has a controlling financial interest—shall be consolidated except (1) when control does not rest with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee. Pursuant to ASC Paragraph 810-10-15-8, the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree. The Company consolidates all less-than-majority-owned subsidiaries, if any, in which the parent’s power to control exists.
The consolidated financial statements include all accounts of the entities at December 31, 2015 as follows:
January |
All inter-company balances and transactions have been eliminated.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 2 - Summary of Significant Accounting Policies (continued)
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 reported amounts of assets and liabilities and disclosures of contingent assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Accounts Receivable
For financial reporting, current earnings are charged and an allowance is credited with a provision for doubtful accounts based on experience. Accounts deemed uncollectible are charged against this allowance. Receivables are reported on the balance sheet net of such allowance. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. The Company believes no allowance for doubtful accounts is necessary at December 31, 2015 or December 31, 2014.
Property and Equipment
Property and equipment are stated at cost and are depreciated on a straight-line basis over their estimated useful lives (from three to seven years). Additions, renewals, and betterments, unless of a minor amount, are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred.
Impairment of Long-Lived Assets
The Company reviews their recoverability of long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment will be based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fixed assets to be disposed of by sale will be carried at the lower of the then current carrying value or fair value less estimated costs to sell. The Company’s management has determined that the fair value of long-lived assets exceeds the book value and thus no impairment charge is necessary as of December 31, 2015 or December 31, 2014.
Fair Value of Financial Instruments
In accordance with ASC 820,Fair Value Measurements and Disclosures, the carrying amount reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The Company does not utilize derivative instruments.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 2 - Summary of Significant Accounting Policies (continued)
Income Taxes
The Company accounts for income taxes utilizing the liability method of accounting. Under the liability method, deferred taxes are determined based on differences between financial statement and tax bases of assets and liabilities at enacted tax rates in effect in years in which differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to amounts that are expected to be realized.
Revenue Recognition
Revenue is recognized from private and public sector contracts that are time and material type contracts. These revenues are recognized in accordance with ASC 605,Revenue Recognition. The Company recognizes revenue when; (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable and (4) collectability is reasonably assured.
The Company assesses whether fees are fixed or determinable at the time of sale and recognizes revenue if all other revenue recognition requirements are met. The Company's standard payment terms are net 30 days. Payments that extend beyond 30 days from the contract date but that are due within twelve months are generally deemed to be fixed or determinable based on the Company's successful collection history on such arrangements, and thereby satisfy the required criteria for revenue recognition.
Revenue from inception to December 31, 2015 has been primarily from research and development grants or contracts to develop solar cells using the Company’s technology.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments and other short-term investments with maturity of three months or less, when purchased, to be cash equivalents. The Company had no cash equivalents as of December 31, 2015 or December 31, 2014.
Uncertainty in Income Taxes
The Company follows ASC 740-10,Accounting for Uncertainty in Income Taxes. This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. Management evaluates their tax positions on an annual basis. The Company’s policy is to recognize both interest and penalties related to unrecognized tax benefits expected to result in payment of cash within one year are classified as accrued liabilities, while those expected beyond one year are classified as other liabilities. The Company has not recorded any interest or penalties since its inception.
The Company files income tax returns in the U.S. federal tax jurisdiction and various state tax jurisdictions. The tax years for 2012 to 2014 remain open for examination by federal and/or state tax jurisdictions. The Company is currently not under examination by any other tax jurisdictions for any tax year.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 2 - Summary of Significant Accounting Policies (continued)
Loss Per Share of Common Stock
Basic net loss per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share (EPS) include additional dilution from common stock equivalents, such as stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for periods presented. The following is a reconciliation of the computation for basic and diluted EPS:
December 31, | December 31, | ||||||||
2015 | 2014 | ||||||||
Net loss | ($ | 565,941 | ) | ($ | 573,718 | ) | |||
Weighted-average common shares outstanding (Basic) | 42,982,899 | 37,469,963 | |||||||
Weighted-average common stock | |||||||||
Equivalents | |||||||||
Stock options | 2,450,000 | 1,730,355 | |||||||
Warrants | 3,785,300 | 3,785,300 | |||||||
Weighted-average common shares outstanding (Diluted) | 49,218,199 | 42,985,618 |
Stock based compensation
The Company applies ASC No. 718 and ASC Subtopic No. 505-50,Equity-Based Payments to Non Employees, to options and other stock based awards issued to nonemployees. In accordance with ASC No. 718 and ASC Subtopic No. 505-50, the Company uses the Black-Scholes option pricing model to measure the fair value of the options at the measurement date.
Recently Issued Accounting Standards
During August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern.” The provisions of ASU No. 2014-15 require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 2 - Summary of Significant Accounting Policies (continued)
Recently Issued Accounting Standards (continued)
During May 2014, the FASB issued an Accounting Standards Update No. 2014-09, "Revenue from Contracts with Customers (Topic 606)". The objective of ASU 2014-09 is to (1) remove inconsistencies and weaknesses in revenue requirements, (2) provide a more robust framework for addressing revenue issues, (3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets, (4) provide more useful information to users of financial statements through improved disclosure requirements, and (5) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. The effective date of this ASU was subsequently changed with the issuance of ASU 2015-14 to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is currently evaluating the effect of this standard on its financial statements.
There were other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Note 3 - Stockholders’ Deficit
The Company has 75,000,000 shares of common stock, par value of $0.001 per share authorized.
Shares
Prior to the Reverse Merger as discussed in Note 1, the Company issued 4,473,686 shares of common stock between January and March 2008 at prices ranging from $0.01 to $0.02 per share for a total of $53,000 cash.
In accordance with the Reverse Merger, the Company cancelled 1,973,684 shares of common stock and issued 21,330,000 shares to the former shareholders of Magnolia Solar, Inc. As a result of these transactions, as of December 31, 2009, there were 23,830,000 shares of common stock issued and outstanding.
The Company effectuated a 1.3157895:1 forward stock split in February 2010, in accordance with the Merger Agreement which resulted in 23,830,000 shares of common stock issued and outstanding.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 3 - Stockholders’ Deficit (continued)
Shares (continued)
In February 2014, the Company issued 1,048,950 shares of common stock at its fair value price ($0.06 per share) in lieu of interest payment for a value of $60,000.
In March 2014, the Company issued 94,737 shares of common stock for consulting services for a value of $4,500 at a fair market value price of $0.05 per share.
In April 2014, the Company issued 2,068,965 shares of common stock at its fair value price ($0.03 per share) in lieu of interest payment for a value of $60,000.
In April 2014, the Company issued 160,714 shares of common stock for consulting services for a value of $4,500 at a fair market value price of $0.03 per share.
In August 2014, the Company issued 1,318,682 shares of common stock at its fair value price ($0.05 per share) in lieu of interest payment for a value of $60,000.
In October 2014, the Company issued 1,200,000 shares of common stock at its fair value price ($0.05 per share) in lieu of interest payment for a value of $60,000.
In March 2015, the Company issued 1,195,219 shares of common stock at its fair value price ($0.05 per share) in lieu of interest payment for a value of $60,000.
In April 2015, the Company issued 1,534,526 shares of common stock at its fair value price ($0.04 per share) in lieu of interest payment for a value of $60,000.
In July 2015, the Company issued 1,643,837 shares of common stock at its fair value price ($0.04 per share) in lieu of interest payment for a value of $60,000.
In October 2015, the Company issued 3,333,333 shares of common stock at its fair value price ($0.02 per share) in lieu of interest payment for a value of $60,000.
As of December 31, 2015, the Company had 47,434,231 shares issued and outstanding.
Warrants
Following the closing of the Reverse Merger in December 2009, the Company issued five-year callable warrants (the “2009 Warrants”) to purchase an aggregate of 2,660,000 shares of common stock exercisable at $1.25 per share to investors in a private placement (the “2009 Private Placement”) and further issued seven year placement agent warrants to purchase an aggregate of 725,300 shares of common stock exercisable at $1.05 per share. On December 29, 2011, the exercise price of both the 2009 Warrants and placement agent warrants was reduced to $0.50 per share.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 3 - Stockholders’ Deficit (continued)
Warrants (continued)
On December 21, 2012, the exercise price of the 2009 Warrants and placement agent warrants were reduced to $0.25 per share. On December 23, 2013, the exercise price of the 2009 Warrants and placement agent warrants were further reduced to $0.10 per share. Additionally, the Company also agreed to extend the expiration date of the 2009 Warrants from December 31, 2014 to December 31, 2016.
On August 15, 2011, the Company issued 400,000 warrants for public relations services. The warrants vest immediately, and are for a term of 5 years with a strike price of $0.50 per share. The warrants have been valued at $59,534 and are reflected in the consolidated financial statements for the year ended December 31, 2014.
As of December 31, 2015, the following warrants are outstanding:
Balance – December 31, 2008 | - | - | |||||||
Issued – in the 26.6 units | 2,660,000 | $ | 0.10 | ||||||
Issued – to Placement Agent | 725,300 | $ | 0.10 | ||||||
Balance – December 31, 2009 | 3,385,300 | $ | 0.10 | ||||||
Balance – December 31, 2010 | 3,385,300 | $ | 0.10 | ||||||
Issued – for public relations | 400,000 | $ | 0.50 | ||||||
Balance – December 31, 2011 | 3,785,300 | $ | 0.14 | ||||||
Balance – December 31, 2012 | 3,785,300 | $ | 0.14 | ||||||
Balance – December 31, 2013 | 3,785,300 | $ | 0.14 | ||||||
Balance – December 31, 2014 | 3,785,300 | $ | 0.14 | ||||||
Balance – December 31, 2015 | 3,785,300 | $ | 0.14 |
Stock Options
In May 2014, the Company granted 2,450,000 shares of common stock under the 2013 Incentive Stock Option Plan. Under the 2013 Plan, the Company may grant options to purchase up to 5,500,000 shares of common stock to be granted to Company employees, officers, directors, consultants and advisors. The vesting provisions, exercise price and expiration dates will be established by the Board of Directors (the "Board") of the Company at the date of grant, but incentive stock options may be subject to earlier termination, as provided in the 2013 Plan. As of December 31, 2015, there were 2,335,709 shares available for future grant.
The fair value of each option grant was estimated on the date of grant using theBlack-Scholes option-pricing model.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 3 - Stockholders’ Deficit (continued)
Stock Options (continued)
Expected volatility was calculated based upon the company’s observed median volatility. The risk-free interest rate assumption is based upon the United States Treasury Bond yield curve in effect at the time of grant for instruments with a similar expected life.
The Company recognized compensation cost related to stock-based compensation in the amount of $31,144, for the year ended December 31, 2015. The Company has not recognized any tax benefits or deductions related to the effects of employee stock-based compensation.
In addition, as of December 31, 2015, approximately $10,382 was related to non-vested options which will be recognized over a weighted-average period of approximately 3.42 years.
No options were exercised under all share-based compensation arrangements for the period ending December 31, 2015.
The following is a summary of stock option activity under the Company's stock option plan:
Number of Options/Shares | Range of Exercise Prices | Weighted- Average Exercise Price | |||||||||||
Outstanding as of December 31, 2014 | 2,450,000 | $ | 0.05 | $ | 0.05 | ||||||||
Options granted | - | $ | 0.00 | $ | 0.00 | ||||||||
Options exercised | - | $ | 0.00 | $ | 0.00 | ||||||||
Options forfeited/expired/cancelled | - | $ | 0.00 | $ | 0.00 | ||||||||
Outstanding as of December 31, 2015 | 2,450,000 | $ | 0.05 | $ | 0.05 | ||||||||
Exercisable as of December 31, 2015 | 2,082,500 | $ | 0.05 | $ | 0.05 | ||||||||
Exercisable as of December 31, 2014 | 980,000 | $ | 0.05 | $ | 0.05 |
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 3 - Stockholders’ Deficit (continued)
Stock Options (continued)
Information about stock options outstanding as of December 31, 2015 is as follows:
Exercise Price | Number of Options Outstanding | Weighted-Average Remaining Contractual Life (years) | Number of Options Exercisable | ||||||||||||
$ | 0.05 | 2,450,000 | 3.42 | 2,082,500 | |||||||||||
2,450,000 | 3.42 | 2,082,500 |
Note 4 - Property and Equipment
Property and equipment consisted of the following at December 31, 2015 and December 31, 2014:
December 31, | December 31, | ||||||||
2015 | 2014 | ||||||||
Office equipment and computers | $ | 6,106 | $ | 6,106 | |||||
Furniture and fixtures | 2,182 | 2,182 | |||||||
8,288 | 8,288 | ||||||||
Accumulated depreciation | (7,977 | ) | (7,665 | ) | |||||
$ | 311 | $ | 623 |
The Company incurred $312 and $312, respectively, in depreciation expense for the periods ended December 31, 2015 and 2014.
Note 5 - License Agreement with Related Party
The Company has entered into a 10-year, renewable, exclusive license with Magnolia Optical Technologies, Inc. (“Magnolia Optical”) on April 30, 2008 for the exclusive rights of the technology related to the application of Optical’s solar cell technology. Magnolia Optical shares common ownership with the Company.
The Company is amortizing the license fee of $356,500 over the 120 month term of the Agreement. Accumulated amortization as of December 31, 2015 and December 31, 2014 was $273,317 and $237,667, respectively. Amortization expense for each of the years ended December 31, 2015 and 2014 was $35,650, respectively. The Company’s management has determined that the fair value of the license exceeds the book value and thus no further impairment or amortization is necessary as of December 31, 2015 or December 31, 2014.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 6 – Original Issue Discount Senior Secured Convertible Promissory Note
Original Notes
Following the closing of the Reverse Merger in December 2009, the Company issued 26.6 units in the 2009 Private Placement consisting of an aggregate of $2,660,000 of 2009 Notes and 2009 Warrants exercisable into an aggregate of 2,660,000 shares of common stock exercisable at $1.25 per share, for $50,000 per unit for aggregate proceeds to the Company of $990,000. In addition, placement agent warrants to purchase an aggregate of 725,300 shares of common stock exercisable at $1.05 per share were issued. The 2009 Notes are secured by a first-priority security interest in the assets of the Company. Holders of the 2009 Notes and warrants issued in the 2009 Private Placement also have the right to “piggyback” registration of the shares underlying the 2009 Notes and warrants.
Prior to the amendment and restatement of the 2009 Notes, the 2009 Notes were originally due December 31, 2011 and convertible at the option of the holder, into shares of the Company’s common stock at an initial conversion rate of $1.00 per share.
Amended Notes
On December 29, 2011, the Company entered into amendment agreements with holders of the 2009 Notes and 2009 Warrants. Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $260,000 were converted into an aggregate of 1,040,000 shares of common stock of the Company at an adjusted conversion price of $0.25 per share, (ii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to extend the maturity dates from December 31, 2011 to December 31, 2012 and 2009 Notes in the aggregate principal amount of the remaining $400,000 were amended to extend the maturity date from December 31, 2011 to December 31, 2013, (iii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to adjust the conversion price of such notes from $1.00 per share to $0.25 per share, (iv) 2009 Notes in the aggregate principal amount of $400,000 were amended to provide that such notes shall, from January 1, 2012 onwards, bear interest at the rate of 10% per annum payable on a quarterly basis, upon conversion and at maturity and that such interest may, at the option of the Company, be paid in cash or in shares of common stock of the Company at the interest conversion rate of 90% of the volume weighted average price of the common stock of the Company during the 20 trading days prior to the interest payment date, (v) an aggregate of 1,300,000 shares of common stock of the Company were issued to certain holders of the 2009 Notes, and (vi) the exercise price of warrants to purchase an aggregate of 3,385,000 shares of common stock was adjusted from $1.25 per share to $0.50 per share.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 6 – Original Issue Discount Senior Secured Convertible Promissory Note (continued)
Amended Notes (continued)
On December 21, 2012 and on June 27, 2013 the 2009 Notes as described in the preceding paragraph were amended. Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to extend the maturity dates from December 31, 2012 to December 31, 2013, (ii) 2009 Notes in the aggregate principal amount of $2,000,000 were amended to provide that such notes shall, from January 1, 2013 onwards, bear interest at the rate of 10% per annum payable on a quarterly basis, upon conversion and at maturity and that such interest may, at the option of the Company, be paid in cash or in shares of common stock of the Company at the interest conversion rate of 90% of the volume weighted average price of the common stock of the Company during the 20 trading days prior to the interest payment date, and (iii) the exercise price of the warrants to purchase an aggregate of 3,385,300 shares of common stock was adjusted from $0.50 per share to $0.25 per share. Upon amendment of the notes, interest was calculated on the entire $2,400,000 of promissory notes at a rate of 10% per year. Interest expense was accrued in the amount of $60,000 per quarter and shares are issued in lieu of cash payments.
On December 29 and 31, 2013 the 2009 Notes as described in the preceding paragraph were amended. Pursuant to the terms of the amendment agreements, (i) 2009 Notes in the aggregate principal amount of $2,400,000 were amended to extend the maturity dates from December 31, 2013 to December 31, 2014, (ii) the exercise price of the warrants to purchase an aggregate of 3,385,300 shares of common stock was adjusted from $0.25 per share to $0.10 per share. Additionally, the Company also agreed to extend the expiration date of the warrants to purchase an aggregate of 2,660,000 shares of common stock from December 31, 2014 to December 31, 2016.
As of December 31, 2015, the Company issued 18,794,940 shares of its common stock in lieu of interest payments in the aggregate of $700,000 relating to the 2009 Notes in the aggregate principal of $2,400,000.
As of December 31, 2015, the entire $2,400,000 balance of the amended 2009 Notes remains outstanding. In the transaction, the Company recognized a discount of $1,670,000 which was amortized over the original life of the 2009 Notes. The discount represented the original issue discount. In addition, the Company determined that the value of the warrants in the transaction of $412,830 as a discount to the 2009 Notes. This discount was being amortized as well over the original life of the 2009 Notes.
The 2009 Notes mature on June 30, 2016 (these notes were extended on January 29, 2016 and will convert to equity if the merger is completed - see Note 11).
As of December 31, 2015, $2,400,000 of the 2009 Notes are classified as a current liability and the amounts have not been repaid as of the issuance of these financial statements. The modifications made to the debt instruments did not constitute a material modification under ASC 470-50.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 7 – Provision for Income Taxes
Deferred income taxes are determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities. Deferred income taxes are measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s tax return. Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.
As of December 31, 2015, there is no provision for income taxes, current or deferred.
December 31, 2015 | |||||
Net operating losses | $ | 1,371,196 | |||
Valuation allowance | (1,371,196 | ) | |||
$ | - |
At December 31, 2015, the Company had a net operating loss carry forward in the amount of approximately $4,000,000 available to offset future taxable income through 2035. The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.
A reconciliation of the Company’s effective tax rate as a percentage of income before taxes and federal statutory rate for the years ended December 31, 2015 and 2014 is summarized below.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 8 – Commitments and Contingencies
Office Lease
The Company leases office facilities located in Woburn, MA under a lease agreement that expires December 30, 2016. The Company leased additional office facilities at a second location in Albany, NY under a lease agreement that was canceled effective October 31, 2015. Rent expense for the Company’s facilities for the years ended December 31, 2015 and December 31, 2014 totaled $15,009 and $18,143, respectively.
The future minimum lease payments due under the above mentioned non-cancelable lease agreement is as follows:
Year ending December 31, | |||||
2016 | $ | 4,212 | |||
$ | 4,212 |
Contract Related Fees
As part of the contract to develop its products, the Company has agreed to pay the contractor 1.5% of future New York state manufactured sales, and 5% of future non-New York state manufactured sales until the entire funds paid by the contractor have been repaid, or 15 years, whichever comes first. As of December 31, 2015, the Company has $1,251,885 of contract related expenses, all of which will be owed to the contractor, contingent upon the sale of the Company’s product. No liability is accrued since no sales have occurred.
Note 9 - Concentration of Credit Risk
The Company maintains its cash in one bank deposit account, which at times may exceed the federally insured limits of $250,000 that exist through December 31, 2015. At December 31, 2015, the Company did not have any uninsured deposits.
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 9 - Concentration of Credit Risk (continued)
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company extends credit based on the customers’ financial conditions. The Company does not require collateral or other security to support customer receivables. Credit losses, when realized, have been within the range of management’s expectations. To further reduce credit risk associated with accounts receivable, the Company performs periodic credit evaluations of its customers.
December 31, 2015 | December 31, 2014 | ||||||||
Concentrations in net revenue: | |||||||||
Customer A | 93 | % | 90 | % |
* Customer did not exceed 10% for the respective year.
Note 10 - Fair Value Measurements
The Company adopted certain provisions of ASC Topic 820. ASC 820 defines fair value, provides a consistent framework for measuring fair value under generally accepted accounting principles and expands fair value financial statement disclosure requirements. ASC 820’s valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect our market assumptions. ASC 820 classifies these inputs into the following hierarchy:
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 10 - Fair Value Measurements (continued)
Financial assets and liabilities measured at fair value on a recurring basis are summarized below:
December 31, 2015 | |||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
Cash | $ | 45,870 | $ | - | $ | - | $ | 45,870 | |||||||||
Total assets | $ | 45,870 | $ | - | $ | - | $ | 45,870 | |||||||||
Original Issue Discount Senior Secured Convertible Promissory Notes | $ | - | $ | - | $ | 2,400,000 | $ | 2,400,000 | |||||||||
Total liabilities | $ | - | $ | - | $ | 2,400,000 | $ | 2,400,000 |
December 31, 2014 | |||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | ||||||||||||||
Cash | $ | 25,127 | $ | - | $ | - | $ | 25,127 | |||||||||
Total assets | $ | 25,127 | $ | - | $ | - | $ | 25,127 | |||||||||
Original Issue Discount Senior Secured Convertible Promissory Notes | $ | - | $ | - | $ | 2,400,000 | $ | 2,400,000 | |||||||||
Total liabilities | $ | - | $ | - | $ | 2,400,000 | $ | 2,400,000 |
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 10 - Fair Value Measurements (continued)
Original Issue Discount Senior Secured Convertible Promissory Notes | |||||
Balance, January 1, 2014 | $ | 2,400,000 | |||
Realized gains (losses) | - | ||||
Unrealized gains (losses) relating to instruments still held at the reporting date | - | ||||
Purchases, sales, issuances and settlements, net | - | ||||
Discount on notes | - | ||||
Amortization of discount on notes | - | ||||
Conversion of notes to common stock | - | ||||
Balance, December 31, 2014 | $ | 2,400,000 | |||
Realized gains (losses) | - | ||||
Unrealized gains (losses) relating to instruments still held at the reporting date | - | ||||
Purchases, sales, issuances and settlements, net | - | ||||
Discount on notes | - | ||||
Amortization of discount on notes | - | ||||
Balance, December 31, 2015 | $ | 2,400,000 |
MAGNOLIA SOLAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2015 AND 2014
Note 11 – Subsequent Events
On January 19, 2016, the Company issued 1,570,681 shares of common stock for payment in lieu of cash of interest equal to $60,000.
On January 29, 2016, the Company entered into a Merger Agreement with Ecoark providing, among other things, for the acquisition of Ecoark by the Company in a share for share exchange pursuant to which it is contemplated that at the closing Ecoark shareholders will own approximately 95% of the outstanding share of the Company. The Company filed a 14A and is awaiting approval from the SEC on certain proposals to amend the Articles of Incorporation to increase of the authorized shares of common stock to 100,000,000 shares, to effect the creation of 5,000,000 shares of "blank check" preferred stock, to approve a reverse stock split of the common stock 1 for 250, and to change the name of the corporation to Ecoark Holdings Inc. Upon approval by the SEC, it is anticipated that the merger will be completed in March 2016.
On January 29, 2016, the Company entered into an agreement with holders of the Notes Payable as mentioned in Note 6 to extend the term of the note to June 30, 2016. The notes will convert to equity if the merger is completed.
Management has evaluated subsequent events for the disclosure and/or recognition in the financial statements through the date that the financial statements were available to be issued, which date is February 26, 2016.
Annex C
EcoArk Inc. AND SUBSIDIARIES
December 31, 2015 AND 2014
CONTENTS
ECOARK INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS (UNAUDITED)DECEMBER 31, 2015 AND 2014
ASSETS | (Dollars in thousands, except per share) | |||||||
2015 | 2014 | |||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 1,962 | $ | 2,220 | ||||
Accounts receivable, net of allowance | 977 | 884 | ||||||
Inventory, net of reserves | 643 | 903 | ||||||
Prepaid expenses | 161 | 151 | ||||||
Related party receivable | - | 100 | ||||||
Other current assets | 138 | 25 | ||||||
Total current assets | 3,881 | 4,283 | ||||||
Property and equipment, net | 363 | 462 | ||||||
Other assets | 25 | |||||||
Intangible assets, net | 852 | 1,904 | ||||||
TOTAL ASSETS | $ | 5,121 | $ | 6,649 |
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ECOARK INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS (UNAUDITED)DECEMBER 31, 2015 AND 2014
(Dollars in thousands, except per share) | ||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | 2015 | 2014 | ||||||
CURRENT LIABILITIES | ||||||||
Current portion of long-term debt | $ | 3,175 | $ | 3,027 | ||||
Current portion of long-term debt - related parties | 1,329 | 6,176 | ||||||
Note payable - bank | - | 250 | ||||||
Accounts payable | 1,116 | 967 | ||||||
Accrued expenses | 374 | 209 | ||||||
Accrued interest | 40 | 148 | ||||||
Deferred revenue | - | 142 | ||||||
Total current liabilities | 6,034 | 10,919 | ||||||
NON-CURRENT LIABILITIES | ||||||||
Long-term debt, net of current portion | - | 171 | ||||||
Long-term debt - related parties, net of current portion | - | 3,111 | ||||||
Total non-current liabilities | - | 3,282 | ||||||
COMMITMENTS AND CONTINGENCIES | - | - | ||||||
Total liabilities | 6,034 | 14,201 | ||||||
STOCKHOLDERS' EQUITY (DEFICIT) (Numbers of shares rounded to thousands) | ||||||||
Series A General Common Shares - $0.01 par value; 38,000 shares authorized and issued, 34,458 and 24,600 shares outstanding as of December 31, 2015 and 2014, respectively | 380 | 380 | ||||||
Series B Common Shares - $0.01 par value; 10,000 shares authorized, 9,862 shares issued and outstanding as of December 31, 2015 and 2014 | 99 | 99 | ||||||
Series C Common Shares - $0.01 par value; 5,000 shares authorized, 3,475 and 3,350 shares issued and outstanding as of December 31, 2015 and 2014, respectively | 35 | 34 | ||||||
Series D Common Shares - $0.01 par value; 8,000 shares authorized, 7,447 shares issued and outstanding as of December 31, 2015 and 2014 | 74 | 74 | ||||||
Additional paid-in-capital | 36,164 | 21,615 | ||||||
Subscription receivable | (55 | ) | (31 | ) | ||||
Accumulated deficit | (36,587 | ) | (26,085 | ) | ||||
Treasury stock, at cost, 3,542 and 13,400 Series A General Common Shares as of December 31, 2015 and 2014, respectively | (928 | ) | (3,514 | ) | ||||
Total stockholders' equity (deficit) before non-controlling interest | (818 | ) | (7,428 | ) | ||||
Non-controlling interest | (95 | ) | (124 | ) | ||||
Total stockholders' equity (deficit) | (913 | ) | (7,552 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $ | 5,121 | $ | 6,649 |
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ECOARK INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)FOR THE YEARS ENDED DECEMBER 31, 2015 AND 2014
(Dollars in thousands) | ||||||||
2015 | 2014 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (10,502 | ) | $ | (14,135 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation, amortization and impairment | 1,226 | 1,709 | ||||||
Stock based compensation | 366 | 192 | ||||||
Shares of common stock issued for services rendered | 175 | 2,938 | ||||||
Shares of treasury stock re-issued for services rendered | 718 | 596 | ||||||
Change in non-controlling interest on cash | 29 | (129 | ) | |||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (93 | ) | (671 | ) | ||||
Inventory | 260 | 93 | ||||||
Prepaid expenses | (10 | ) | 13 | |||||
Other current assets | (113 | ) | 38 | |||||
Other assets | (25 | ) | - | |||||
Accounts payable | 149 | 123 | ||||||
Accrued expenses | 165 | 103 | ||||||
Accrued interest | 126 | 976 | ||||||
Deferred revenue | (142 | ) | 142 | |||||
Net cash used in operating activities | (7,671 | ) | (8,012 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchases of property and equipment | (59 | ) | (197 | ) | ||||
Proceeds from sale of property and equipment | - | - | ||||||
Collections (advances) on notes receivable - related party | 100 | (100 | ) | |||||
Acquisition of intangible assets | (15 | ) | - | |||||
Net cash provided by (used in) investing activities | 26 | (297 | ) | |||||
Cash flows from financing activities: | ||||||||
Proceeds from the issuance of common stock, net of fees | 31 | 5,143 | ||||||
Re-issuance of treasury shares for cash, net of expenses | 8,430 | - | ||||||
Proceeds from the issuances of long-term debt | - | 3,000 | ||||||
Repayments of debt | (274 | ) | (26 | ) | ||||
Proceeds from the issuances of long-term debt - related parties | 600 | 5,259 | ||||||
Repayments of long-term debt - related parties | (1,400 | ) | (3,199 | ) | ||||
Net cash provided by financing activities | 7,387 | 10,177 | ||||||
NET INCREASE (DECREASE) IN CASH | (258 | ) | 1,868 | |||||
Cash and cash equivalents - beginning of the year | 2,220 | 352 | ||||||
Cash and cash equivalents - end of the year | $ | 1,962 | $ | 2,220 | ||||
SUPPLEMENTAL DISCLOSURES: | ||||||||
Cash paid for interest | $ | 551 | $ | 23 | ||||
Cash paid for income taxes | $ | - | $ | 1 | ||||
SUMMARY OF NONCASH ACTIVITIES: | ||||||||
Treasury stock re-purchased for long-term debt related parties | $ | - | $ | 2,500 | ||||
Treasury stock re-purchased for release of guarantee | $ | 393 | $ | - | ||||
Treasury stock re-purchased for sale of net assets - SA Concepts | $ | - | $ | 616 | ||||
Treasury stock re-issued for debt conversion - related parties | $ | 7,391 | $ | - | ||||
Accrued interest converted into debt - related parties | $ | 234 | $ | 1,400 |
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ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
NOTE1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Organization
EcoArk Inc. and Subsidiaries is an innovative and growth-oriented company founded in 2011 that develops and deploys intelligent technologies and consumer products in order to meet the demand for sustainable, integrated solutions to contemporary business needs. EcoArk Inc. is a holding company that conducts business through its subsidiaries (see detail below).
Eco3D, LLC – Eco3D is located in Phoenix, Arizona and provides customers with the latest 3D technologies. Eco3D was formed by the Company in November 2013 and the Company owns 65% of the LLC. The remaining 35% is reflected as non-controlling interests.
Eco360, LLC – Eco360 is located in Bentonville, Arkansas and provides companies with mobile data capture App technology and systems. Eco360 was formed in November 2014 by the Company.
SA Concepts, Inc. – SA Concepts was located in Springdale, Arkansas and was organized for social and environmental purposes. SA Concepts was purchased in April 2013 and subsequently sold in November 2014. The results of operations of this entity are reflected as discontinued operations.
Pioneer Products, LLC – Pioneer is located in Bentonville, Arkansas and is involved in the selling of recycled plastic products and is the sales and sourcing arm of the Company and its subsidiaries. Pioneer was purchased by the Company in 2012.
Intelleflex Corporation – Intelleflex is located in San Jose, California and provides a perishable food quality management solution to food retailers and suppliers. Intelleflex was purchased by the Company in September 2013.
Principles of Consolidation
The consolidated financial statements include the accounts of EcoArk, Inc. and its subsidiaries, collectively referred to as “the Company”. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company is a holding company and holds one hundred percent of Eco360, Pioneer, and Intelleflex. EcoArk owns 65% of Eco3D and the remaining 35% interest is owned by the executives of Eco3D.
The Company applies the guidance of Topic 810 “Consolidation” of the FASB Accounting Standards Codification to determine whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all entities in which a parent has a controlling financial interest—shall be consolidated except (1) when control does not rest with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee. Pursuant to ASC Paragraph 810-10-15-8, the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree. The Company consolidates all less-than-majority-owned subsidiaries, if any, in which the parent’s power to control exists.
Noncontrolling Interests
In accordance with ASC 810-10-45,Noncontrolling Interests in Consolidated Financial Statements,the Company classifies controlling interests as a component of equity within the consolidated balance sheets. For the years ended December 31, 2015 and 2014, net income or (loss) attributable to noncontrolling interests of $29 and ($129), respectively, is included in the Company’s net loss.
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ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
Basis of Presentation
The accompanying financial statements have been prepared in conformity with U.S generally accepted accounting principles (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (the “Commission”). It is management's opinion, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. These estimates include, but are not limited to, management’s estimate of provisions required for non-collectible accounts receivable, obsolete or slow-moving inventory, and determination of the fair value of stock awards issued. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents are carried at cost, which approximates market value. For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. At December 31, 2015 and 2014, the Company had no cash equivalents.
Inventory
Inventory is stated at the lower of cost or market. Inventory cost is determined by specific identification on a first in first out basis, and provisions are made to reduce slow-moving, obsolete, or unusable inventories to their estimated useful or scrap values.
Property and Equipment and Long-Lived Assets
Property and equipment is stated at cost. Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from five to twenty-eight years.
Financial Accounting Standards Board (FASB) Codification Topic 360 “Property, Plant and Equipment” (ASC 360), requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The application of ASC 360 has not materially affected the Company’s reported earnings, financial condition or cash flows.
There were no impairment charges for the years ended December 31, 2015 and 2014, respectively.
Advertising Expense
The Company expenses advertising costs, as incurred. Advertising expenses for the years ended December 31, 2015 and 2014 are included in other general and administrative costs.
Software Costs
The Company accounts for software development costs in accordance with ASC 985.730, Software Research and Development, and ASC 985-20, Costs of Software to be Sold, Leased or Marketed. ASC 985-20 requires that costs related to the development of the Company’s productsbe capitalized as an asset when incurred subsequent to the point at which technological feasibility of the enhancement is established. ASC 985-20 specifies that “technological feasibility” can only be established by the completion of a “detailed program design” or if no such design is prepared, upon the completion of a “working model” of the software. The Company’s development process does not include a detailed program design. Management believes that such a design could be produced in the early stages of development but would entail significant wasted expense and delay. Consequently, ASC 985-20 requires the development costs to be recorded as an expense until the completion of a “working model”. In the Company’s case, the completion of a working model does not occur until shortly before the time when the software is ready for sale.
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ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
Research and Development Costs
Research and development costs incurred after completion of development of a product are expensed as incurred. Research and development costs are included in cost of sales for the years ended December 31, 2015 and 2014.
Subsequent Events
Subsequent events were evaluated through the date the consolidated financial statements were issued.
Intangible Assets
Intangible assets with definite useful lives are stated at cost less accumulated amortization. Intangible assets capitalized as of December 31, 2015 and 2014 represent the valuation of the Company-owned patents and customer lists. These intangible assets are being amortized on a straight-line basis over their estimated average useful lives of thirteen and a half years for the patents and three years for the customer lists. Expenditures on intangible assets through the Company’s filing of patent and trademark protection for Company-owned inventions are expensed as incurred.
Shipping and Handling Costs
The Company reports shipping and handling revenues and their associated costs in revenue and cost of revenue, respectively. Shipping revenues and costs for the years ended December 31, 2015 and 2014 were nominal and included in cost of goods sold.
Revenue Recognition
In regards to product revenue, product revenue primarily consists of the sale of electronic hardware, recycled plastics products, and recycled furniture. These subsidiaries recognize revenue when the following criteria have been met:
Evidence of an arrangement exists.The Company considers a customer purchase order, service agreement, contract, or equivalent document to be evidence of an arrangement.
Delivery has occurred. The Company’s standard transfer terms are free on board (FOB) shipping point. Thus, delivery is considered to have occurred when title and risk of loss have passed to the customer at the time of shipment.
The fee is fixed or determinable.The Company considers the fee to be fixed or determinable if the fee is not subject to refund or adjustment and payment terms are standard, which is generally 30-60 days.
Collection is deemed reasonably assured. Collection is deemed reasonably assured if it is expected that the customer will be able to pay amounts under the arrangement as payments become due. If it is determined that collection is not reasonably assured, then revenue is deferred and recognized upon cash collection.
The Company for its software revenue will recognize revenues in accordance with ASC 985-605, Software Revenue Recognition.
Revenue from software license agreements is recognized when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. In software arrangements that include more than one element, the Company allocates the total arrangement fee among the elements based on the relative fair value of each of the elements.
License revenue allocated to software products generally is recognized upon delivery of the products or deferred and recognized in future periods to the extent that an arrangement includes one or more elements to be delivered at a future date and for which fair values have not been established. Revenue allocated to maintenance agreements is recognized ratably over the maintenance term and revenue allocated to training and other service elements is recognized as the services are performed. If evidence of fair value does not exist for all elements of a license agreement and post customer support (PCS) is the only undelivered element, then all revenue for the license arrangement is recognized ratably over the term of the agreement as license revenue. If evidence of fair value of all undelivered PCS elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.
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ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
Cost of license revenue primarily includes product, delivery, and royalty costs. Cost of maintenance and service revenue consists primarily of labor costs for engineers performing implementation services, technical support, and training personnel as well as facilities and equipment costs.
The Company enters into arrangements that can include various combinations of software, services, and hardware. Where elements are delivered over different periods of time, and when allowed under U.S. GAAP, revenue is allocated to the respective elements based on their relative selling prices at the inception of the arrangement, and revenue is recognized as each element is delivered. The Company uses a hierarchy to determine the fair value to be used for allocating revenue to elements: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence, and (iii) best estimate of selling price (“ESP”). For software elements, the Company follows the industry specific software guidance which only allows for the use of VSOE in establishing fair value. Generally, VSOE is the price charged when the deliverable is sold separately or the price established by management for a product that is not yet sold if it is probable that the price will not change before introduction into the marketplace.
ESPs are established as best estimates of what the selling prices would be if the deliverables were sold regularly on a stand-alone basis. The process for determining ESPs requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable.
When the arrangement with a customer includes significant production, modification, or customization of the software, we recognize the related revenue using the percentage-of-completion method in accordance with the accounting guidance and certain production-type contracts contained in ASC 605-35, Construction-Type and Production-Type Contracts. We use the percentage of completion method provided all of the following conditions exist:
We measure completion based on achieving milestones detailed in the agreements with the customers. Costs of providing services, including services accounted for in accordance with ASC 605-35, are expensed as incurred.
Accounts Receivable and Concentration of Credit Risk
The Company considers accounts receivable, net of allowance for returns, to be fully collectible. The allowance is based on management’s estimate of the overall collectability of accounts receivable, considering historical losses and economic conditions. Based on these same factors, individual accounts are charged off against the allowance when management determines those individual accounts are uncollectible. Credit extended to customers is generally uncollateralized. Past-due status is based on contractual terms.
Uncertain Tax Positions
The Company follows ASC 740-10, “Accounting for Uncertainty in Income Taxes” (“ASC 740-10”). This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. ASC 740-10 is effective for fiscal years beginning after December 15, 2006. Management has adopted ASC 740-10 and they evaluate their tax positions on an annual basis. The Company’s policy is to recognize both interest and penalties related to unrecognized tax benefits expected to result in payment of cash within one year are classified as accrued liabilities, while those expected beyond one year are classified as other liabilities. The Company has not recorded any interest or penalties since its inception.
The Company files income tax returns in the U.S. federal tax jurisdiction and various state tax jurisdictions. The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they were filed.
Stock-Based Compensation
In 2011, the Company adopted the provisions of ASC 718-10“Share Based Payments”. The adoption of this principle had no effect on the Company’s operations.
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ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
The Company has elected to use the modified–prospective approach method. Under that transition method, the calculated expense is equivalent to compensation expense for all awards granted prior to, but not yet vested, based on the grant-date fair values. Stock-based compensation expense for all awards granted is based on the grant-date fair values. The Company recognizes these compensation costs, net of an estimated forfeiture rate, on a pro rata basis over the requisite service period of each vesting tranche of each award. The Company considers voluntary termination behavior as well as trends of actual option forfeitures when estimating the forfeiture rate.
The Company measures compensation expense for its non-employee stock-based compensation under ASC 505-50, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”. The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to expense and additional paid-in capital.
Fair Value of Financial Instruments
Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 825, "Financial Instruments," requires the Company to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments: The carrying amount of cash, accounts receivable, prepaid and other current assets, accounts payable and accrued expenses, and accounts payable to related parties, approximate fair value because of the short maturity of those instruments.
The carrying amount reported in the balance sheets for cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The Company does not utilize derivative instruments.
Recoverability of Long-Lived Assets
The Company reviews recoverability of long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fixed assets to be disposed of by sale will be carried at the lower of the then current carrying value or fair value less estimated costs to sell.
Earnings (Loss) Per Share of Common Stock
Basic net income (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share (EPS) include additional dilution from common stock equivalents, such as convertible notes, preferred stock, stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for periods presented.
Fair Value Measurements
In September 2006, ASC issued 820, “Fair Value Measurements”. ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements.
ASC 820 classifies these inputs into the following hierarchy:
Level 1 inputs: Quoted prices for identical instruments in active markets.
Level 2 inputs: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 inputs: Instruments with primarily unobservable value drivers.
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ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
Recently Issued Accounting Standards
In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-02 (ASU 2015-02) "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We are currently in the process of evaluating the impact of the adoption of ASU 2015-02 on our consolidated financial statements.
In November 2014, the FASB issued ASU No. 2014-17, “Business Combination.” The provisions of ASU No. 2014-17 require management to determining whether and at what threshold an acquiree (acquired entity) can reflect the acquirer’s accounting and reporting basis (pushdown accounting) in its separate financial statements. Since neither unit of this business combination is in the development stage, nor had recognizable revenues during this period the application of push down accounting would not be of significant value to the readers of these consolidated financial statements. The Company has not elected to apply pushdown accounting in its separate financial statements upon occurrence of this event.
During August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern.” The provisions of ASU No. 2014-15 require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606) (ASU 2014-09), which supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition”, and most industry-specific guidance. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in ASU 2014-09 will be applied using one of two retrospective methods. The effective date will be the first quarter of our fiscal year ended December 31, 2018. We have not determined the potential effects on our financial statements.
There were other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Going Concern
The Company commenced operations in 2011, and has experienced typical start-up costs and losses from operations resulting in an accumulated deficit of $36,587 since inception. The accumulated deficit as well as recurring losses of $10,502 and $14,135 for the years ended December 31, 2015 and 2014, and the working capital deficit of $2,153 as of December 31, 2015, have resulted in the uncertainty of the Company to continue as a going concern.
These consolidated financial statements of the Company have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable period of time.
The Company plans to raise additional capital to carry out its business plan. The Company’s ability to raise additional capital through future equity and debt securities issuances is unknown. Obtaining additional financing, the successful development of the Company’s contemplated plan of operations, ultimately, to profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raises substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome of the uncertainties.
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ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
NOTE2:INVENTORY
Inventory, net of reserves, consisted of the following as of December 31, 2015 and 2014:
2015 | 2014 | |||||||
Inventory | $ | 1,363 | $ | 1,495 | ||||
Inventory Reserves | (720 | ) | (592 | ) | ||||
Total | $ | 643 | $ | 903 |
NOTE3:PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 2015 and 2014:
2015 | 2014 | |||||||
Furniture and fixtures | $ | 110 | $ | 110 | ||||
Computers and software costs | 382 | 359 | ||||||
Plant machinery and equipment | 476 | 443 | ||||||
Leasehold improvements | 4 | 5 | ||||||
Total | 972 | 917 | ||||||
Accumulated depreciation | (609 | ) | (455 | ) | ||||
Net property and equipment | $ | 363 | $ | 462 |
Depreciation expense for the years ended December 31, 2015 and 2014 was $159 and $312, respectively. There was no impairment on these assets for this two year period.
NOTE 4: INTANGIBLE ASSETS
The following is a summary of intangible assets as of December 31, 2015 and 2014:
2015 | 2014 | |||||||
Customer lists | $ | 3,980 | $ | 3,965 | ||||
Patents | 1,013 | 1,013 | ||||||
Total Intangible Assets | 4,993 | 4,978 | ||||||
Accumulated Amortization | (4,141 | ) | (3.074 | ) | ||||
Intangible Assets, net | $ | 852 | $ | 1,904 |
Amortization expense for the years ended December 31, 2015 and 2014 was $1,067 and $1,397, respectively. There was no impairment on these assets for this two year period.
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ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
NOTE 5: LONG-TERM DEBT – RELATED PARTIES
The following is a summary of long-term debt – related parties as of December 31, 2015 and 2014:
2015 | 2014 | |||||||||||
Promissory notes – shareholders | (a) | $ | - | $ | - | |||||||
Promissory note – related party | (b) | 50 | 412 | |||||||||
Promissory note #1 – CEO | (c) | 62 | 227 | |||||||||
Promissory note #2 – CEO | (d) | - | 2,500 | |||||||||
Promissory note #3 – CEO | (e) | 1,217 | - | |||||||||
Note payable – various | (f) | - | 800 | |||||||||
Note payable –SA Concepts | (g) | - | 74 | |||||||||
Note payable – Goldenhawk | (h) | - | 3,674 | |||||||||
Note payable - other | (i) | - | 1,600 | |||||||||
Total | 1,329 | 9,287 | ||||||||||
Less: current portion | (1,329 | ) | (6,176 | ) | ||||||||
Long-term debt – related parties | $ | - | $ | 3,111 |
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ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
Interest expense on the long-term debt – related parties for the years ended December 31, 2015 and 2014 was $466 and $1,236, respectively.
NOTE 6: NOTE PAYABLE - BANK
The Company’s former subsidiary, SA Concepts, had a note payable with a bank that was due November 2014 at 5.5% interest per annum. The note was transferred to the Company upon the sale of SA Concepts. The note was secured by the property of the Company. This note was extended to February 2016 and was paid off in October 2015. The balance of this note at December 31, 2014 was $250.
NOTE 7: LONG-TERM DEBT
The following is a summary of long-term debt as of December 31, 2015 and 2014:
2015 | 2014 | |||||||||||
Note payable – Celtic Bank | (a) | $ | 175 | $ | 198 | |||||||
Note payable – B&B Merritt | (b) | 3,000 | 3,000 | |||||||||
Total | 3,175 | 3,198 | ||||||||||
Less: current portion | (3,175 | ) | (3,027 | ) | ||||||||
Long-term debt | $ | - | $ | 171 |
Interest expense on the long-term debt for the years ended December 31, 2015 and 2014 was $310 and $11, respectively.
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ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
NOTE 8: STOCKHOLDERS’ EQUITY (DEFICIT)
On November 28, 2011, the Company was formed with three series’ of common stock authorizing a total of 50,000 shares as follows:
Series A General Common Shares – 38,000 authorized shares
Series B Common Shares – 10,000 authorized shares
Series C Common Shares – 2, 000 authorized shares
On April 29, 2013, the Certificate of Incorporation was amended to increase the authorized shares to 58,000 shares, designating a Series D Common Shares with an authorized limit of 8,000 shares.
On November 1, 2014, the Certificate of Incorporation was amended a second time to increase the authorized shares to 61,000 shares, increasing the Series C Common Shares authorized from 2,000 shares to 5,000 shares.
Series A General Common Shares (“Series A Stock”) and Treasury Stock
The Series A Stock was incorporated with 38,000 shares authorized with a par value of $0.01.
Each share of Series A Stock represents the right to one (1) vote on all issues presented to shareholders for a vote. Series A shareholders will not have any cumulative voting rights.
Holders of Series A Stock shall be entitled to receive a dividend, if, when and as authorized and declared by the Board of Directors, out of assets of the Company legally available therefore.
Upon the voluntary or involuntary dissolution, liquidation or winding up on the affairs of the Company, after the payment in full of its debts and other liabilities, the remaining Company assets are to be distributed pro rata among the holders of the common stock.
All 38,000 shares of authorized Series A Stock were issued to the founders of the Company at par ($380) for services rendered to the Company in the start-up phase. As of December 31, 2015 and 2014, the 38,000 shares are issued, and there were 34,458 and 24,600 shares outstanding at December 31, 2015 and 2014, respectively.
The 3,542 and 13,400 share difference between issued shares and outstanding shares represent treasury stock. At various times in 2013 through 2014, the Company repurchased shares in various transactions, and re-issued some of these shares in other acquisitions of companies as well as for services rendered. The treasury stock is calculated at cost, and the value of the treasury stock at December 31, 2015 and 2014 are $928 and $3,514, respectively.
Series B Common Shares (“Series B Stock”)
The Series B Stock was incorporated with 10,000 shares authorized with a par value of $0.01.
Every fifty (50) shares of Series B Stock represent the right to one (1) vote on all issues presented to shareholders for a vote. Series B shareholders will not have any cumulative voting rights.
Holders of Series B Stock shall be entitled to receive a dividend, if, when and as authorized and declared by the Board of Directors, out of assets of the Company legally available therefore.
Upon the voluntary or involuntary dissolution, liquidation or winding up on the affairs of the Company, after the payment in full of its debts and other liabilities, the remaining Company assets are to be distributed pro rata among the holders of the common stock.
The Company issued 8,862 shares of Series B Stock in 2012 for $8,342. Of this amount the Company had a subscription receivable in the amount of $885 that was received in 2013. Additionally, in 2013, the Company issued 1,000 shares of Series B Stock for services valued at $800.
As of December 31, 2015 and 2014, the Company had 9,862 shares issued and outstanding.
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ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
Series C Common Shares (“Series C Stock”)
The Series C Stock was incorporated with 2,000 shares authorized with a par value of $0.01. On November 1, 2014, the Certificate of Incorporation was amended a second time to increase the authorized shares of the Series C Stock from 2,000 shares to 5,000 shares.
The Series C stockholders will have no voting rights.
Holders of Series C Stock shall be entitled to receive a dividend, if, when and as authorized and declared by the Board of Directors, out of assets of the Company legally available therefore.
Upon the voluntary or involuntary dissolution, liquidation or winding up on the affairs of the Company, after the payment in full of its debts and other liabilities, the remaining Company assets are to be distributed pro rata among the holders of the common stock.
In 2013, the Company issued 2,000 shares of Series C Stock for services rendered valued at $2,500; in 2014, the Company issued 1,350 shares of Series C Stock for services rendered valued at $1,688; and in 2015, the Company issued 125 shares of Series C Stock for services rendered valued at $175.
As of December 31, 2015 and 2014, the Company had 3,475 and 3,350 shares issued and outstanding.
As noted below, the Company also granted 693 thousand Series C Stock Options in 2014. These stock options vest over a three-year period. Stock based compensation recorded in 2014 for these options was $192 and was recorded as additional paid in capital.
Series D Common Shares (“Series D Stock”)
On April 29, 2013, the Certificate of Incorporation was amended to designate a new class of shares, Series D Stock with authorized shares of 8,000 shares.
The Series D Stock has a par value of $0.01.
Every fifty (50) shares of Series D Stock represent the right to one (1) vote on all issues presented to shareholders for a vote. Series B shareholders will not have any cumulative voting rights.
Holders of Series D Stock shall be entitled to receive a dividend, if, when and as authorized and declared by the Board of Directors, out of assets of the Company legally available therefore.
Upon the voluntary or involuntary dissolution, liquidation or winding up on the affairs of the Company, after the payment in full of its debts and other liabilities, the remaining Company assets are to be distributed pro rata among the holders of the common stock.
The Company issued 1,779 shares of Series D Stock in 2013 for $1,876. Additionally, in 2014, the Company issued 4,667 shares for $5,373 of which $31 was reflected as a subscription receivable and was collected in February 2015, and an additional 1,000 shares of Series D Stock for services valued at $1,250.
As of December 31, 2015 and 2014, the Company had 7,446 shares issued and outstanding.
Series C Stock Options (“Series C Stock Options”)
On February 16, 2013, the Board of Directors approved the EcoArk Inc. 2013 Stock Option Plan (the “Plan”).
The purposes of the Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees, directors and consultants, and to promote the success of the Company’s business. The Plan is expected to contribute to the attainment of these objectives by offering employees, directors and consultants the opportunity to acquire stock ownership interests in the Company, and other rights with respect to stock of the Company, and to thereby provide them with incentives to put forth maximum efforts for the success of the Company.
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ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
Awards under the Plan may only be granted in the form of nonstatutory stock options (“Options”) to purchase the Company's Series C Stock. The Company does not plan to register the Series C Stock under applicable securities laws and certificates evidencing shares of Series C Stock issued upon exercise may contain a legend restricting transfer thereof.
The maximum number of shares to be issued under the Plan is 5,000.
In May 2014, the Company granted 693 thousand Series C Stock Options to various employees and consultants of the Company. The Series C Stock Options have a term of 10 years, and the Series C Stock Options vest over a three-year period as follows: 25% immediately; 25% on the first anniversary date; 25% on the second anniversary date; and 25% on the third anniversary date. During 2015 the Company issued 625 thousand additional Series C Stock Options.
Management valued the Series C Stock Options utilizing the Black-Scholes Method, with the following criteria: stock price - $1.25; exercise price - $1.25; expected term – 10 years; discount rate – 0.25%; and volatility – 100%.
The Company records stock based compensation in accordance with ASC 718, and has recorded stock based compensation of $366 and $192 for the years ended December 31, 2015 and 2014, respectively.
NOTE 9: ACQUISITIONS
SA Concepts
On June 11, 2013, the Company, entered into a Stock Purchase Agreement (the “SPA”) with Sustainable Aerodynamic (“SA”) Concepts pursuant to which the Company issued from its shares held in Class A Stock 1,500 shares to three individuals valued at $426 to acquire 100% of SA Concepts. The Company sold this entity in November 2014. The acquisition was accounted for as a purchase of a business under ASC 805.
Intelleflex Corporation
On September 19, 2013, the Company acquired Intelleflex Corporation. The acquisition was accounted for as a purchase of a business under ASC 805.
The allocation of the purchase price was as follows
Cash | $ | 782 | ||
Inventory | 988 | |||
Prepaid expenses and other assets | 210 | |||
Fixed assets | 510 | |||
Intangible assets | 1,013 | |||
Accounts payable and other liabilities | (1,010 | ) | ||
Total | $ | 2,492 | ||
Cash | $ | 1,300 | ||
Retirement of debt | 1,192 | |||
Total consideration | $ | 2,492 |
The intangible assets represent acquired patents that were independently valued. The remaining useful life of these patents was 13.5 years as of the date purchased.
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ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
NOTE10: COMMITMENTS
Operating Leases
The Company leases many of its operating and office facilities for various terms under long-term, non-cancelable operating lease agreements. These leases expire at various dates through 2019. Rent expense was approximately $412 and $415 for the years ended December 31, 2015 and 2014. The following is a schedule of future minimum lease payments required under the operating leases:
Years ending December 31: 2016 - $284, 2017 - $96, and 2018 - $68.
NOTE 11: DISCONTINUED OPERATIONS
SA Concepts
In November 2014, the Company sold its subsidiary, SA Concepts. In the sale, the Company sold the net assets back to an original shareholder of SA Concepts for his return of 2,000 Class A shares of stock. The value of the treasury stock in this transaction of $616 was equal to the value of the net assets of SA Concepts sold. Therefore, there was no gain or loss attributable to the disposal of this subsidiary. The operations of SA Concepts for the year ended December 31, 2014 are reflected as loss from discontinued operations in the consolidated statements of operations in accordance with ASC 205-50.
The following table sets forth for the year ended December 31, 2014 selected financial data of the Company’s discontinued operations of its SA Concepts subsidiary.
Revenues | $ | 379 | ||
Cost of sales | 818 | |||
Gross (loss) | (439 | ) | ||
Operating and other non-operating expenses | 1,010 | |||
Loss from discontinued operations | (1,449 | ) | ||
Gain from sale of SA Concepts | - | |||
Loss from discontinued operations | $ | (1,449 | ) |
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ECOARK INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLAR AMOUNTS and shares IN THOUSANDS, EXCEPT PER SHARE data)
YEARS ENDED DECEMBER 31, 2015 AND 2014
NOTE 12: PROVISION FOR INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31, 2015 and 2014 differs from the amount which would be expected as a result of applying the statutory tax rates to the losses before income taxes due primarily to the valuation allowance to fully reserve net deferred tax assets.
Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry-forwards are expected to be available to reduce taxable income. As the achievement of required future taxable income is uncertain, the Company recorded a valuation allowance.
As of December 31, 2015 | As of December 31, 2014 | |||||||
Deferred tax assets: | ||||||||
Net operating loss before non-deductible items | $ | (36,028 | ) | $ | (25,892 | ) | ||
Tax rate | 34 | % | 34 | % | ||||
Total deferred tax assets | 12,250 | 8,803 | ||||||
Less: Valuation allowance | (12,250 | ) | (8,803 | ) | ||||
Net deferred tax assets | $ | - | $ | - |
As of December 31, 2015, the Company has a net operating loss carry forward of $36,028 expiring through 2035. The Company has provided a valuation allowance against the full amount of the deferred tax asset due to management’s uncertainty about its realization. Furthermore, the net operating loss carry forward may be subject to further limitation pursuant to Section 382 of the Internal Revenue Code. The valuation allowance was increased by $3,447 in 2015.
nOTE 13: CONCENTRATIONS
During the years ended December 31, 2015 and 2014, the Company had one major customer comprising 62% and 72% of sales. A major customer is defined as a customer that represents 10% or greater of total sales. Additionally, the Company had two customers as of December 31, 2015 and 2014 with accounts receivable balances of 48% and 54% of the total accounts receivable. The Company does not believe that the risk associated with these customers will have an adverse effect on the business.
The Company maintained cash balances in excess of the FDIC insured limit in both years. The Company does not consider this risk to be material.
nOTE 14: SUBSEQUENT EVENTS
On January 29, 2016, the Company entered into a Merger Agreement with Magnolia Solar Corporation (“Magnolia”) providing, among other things, for the acquisition of the Company by Magnolia in a share for share exchange pursuant to which it is contemplated that at the closing Company shareholders will own approximately 95% of the outstanding shares of Magnolia. Magnolia filed a 14A and is awaiting approval from the SEC on certain proposals to amend the Articles of Incorporation to increase the authorized shares of common stock to 100,000 shares, to effect the creation of 5,000 shares of "blank check" preferred stock, to approve a reverse stock split of the common stock 1 for 250, and to change the name of the corporation to Ecoark Holdings Inc. Upon approval by the SEC, it is anticipated that the merger will be completed in March 2016.
In January 2016, the Company collected $55 in subscriptions receivable and received an additional $200 in equity investments.
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Annex D
EcoArk, Inc. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2014 AND 2013
EcoArk, Inc. AND SUBSIDIARIES
December 31, 2014 AND 2013
CONTENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Directors of
EcoArk, Inc. and Subsidiaries
Rogers, Arkansas
We have audited the accompanying consolidated balance sheets of EcoArk, Inc. and Subsidiaries (the “Company”) as of December 31, 2014 and 2013 and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EcoArk, Inc. and Subsidiaries as of December 31, 2014 and 2013, and the results of its statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has sustained operating losses and needs to obtain additional financing to continue the development of their products. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ KBL, LLP
New York, NY
December 22, 2015
ECOARK, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2014 AND 2013
2014 | 2013 | |||||||
ASSETS | ||||||||
CURRENT ASSETS | ||||||||
Cash and cash equivalents | $ | 2,220,094 | $ | 352,499 | ||||
Accounts receivable, net of allowance | 883,587 | 212,317 | ||||||
Inventory, net of reserves | 902,766 | 995,301 | ||||||
Prepaid expenses | 150,567 | 164,040 | ||||||
Related party receivable | 100,000 | - | ||||||
Other current assets | 25,551 | 63,389 | ||||||
Assets of discontinued operations | - | 344,013 | ||||||
Total current assets | 4,282,565 | 2,131,559 | ||||||
Property and equipment, net | 462,691 | 577,422 | ||||||
Intangible assets, net | 1,903,905 | 3,300,585 | ||||||
TOTAL ASSETS | $ | 6,649,161 | $ | 6,009,566 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
CURRENT LIABILITIES | ||||||||
Current portion of long-term debt | $ | 3,027,424 | $ | 26,038 | ||||
Current portion of long-term debt - related parties | 6,175,857 | 1,300,000 | ||||||
Note payable - bank | 250,000 | 250,000 | ||||||
Accounts payable | 967,646 | 844,076 | ||||||
Accrued expenses | 208,750 | 105,334 | ||||||
Accrued interest | 147,658 | 572,013 | ||||||
Deferred revenue | 142,112 | - | ||||||
Liabilities of discontinued operations | - | 51,573 | ||||||
Total current liabilities | 10,919,447 | 3,149,034 | ||||||
NON-CURRENT LIABILITIES | ||||||||
Long-term debt, net of current portion | 170,932 | 198,356 | ||||||
Long-term debt - related parties, net of current portion | 3,110,637 | 1,702,618 | ||||||
Total non-current liabilities | 3,281,569 | 1,900,974 | ||||||
COMMITMENTS AND CONTINGENCIES | - | - | ||||||
Total liabilities | 14,201,016 | 5,050,008 | ||||||
STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
Series A General Common Shares - $0.01 par value; 38,000,000 shares authorized, 38,000,000 and 38,000,000 shares issued and 24,600,000 and 34,500,000 shares outstanding at December 31, 2014 and 2013, respectively | 380,000 | 380,000 | ||||||
Series B Common Shares - $0.01 par value; 10,000,000 shares authorized, and 9,862,400 shares issued, and outstanding as of December 31, 2014 and 2013, respectively | 98,624 | 98,624 | ||||||
Series C Common Shares - $0.01 par value; 5,000,000 and 2,000,000 shares authorized, 3,350,000 and 2,000,000 shares issued and outstanding as of December 31, 2014 and 2013, respectively | 33,500 | 20,000 | ||||||
Series D Common Shares - $0.01 par value; 8,000,000 shares authorized, 7,446,561 and 1,779,200 shares issued and outstanding as of December 31, 2014 and 2013, respectively | 74,466 | 17,792 | ||||||
Additional paid-in-capital | 21,614,911 | 13,381,067 | ||||||
Subscription receivable | (31,250 | ) | - | |||||
Accumulated deficit | (26,084,616 | ) | (11,949,414 | ) | ||||
Treasury stock, at cost, 13,400,000 and 3,500,000 Series A General Common Shares, at December 31, 2014 and 2013, respectively | (3,513,663 | ) | (993,467 | ) | ||||
Total stockholders' equity (deficit) before non-controlling interest | (7,428,028 | ) | 954,602 | |||||
Non-controlling interest | (123,827 | ) | 4,956 | |||||
Total stockholders' equity (deficit) | (7,551,855 | ) | 959,558 | |||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $ | 6,649,161 | $ | 6,009,566 |
* Does not include Note payable - bank as this was transferred to parent at sale
The accompanying notes are an integral part of these consolidated financial statements.
ECOARK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
2014 | 2013 | |||||||
NET SALES | $ | 5,932,093 | $ | 1,370,689 | ||||
COST OF SALES (including research and development) | 6,077,157 | 1,519,502 | ||||||
GROSS (LOSS) | (145,064 | ) | (148,813 | ) | ||||
OPERATING EXPENSES: | ||||||||
Salaries and salary related costs, including stock based compensation | 2,836,305 | 1,259,833 | ||||||
Professional fees and consulting expenses | 5,310,795 | 5,401,428 | ||||||
Other general and administrative | 1,630,577 | 803,476 | ||||||
Depreciation, amortization and impairment | 1,708,568 | 1,486,532 | ||||||
Total operating expenses | 11,486,245 | 8,951,269 | ||||||
Loss from operations | (11,631,309 | ) | (9,100,082 | ) | ||||
OTHER INCOME (EXPENSES): | ||||||||
Interest expense, net of interest income | (1,270,228 | ) | (574,925 | ) | ||||
Other income | 86,954 | 95,992 | ||||||
Total other income (expenses) | (1,183,274 | ) | (478,933 | ) | ||||
Loss from continuing operations before provision for income taxes | (12,814,583 | ) | (9,579,015 | ) | ||||
PROVISION FOR INCOME TAXES | (800 | ) | - | |||||
LOSS FROM CONTINUING OPERATIONS | (12,815,383 | ) | (9,579,015 | ) | ||||
DISCONTINUED OPERATIONS | ||||||||
Gain (loss) from discontinued operations | (1,448,602 | ) | (661,011 | ) | ||||
Gain (loss) on disposal of operations | - | - | ||||||
GAIN (LOSS) FROM DISCONTINUED OPERATIONS | (1,448,602 | ) | (661,011 | ) | ||||
NET LOSS | (14,263,985 | ) | (10,240,026 | ) | ||||
NET INCOME (LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST | (128,783 | ) | 4,956 | |||||
NET INCOME (LOSS) ATTRIBUTABLE TO CONTROLLING INTEREST | $ | (14,135,202 | ) | $ | (10,244,982 | ) | ||
NET LOSS PER SHARE | ||||||||
Basic | $ | (0.26 | ) | $ | (0.21 | ) | ||
Diluted | $ | (0.26 | ) | $ | (0.21 | ) | ||
SHARES USED IN CALCULATION OF NET INCOME PER SHARE | ||||||||
Basic | 55,150,281 | 49,252,000 | ||||||
Diluted | 55,843,281 | 49,252,000 |
The accompanying notes are an integral part of these consolidated financial statements.
ECOARK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
Series A General Common | Series B Common | Series C Common | Series D Common | Additional Paid-In- | Subscription | Accumulated | Treasury | Non-controlling | ||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Receivable | Deficit | Stock | Interest | Total | |||||||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2013 | 38,000,000 | $ | 380,000 | 8,862,400 | $ | 88,624 | - | $ | - | - | $ | - | $ | 8,253,060 | $ | (885,000 | ) | $ | (1,704,432 | ) | $ | - | $ | - | $ | 6,132,252 | ||||||||||||||||||||||||||||||
Shares issued for cash, net of expenses | - | - | - | - | - | - | 1,779,200 | 17,792 | 1,858,007 | - | - | - | - | 1,875,799 | ||||||||||||||||||||||||||||||||||||||||||
Shares issued for services rendered | - | - | 1,000,000 | 10,000 | 2,000,000 | 20,000 | - | - | 3,270,000 | - | - | - | - | 3,300,000 | ||||||||||||||||||||||||||||||||||||||||||
Collection of subscription receivable | - | - | - | - | - | - | - | - | - | 885,000 | - | - | - | 885,000 | ||||||||||||||||||||||||||||||||||||||||||
Repurchase of treasury shares | - | - | - | - | - | - | - | - | - | - | - | (2,384,320 | ) | - | (2,384,320 | ) | ||||||||||||||||||||||||||||||||||||||||
Re-issuance of treasury shares for company acquisition | - | - | - | - | - | - | - | - | - | - | - | 425,771 | - | 425,771 | ||||||||||||||||||||||||||||||||||||||||||
Re-issuance of treasury shares for services rendered | - | - | - | - | - | - | - | - | - | - | - | 965,082 | - | 965,082 | ||||||||||||||||||||||||||||||||||||||||||
Net loss for the year | - | - | - | - | - | - | - | - | - | - | (10,244,982 | ) | - | 4,956 | (10,240,026 | ) | ||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2013 | 38,000,000 | 380,000 | 9,862,400 | 98,624 | 2,000,000 | 20,000 | 1,779,200 | 17,792 | 13,381,067 | - | (11,949,414 | ) | (993,467 | ) | 4,956 | 959,558 | ||||||||||||||||||||||||||||||||||||||||
Shares issued for cash, net of expenses | - | - | - | - | - | - | 4,667,361 | 46,674 | 5,127,630 | (31,250 | ) | - | - | - | 5,143,054 | |||||||||||||||||||||||||||||||||||||||||
Shares issued for services rendered | - | - | - | - | 1,350,000 | 13,500 | 1,000,000 | 10,000 | 2,914,000 | - | - | - | - | 2,937,500 | ||||||||||||||||||||||||||||||||||||||||||
Repurchase of treasury shares | - | - | - | - | - | - | - | - | - | - | - | (3,116,276 | ) | - | (3,116,276 | ) | ||||||||||||||||||||||||||||||||||||||||
Re-issuance of treasury shares for company formation | - | - | - | - | - | - | - | - | - | - | - | 28,385 | - | 28,385 | ||||||||||||||||||||||||||||||||||||||||||
Re-issuance of treasury shares for services rendered | - | - | - | - | - | - | - | - | - | - | - | 567,695 | - | 567,695 | ||||||||||||||||||||||||||||||||||||||||||
Stock based compensation - options | - | - | - | - | - | - | - | - | 192,214 | - | - | - | - | 192,214 | ||||||||||||||||||||||||||||||||||||||||||
Net loss for the year | - | - | - | - | - | - | - | - | - | - | (14,135,202 | ) | - | (128,783 | ) | (14,263,985 | ) | |||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2014 | 38,000,000 | $ | 380,000 | 9,862,400 | $ | 98,624 | 3,350,000 | $ | 33,500 | 7,446,561 | $ | 74,466 | $ | 21,614,911 | $ | (31,250 | ) | $ | (26,084,616 | ) | $ | (3,513,663 | ) | $ | (123,827 | ) | $ | (7,551,855 | ) |
The accompanying notes are an integral part of this consolidated financial statement.
ECOARK, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2013
2014 | 2013 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (14,135,202 | ) | $ | (10,244,982 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation, amortization and impairment | 1,708,568 | 1,873,967 | ||||||
Stock based compensation | 192,214 | - | ||||||
Loss on sale of assets | - | 491 | ||||||
Shares of common stock issued for services rendered | 2,937,500 | 3,300,000 | ||||||
Shares of treasury stock re-issued for services rendered | 596,080 | 965,082 | ||||||
Change in non-controlling interest on cash | (128,783 | ) | 4,956 | |||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (671,270 | ) | 15,784 | |||||
Inventory | 92,535 | 704,721 | ||||||
Prepaid expenses | 13,473 | 45,510 | ||||||
Other current assets | 37,838 | (25,052 | ) | |||||
Accounts payable | 123,571 | (328,974 | ) | |||||
Accrued expenses | 103,416 | 81,753 | ||||||
Accrued interest | 976,107 | 570,006 | ||||||
Deferred revenue | 142,112 | - | ||||||
Net cash used in operating activities | (8,011,841 | ) | (3,036,738 | ) | ||||
Cash flows from investing activities: | ||||||||
Purchases of property and equipment | (197,158 | ) | (650,925 | ) | ||||
Proceeds from sale of property and equipment | - | 1,090,126 | ||||||
Advances on notes receivable - related party | (100,000 | ) | - | |||||
Acquisition of subsidiary, net of cash received in acquisition | - | (518,128 | ) | |||||
Net cash used in investing activities | (297,158 | ) | (78,927 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from the issuance of common stock, net of fees | 5,143,054 | 2,760,799 | ||||||
Repurchase of treasury shares for cash | - | (50,000 | ) | |||||
Proceeds from the issuances of long-term debt | 3,000,000 | - | ||||||
Repayments of long-term debt | (26,038 | ) | (24,501 | ) | ||||
Proceeds from the issuances of long-term debt - related parties | 5,258,370 | 3,175,210 | ||||||
Repayments of long-term debt - related parties | (3,198,792 | ) | (3,836,616 | ) | ||||
Net cash provided by financing activities | 10,176,594 | 2,024,892 | ||||||
NET INCREASE (DECREASE) IN CASH | 1,867,595 | (1,090,773 | ) | |||||
Cash and cash equivalents - beginning of the year | 352,499 | 1,443,272 | ||||||
Cash and cash equivalents - end of the year | $ | 2,220,094 | $ | 352,499 | ||||
SUPPLEMENTAL DISCLOSURES: | ||||||||
Cash paid for interest | $ | 22,640 | $ | 8,879 | ||||
Cash paid for income taxes | $ | 800 | $ | 800 | ||||
SUMMARY OF NONCASH ACTIVITIES: | ||||||||
Treasury stock re-purchased for long-term debt related parties | $ | 2,500,000 | $ | - | ||||
Treasury stock re-purchased for sale of net assets - SA Concepts | $ | 616,276 | $ | - | ||||
Accrued interest converted into long-term debt - related parties | $ | 1,400,462 | $ | - | ||||
Net assets acquired in SA Concepts acquisition | $ | - | $ | 425,771 |
The accompanying notes are an integral part of this consolidated financial statement.
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business and Organization
EcoArk, Inc. and Subsidiaries is an innovative and growth-oriented company founded in 2011 that develops and deploys intelligent technologies and consumer products in order to meet the demand for sustainable, integrated solutions to contemporary business needs. EcoArk, Inc. is a holding company that conducts business through its subsidiaries (see detail below).
Eco3D, LLC – Eco3D is located in Phoenix, Arizona and provides customers with the latest 3D technologies. Eco3D was formed by the Company in November 2013 and the Company owns 65% of the LLC. The remaining 35% is reflected as non-controlling interests.
Eco360, LLC – Eco360 is located in Bentonville, Arkansas and provides companies with mobile data capture App technology and systems. Eco360 was formed in November 2014 by the Company.
SA Concepts, Inc. – SA Concepts was located in Springdale, Arkansas and was organized for social and environmental purposes. SA Concepts was purchased in April 2013 and subsequently sold in November 2014. The results of operations of this entity are reflected as discontinued operations.
Pioneer Products, LLC – Pioneer is located in Bentonville, Arkansas and is involved in the selling of recycled plastic products and is the sales and sourcing arm of the Company and its subsidiaries. Pioneer was purchased by the Company in 2012.
Intelleflex Corporation – Intelleflex is located in San Jose, California and provides a perishable food quality management solution to food retailers and suppliers. Intelleflex was purchased by the Company in September 2013.
Principles of Consolidation
The consolidated financial statements include the accounts of EcoArk, Inc. and its subsidiaries, collectively referred to as “the Company”. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company is a holding company and holds one hundred percent of Eco360, Pioneer, and Intelleflex. EcoArk owns 65% of Eco3D and the remaining 35% interest is owned by the executives of Eco3D.
The Company applies the guidance of Topic 810 “Consolidation” of the FASB Accounting Standards Codification to determine whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all entities in which a parent has a controlling financial interest—shall be consolidated except (1) when control does not rest with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee. Pursuant to ASC Paragraph 810-10-15-8, the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree. The Company consolidates all less-than-majority-owned subsidiaries, if any, in which the parent’s power to control exists.
Noncontrolling Interests
In accordance with ASC 810-10-45,Noncontrolling Interests in Consolidated Financial Statements,the Company classifies controlling interests as a component of equity within the consolidated balance sheets. For the years ended December 31, 2014 and 2013, net income or loss attributable to noncontrolling interests of ($128,783) and $4,956, respectively, is included in the Company’s net loss.
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
Basis of Presentation
The accompanying financial statements have been prepared in conformity with U.S generally accepted accounting principles (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (the “Commission”). It is management's opinion, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. These estimates include, but are not limited to, management’s estimate of provisions required for non-collectible accounts receivable, obsolete or slow-moving inventory, and determination of the fair value of stock awards issued. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents are carried at cost, which approximates market value. For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. At December 31, 2014 and 2013, the Company had no cash equivalents.
Inventory
Inventory is stated at the lower of cost or market. Inventory cost is determined by specific identification on a first in first out basis, and provisions are made to reduce slow-moving, obsolete, or unusable inventories to their estimated useful or scrap values.
Property and Equipment and Long-Lived Assets
Property and equipment is stated at cost. Depreciation on property and equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from five to twenty eight years.
Financial Accounting Standards Board (FASB) Codification Topic 360 “Property, Plant and Equipment” (ASC 360), requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The application of ASC 360 has not materially affected the Company’s reported earnings, financial condition or cash flows.
There were no impairment charges for the years ended December 31, 2014 and 2013, respectively.
Advertising Expense
The Company expenses advertising costs, as incurred. Advertising expenses for the years ended December 31, 2014 and 2013 are included in other general and administrative costs.
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
Software Costs
The Company accounts for software development costs in accordance with ASC 985.730, Software Research and Development, and ASC 985-20, Costs of Software to be Sold, Leased or Marketed. ASC 985-20 requires that costs related to the development of the Company’s productsbe capitalized as an asset when incurred subsequent to the point at which technological feasibility of the enhancement is established. ASC 985-20 specifies that “technological feasibility” can only be established by the completion of a “detailed program design” or if no such design is prepared, upon the completion of a “working model” of the software. The Company’s development process does not include a detailed program design. Management believes that such a design could be produced in the early stages of development but would entail significant wasted expense and delay. Consequently, ASC 985-20 requires the development costs to be recorded as an expense until the completion of a “working model”. In the Company’s case, the completion of a working model does not occur until shortly before the time when the software is ready for sale.
Research and Development Costs
Research and development costs incurred after completion of development of a product are expensed as incurred. Research and development costs are included in cost of sales for the years ended December 31, 2014 and 2013.
Subsequent Events
Subsequent events are evaluated through the date the consolidated financial statements were issued.
Intangible Assets
Intangible assets with definite useful lives are stated at cost less accumulated amortization. Intangible assets capitalized as of December 31, 2014 and 2013 represent the valuation of the Company-owned patents and customer lists. These intangible assets are being amortized on a straight-line basis over their estimated average useful lives of thirteen and a half years for the patents and three years for the customer lists. Expenditures on intangible assets through the Company’s filing of patent and trademark protection for Company-owned inventions are expensed as incurred.
Shipping and Handling Costs
The Company reports shipping and handling revenues and their associated costs in revenue and cost of revenue, respectively. Shipping revenues and costs for the years ended December 31, 2014 and 2013 were nominal and included in cost of goods sold.
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
Revenue Recognition
In regards to product revenue, product revenue primarily consists of the sale of electronic hardware, recycled plastics products, and recycled furniture. These subsidiaries recognize revenue when the following criteria have been met:
Evidence of an arrangement exists. The Company considers a customer purchase order, service agreement, contract, or equivalent document to be evidence of an arrangement.
Delivery has occurred. The Company’s standard transfer terms are free on board (FOB) shipping point. Thus, delivery is considered to have occurred when title and risk of loss have passed to the customer at the time of shipment.
The fee is fixed or determinable.The Company considers the fee to be fixed or determinable if the fee is not subject to refund or adjustment and payment terms are standard, which is generally 30-60 days.
Collection is deemed reasonably assured. Collection is deemed reasonably assured if it is expected that the customer will be able to pay amounts under the arrangement as payments become due. If it is determined that collection is not reasonably assured, then revenue is deferred and recognized upon cash collection.
The Company for its software revenue will recognize revenues in accordance with ASC 985-605, Software Revenue Recognition.
Revenue from software license agreements is recognized when persuasive evidence of an agreement exists, delivery of the software has occurred, the fee is fixed or determinable, and collectability is probable. In software arrangements that include more than one element, the Company allocates the total arrangement fee among the elements based on the relative fair value of each of the elements.
License revenue allocated to software products generally is recognized upon delivery of the products or deferred and recognized in future periods to the extent that an arrangement includes one or more elements to be delivered at a future date and for which fair values have not been established. Revenue allocated to maintenance agreements is recognized ratably over the maintenance term and revenue allocated to training and other service elements is recognized as the services are performed. If evidence of fair value does not exist for all elements of a license agreement and post customer support (PCS) is the only undelivered element, then all revenue for the license arrangement is recognized ratably over the term of the agreement as license revenue. If evidence of fair value of all undelivered PCS elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.
Cost of license revenue primarily includes product, delivery, and royalty costs. Cost of maintenance and service revenue consists primarily of labor costs for engineers performing implementation services, technical support, and training personnel as well as facilities and equipment costs.
The Company enters into arrangements that can include various combinations of software, services, and hardware. Where elements are delivered over different periods of time, and when allowed under U.S. GAAP, revenue is allocated to the respective elements based on their relative selling prices at the inception of the arrangement, and revenue is recognized as each element is delivered. The Company uses a hierarchy to determine the fair value to be used for allocating revenue to elements: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence, and (iii) best estimate of selling price (“ESP”). For software elements, the Company follows the industry specific software guidance which only allows for the use of VSOE in establishing fair value. Generally, VSOE is the price charged when the deliverable is sold separately or the price established by management for a product that is not yet sold if it is probable that the price will not change before introduction into the marketplace.
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
ESPs are established as best estimates of what the selling prices would be if the deliverables were sold regularly on a stand-alone basis. The process for determining ESPs requires judgment and considers multiple factors that may vary over time depending upon the unique facts and circumstances related to each deliverable.
When the arrangement with a customer includes significant production, modification, or customization of the software, we recognize the related revenue using the percentage-of-completion method in accordance with the accounting guidance and certain production-type contracts contained in ASC 605-35, Construction-Type and Production-Type Contracts. We use the percentage of completion method provided all of the following conditions exist:
We measure completion based on achieving milestones detailed in the agreements with the customers. Costs of providing services, including services accounted for in accordance with ASC 605-35, are expensed as incurred.
Accounts Receivable and Concentration of Credit Risk
The Company considers accounts receivable, net of allowance for returns, to be fully collectible. The allowance is based on management’s estimate of the overall collectability of accounts receivable, considering historical losses and economic conditions. Based on these same factors, individual accounts are charged off against the allowance when management determines those individual accounts are uncollectible. Credit extended to customers is generally uncollateralized. Past-due status is based on contractual terms.
Uncertain Tax Positions
The Company follows ASC 740-10, “Accounting for Uncertainty in Income Taxes” (“ASC 740-10”). This interpretation requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. ASC 740-10 is effective for fiscal years beginning after December 15, 2006. Management has adopted ASC 740-10 and they evaluate their tax positions on an annual basis. The Company’s policy is to recognize both interest and penalties related to unrecognized tax benefits expected to result in payment of cash within one year are classified as accrued liabilities, while those expected beyond one year are classified as other liabilities. The Company has not recorded any interest or penalties since its inception.
The Company files income tax returns in the U.S. federal tax jurisdiction and various state tax jurisdictions. The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they were filed.
Stock-Based Compensation
In 2011, the Company adopted the provisions of ASC 718-10“Share Based Payments”. The adoption of this principle had no effect on the Company’s operations.
The Company has elected to use the modified–prospective approach method. Under that transition method, the calculated expense is equivalent to compensation expense for all awards granted prior to, but not yet vested, based on the grant-date fair values. Stock-based compensation expense for all awards granted is based on the grant-date fair values. The Company recognizes these compensation costs, net of an estimated forfeiture rate, on a pro rata basis over the requisite service period of each vesting tranche of each award. The Company considers voluntary termination behavior as well as trends of actual option forfeitures when estimating the forfeiture rate.
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
The Company measures compensation expense for its non-employee stock-based compensation under ASC 505-50, “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”. The fair value of the option issued is used to measure the transaction, as this is more reliable than the fair value of the services received. The fair value is measured at the value of the Company’s common stock on the date that the commitment for performance by the counterparty has been reached or the counterparty’s performance is complete. The fair value of the equity instrument is charged directly to expense and additional paid-in capital.
Fair Value of Financial Instruments
Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 825, "Financial Instruments," requires the Company to disclose estimated fair values for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments: The carrying amount of cash, accounts receivable, prepaid and other current assets, accounts payable and accrued expenses, and accounts payable to related parties, approximate fair value because of the short maturity of those instruments.
The carrying amount reported in the balance sheets for cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximate fair value because of the immediate or short-term maturity of these financial instruments. The Company does not utilize derivative instruments.
Recoverability of Long-Lived Assets
The Company reviews their recoverability of long-lived assets on a periodic basis whenever events and changes in circumstances have occurred which may indicate a possible impairment. The assessment for potential impairment will be based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future cash flows from its operations on an undiscounted basis. If such assets are determined to be impaired, the impairment recognized is the amount by which the carrying value of the assets exceeds the fair value of the assets. Fixed assets to be disposed of by sale will be carried at the lower of the then current carrying value or fair value less estimated costs to sell.
Earnings (Loss) Per Share of Common Stock
Basic net income (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted earnings per share (EPS) include additional dilution from common stock equivalents, such as convertible notes, preferred stock, stock issuable pursuant to the exercise of stock options and warrants. Common stock equivalents are not included in the computation of diluted earnings per share when the Company reports a loss because to do so would be anti-dilutive for periods presented.
Segment Information
The Company follows the provisions of ASC 280-10, “Disclosures about Segments of an Enterprise and Related Information”. This standard requires that companies disclose operating segments based on the manner in which management disaggregates the Company in making internal operating decisions. As of December 31, 2014 and 2013, and for the years ended December 31, 2014 and 2013, the Company operates in three segments. The segments are as follows: product (1), software (2) and consulting/modeling (3). Home office costs in the parent are allocated based on revenue for these periods, however the Company is exploring more appropriate means for allocation for these costs.
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
The method for determining what information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance as determined by the Company’s chief financial officer (“CFO”).
The CFO reviews financial information presented on an entity level basis accompanied by disaggregated information about revenues by product type and certain information about geographic regions where appropriate for purposes of making operating decisions and assessing financial performance. The entity level financial information is identical to the information presented in the accompanying consolidated statements of operations.
December 31, 2014 | 1 | 2 | 3 | Total | ||||||||||||
Segmented Operating Revenues | $ | 4,292,435 | $ | 133,688 | $ | 1,505,970 | $ | 5,932,093 | ||||||||
Total Cost of Revenues | 5,079,333 | 196,536 | 801,288 | 6,077,157 | ||||||||||||
Gross Profit (Loss) | (786,898 | ) | (62,848 | ) | 704,682 | (145,064 | ) | |||||||||
Total Operating Expenses Net of Depreciation and Amortization, and Other (Income) Loss | 2,885,767 | 4,610,219 | 2,281,691 | 9,777,677 | ||||||||||||
Depreciation and Amortization Other (Income) Loss (including Discontinued Operations) | 3,293,314 | 337,011 | 710,919 | 4,341,244 | ||||||||||||
Net Income (Loss) Applicable to Common Shares | (6,965,979 | ) | (5,010,078 | ) | (2,287,928 | ) | (14,263,985 | ) | ||||||||
Non-controlling interest | - | - | 128,783 | 128,783 | ||||||||||||
Net Income (Loss) – Controlling Interest | ($ | 6,965,979 | ) | ($ | 5,010,078 | ) | ($ | 2,159,145 | ) | ($ | 14,135,202 | ) | ||||
Segmented Assets | ||||||||||||||||
Property and equipment | $ | 38,854 | $ | 295,154 | $ | 128,683 | $ | 462,691 | ||||||||
Intangible assets | $ | 713,701 | $ | 942,392 | $ | 247,812 | $ | 1,903,905 |
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
December 31, 2013 | 1 | 2 | 3 | Total | ||||||||||||
Segmented Operating Revenues | $ | 865,297 | $ | 137,810 | $ | 367,582 | $ | 1,370,689 | ||||||||
Total Cost of Revenues | 1,023,029 | 137,118 | 359,355 | 1,519,502 | ||||||||||||
Gross Profit (Loss) | (157,732 | ) | 692 | 8,227 | (148,813 | ) | ||||||||||
Total Operating Expenses Net of Depreciation and Amortization, and Other (Income) Loss | 3,787,827 | 1,996,819 | 1,680,091 | 7,464,737 | ||||||||||||
Depreciation and Amortization Other (Income) Loss (including Discontinued Operations) | 1,896,712 | 198,763 | 531,001 | 2,626,476 | ||||||||||||
Net Income (Loss) Applicable to Common Shares | (5,842,271 | ) | (2,194,890 | ) | (2,202,865 | ) | (10,240,026 | ) | ||||||||
Non-controlling interest | - | - | (4,956 | ) | (4,956 | ) | ||||||||||
Net Income (Loss) – Controlling Interest | ($ | 5,842,271 | ) | ($ | 2,194,890 | ) | ($ | 2,207,821 | ) | ($ | 10,244,982 | ) | ||||
Segmented Assets | ||||||||||||||||
Property and equipment | $ | 78,630 | $ | 453,292 | $ | 45,500 | $ | 577,422 | ||||||||
Intangible assets | $ | 1,457,138 | $ | 1,218,960 | $ | 624,487 | $ | 3,300,585 |
Fair Value Measurements
In September 2006, ASC issued 820, “Fair Value Measurements”. ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. Early adoption is encouraged. The adoption of ASC 820 is not expected to have a material impact on the consolidated financial statements.
ASC 820 classifies these inputs into the following hierarchy:
Level 1 inputs: Quoted prices for identical instruments in active markets.
Level 2 inputs: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3 inputs: Instruments with primarily unobservable value drivers.
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
Recent Issued Accounting Standards
In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2015-02 (ASU 2015-02) "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We are currently in the process of evaluating the impact of the adoption of ASU 2015-02 on our consolidated financial statements.
In November 2014, the FASB issued ASU No. 2014-17, “Business Combination.” The provisions of ASU No. 2014-17 require management to determining whether and at what threshold an acquiree (acquired entity) can reflect the acquirer’s accounting and reporting basis (pushdown accounting) in its separate financial statements. Since neither unit of this business combination is in the development stage, nor had recognizable revenues during this period the application of push down accounting would not be of significant value to the readers of these consolidated financial statements. The Company has not elected to apply pushdown accounting in its separate financial statements upon occurrence of this event.
During August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern.” The provisions of ASU No. 2014-15 require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606) (ASU 2014-09), which supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition”, and most industry-specific guidance. ASU 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The amendments in ASU 2014-09 will be applied using one of two retrospective methods. The effective date will be the first quarter of our fiscal year ended December 31, 2018. We have not determined the potential effects on our financial statements.
There were other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Going Concern
The Company commenced operations in 2011, and has experienced typical start-up costs and losses from operations resulting in an accumulated deficit of $26,084,616 since inception. The accumulated deficit as well as recurring losses of $14,135,202 and $10,244,982 for the years ended December 31, 2014 and 2013, and the working capital deficit of $6,636,882 as of December 31, 2014, have resulted in the uncertainty of the Company to continue as a going concern.
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
These consolidated financial statements of the Company have been prepared assuming that the Company will continue as a going concern, which contemplates, among other things, the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable period of time.
The Company plans to raise additional capital to carry out its business plan. The Company’s ability to raise additional capital through future equity and debt securities issuances is unknown. Obtaining additional financing, the successful development of the Company’s contemplated plan of operations, ultimately, to profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raises substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome of the uncertainties.
NOTE 2:INVENTORY
Inventory, net of reserves, consisted of the following as of December 31, 2014 and 2013:
December 31, 2014 | December 31, 2013 | |||||||
Inventory | $ | 1,494,843 | $ | 1,587,378 | ||||
Inventory Reserves | (592,077 | ) | (592,077 | ) | ||||
Total | $ | 902,766 | $ | 995,301 |
NOTE 3:PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31, 2014 and 2013:
December 31, 2014 | December 31, 2013 | |||||||
Furniture and fixtures | $ | 110,191 | $ | 71,305 | ||||
Computers and software costs | 359,197 | 227,875 | ||||||
Plant machinery and equipment | 442,564 | 415,614 | ||||||
Leasehold improvements | 5,543 | 5,543 | ||||||
Total | 917,495 | 720,337 | ||||||
Accumulated depreciation | (454,804 | ) | (142,915 | ) | ||||
Net property and equipment | $ | 462,691 | $ | 577,422 |
Depreciation expense for the years ended December 31, 2014 and 2013 was $311,889 and $139,862, respectively. There was no impairment on these assets for this two year period.
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
NOTE 4: INTANGIBLE ASSETS
The following is a summary of intangible assets as of December 31, 2014 and 2013:
December 31, 2014 | December 31, 2013 | |||||||
Customer lists | $ | 3,965,000 | $ | 3,965,000 | ||||
Patents | 1,012,672 | 1,012,672 | ||||||
Total Intangible Assets | 4,977,672 | 4,977,672 | ||||||
Accumulated Amortization | 3,073,767 | 1,677,087 | ||||||
Intangible Assets, net | $ | 1,903,905 | $ | 3,300,585 |
Amortization expense for the years ended December 31, 2014 and 2013 was $1,396,680 and $1,346,671, respectively. There was no impairment on these assets for this two year period.
NOTE 5: LONG-TERM DEBT – RELATED PARTIES
The following is a summary of long-term debt – related parties as of December 31, 2014 and 2013:
December 31, 2014 | December 31, 2013 | |||||||||
Promissory notes – shareholders | (a) | $ | - | $ | 1,100,000 | |||||
Promissory note – Hagood | (b) | 411,696 | 200,000 | |||||||
Promissory note – May #1 | (c) | 226,684 | 1,702,618 | |||||||
Promissory note – May #2 | (d) | 2,500,000 | - | |||||||
Note payable – various | (e) | 800,000 | - | |||||||
Note payable –SA Concepts | (f) | 74,000 | - | |||||||
Note payable – Goldenhawk | (g) | 3,674,114 | - | |||||||
Note payable - other | (h) | 1,600,000 | - | |||||||
Total | 9,286,494 | 3,002,618 | ||||||||
Less: current portion | (6,175,857 | ) | (1,300,000 | ) | ||||||
Long-term debt – related parties | $ | 3,110,637 | $ | 1,702,618 |
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
Long-term debt – related parties maturities for each of the next two years are as follows:
Year ending December 31, 2015 | $ | 6,175,857 | ||
Year ending December 31, 2016 | 3,110,637 | |||
$ | 9,286,494 |
Interest expense on the long-term debt – related parties for the years ended December 31, 2014 and 2013 were $1,235,630 and $574,365, respectively.
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
NOTE 6: NOTE PAYABLE - BANK
The Company’s former subsidiary, SA Concepts, had a note payable with a bank that was due November 2014 at 5.5% interest per annum. This note was extended to February 2016 and was paid off in October 2015. The note was transferred to the Company upon sale of SA Concepts. The note was secured by the property of the Company. The balance of this note at December 31, 2014 and 2013 was $250,000.
NOTE 7: LONG-TERM DEBT
The following is a summary of long-term debt as of December 31, 2014 and 2013:
December 31, 2014 | December 31, 2013 | |||||||||
Note payable – Celtic Bank | (a) | $ | 198,356 | $ | 224,394 | |||||
Note payable – B&B Merritt | (b) | 3,000,000 | - | |||||||
Total | 3,198,356 | 224,394 | ||||||||
Less: current portion | (3,027,424 | ) | (26,038 | ) | ||||||
Long-term debt | $ | 170,932 | $ | 198,356 |
Long-term debt maturities for each of the next five years are as follows:
Year ending December 31, 2015 | $ | 3,027,424 | ||
Year ending December 31, 2016 | 28,899 | |||
Year ending December 31, 2017 | 30,454 | |||
Year ending December 31, 2018 | 32,091 | |||
Year ending December 31, 2019 | 33,817 | |||
Thereafter | 45,671 | |||
$ | 3,198,356 |
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
Interest expense on the long-term debt for the years ended December 31, 2014 and 2013 were $11,146 and $11,781, respectively.
NOTE 8: STOCKHOLDERS’ EQUITY (DEFICIT)
On November 28, 2011, the Company was formed with three series’ of common stock authorizing a total of 50,000,000 shares as follows:
Series A General Common Shares – 38,000,000 authorized shares
Series B Common Shares – 10,000,000 authorized shares
Series C Common Shares – 2, 000,000 authorized shares
On April 29, 2013, the Certificate of Incorporation was amended to increase the authorized shares to 58,000,000 shares, designating a Series D Common Shares with an authorized limit of 8,000,000 shares.
On November 1, 2014, the Certificate of Incorporation was amended a second time to increase the authorized shares to 61,000,000 shares, increasing the Series C Common Shares authorized from 2,000,000 shares to 5,000,000 shares.
Series A General Common Shares (“Series A Stock”) and Treasury Stock
The Series A Stock was incorporated with 38,000,000 shares authorized with a par value of $0.01.
Each share of Series A Stock represents the right to one (1) vote on all issues presented to shareholders for a vote. Series A shareholders will not have any cumulative voting rights.
Holders of Series A Stock shall be entitled to receive a dividend, if, when and as authorized and declared by the Board of Directors, out of assets of the Corporation legally available therefore.
Upon the voluntary or involuntary dissolution, liquidation or winding up on the affairs of the Corporation, after the payment in full of its debts and other liabilities, the remaining Corporation assets are to be distributed pro rata among the holders of the common stock.
All 38,000,000 shares of authorized Series A Stock were issued to the founders of the Company at par ($380,000) for services rendered to the Company in the start-up phase. As of December 31, 2014 and 2013, the 38,000,000 shares are issued, and there are 24,600,000 and 34,500,000 shares outstanding at December 31, 2014 and 2013, respectively.
The 13,400,000 and 3,500,000 share difference between issued shares and outstanding shares represent treasury stock. At various times in 2013 through 2014, the Company repurchased shares in various transactions, and re-issued some of these shares in other acquisitions of companies as well as for services rendered. The treasury stock is calculated at cost, and the value of the treasury stock at December 31, 2014 and 2013 are $3,513,663 and $993,467, respectively.
Series B Common Shares (“Series B Stock”)
The Series B Stock was incorporated with 10,000,000 shares authorized with a par value of $0.01.
Every fifty (50) shares of Series B Stock represents the right to one (1) vote on all issues presented to shareholders for a vote. Series B shareholders will not have any cumulative voting rights.
Holders of Series B Stock shall be entitled to receive a dividend, if, when and as authorized and declared by the Board of Directors, out of assets of the Corporation legally available therefore.
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
Upon the voluntary or involuntary dissolution, liquidation or winding up on the affairs of the Corporation, after the payment in full of its debts and other liabilities, the remaining Corporation assets are to be distributed pro rata among the holders of the common stock.
The Company issued 8,862,400 shares of Series B Stock in 2012 for $8,341,684. Of this amount the Company had a subscription receivable in the amount of $885,000 that was received in 2013. Additionally, in 2013, the Company issued 1,000,000 shares of Series B Stock for services valued at $800,000.
As of December 31, 2014 and 2013, the Company has 9,862,400 shares issued and outstanding.
Series C Common Shares (“Series C Stock”)
The Series C Stock was incorporated with 2,000,000 shares authorized with a par value of $0.01. On November 1, 2014, the Certificate of Incorporation was amended a second time to increase the authorized shares of the Series C Stock from 2,000,000 shares to 5,000,000 shares.
The Series C stockholders will have no voting rights.
Holders of Series C Stock shall be entitled to receive a dividend, if, when and as authorized and declared by the Board of Directors, out of assets of the Corporation legally available therefore.
Upon the voluntary or involuntary dissolution, liquidation or winding up on the affairs of the Corporation, after the payment in full of its debts and other liabilities, the remaining Corporation assets are to be distributed pro rata among the holders of the common stock.
In 2013, the Company issued 2,000,000 shares of Series C Stock for services rendered valued at $2,500,000, in 2014, the Company issued 1,350,000 shares of Series C Stock for services rendered valued at $1,687,500, and in 2015, the Company issued 225,000 shares of Series C Stock for services rendered valued at $281,250.
As of December 31, 2014 and 2013, the Company has 3,350,000 and 2,000,000 shares issued and outstanding.
As noted below, the Company also granted 693,000 Series C Stock Options in 2014. These stock options vest over a three-year period. Stock based compensation recorded in 2014 for these options were $192,214 and recorded as additional paid in capital.
Series D Common Shares (“Series D Stock”)
On April 29, 2013, the Certificate of Incorporation was amended to designate a new class of shares, Series D Stock with authorized shares of 8,000,000 shares.
The Series D Stock has a par value of $0.01.
Every fifty (50) shares of Series D Stock represents the right to one (1) vote on all issues presented to shareholders for a vote. Series B shareholders will not have any cumulative voting rights.
Holders of Series D Stock shall be entitled to receive a dividend, if, when and as authorized and declared by the Board of Directors, out of assets of the Corporation legally available therefore.
Upon the voluntary or involuntary dissolution, liquidation or winding up on the affairs of the Corporation, after the payment in full of its debts and other liabilities, the remaining Corporation assets are to be distributed pro rata among the holders of the common stock.
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
The Company issued 1,779,200 shares of Series D Stock in 2013 for $1,875,799. Additionally, in 2014, the Company issued 4,667,361 shares for $5,372,900 of which $31,250 is reflected as a subscription receivable and was collected in February 2015, and an additional 1,000,000 shares of Series D Stock for services valued at $1,250,000.
As of December 31, 2014 and 2013, the Company has 7,446,561 and 1,779,200 shares issued and outstanding.
Series C Stock Options (“Series C Stock Options”)
On February 16, 2013, the Board of Directors approved the EcoArk, Inc. 2013 Stock Option Plan (the “Plan”).
The purposes of the Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees, directors and consultants, and to promote the success of the Company’s business. The Plan is expected to contribute to the attainment of these objectives by offering employees, directors and consultants the opportunity to acquire stock ownership interests in the Company, and other rights with respect to stock of the Company, and to thereby provide them with incentives to put forth maximum efforts for the success of the Company.
Awards under the Plan may only be granted in the form of nonstatutory stock options (“Options”) to purchase the Company's Series C Stock. The Company does not plan to register the Series C Stock under applicable securities laws and certificates evidencing shares of Series C Stock issued upon exercise may contain a legend restricting transfer thereof.
The maximum shares to be issued under the Plan is 5,000,000.
In May 2014, the Company granted 693,000 Series C Stock Options to various employees and consultants of the Company. The Series C Stock Options have a term of 10 years, and the Series C Stock Options vest over a three-year period as follows: 25% immediately; 25% on the first anniversary date; 25% on the second anniversary date; and 25% on the third anniversary date.
Management valued the Series C Stock Options utilizing the Black-Scholes Method, with the following criteria: stock price - $1.25; exercise price - $1.25; expected term – 10 years; discount rate – 0.25%; and volatility – 100%.
The Company records stock based compensation in accordance with ASC 718, and has recorded stock based compensation of $192,214 for the year ended December 31, 2014. There was no stock based compensation for 2013.
NOTE 9: ACQUISITIONS
SA Concepts
On June 11, 2013, the Company, entered into a Stock Purchase Agreement (the “SPA”) with Sustainable Aerodynamic Concepts pursuant to which the Company issued from its shares held in Class A Stock 1,500,000 shares to three individuals valued at $425,771 to acquire 100% of SA Concepts. The Company sold this entity in November 2014. The acquisition was accounted for as a purchase of a business under ASC 805.
The allocation of the purchase price is as follows
Other assets | $ | 38,337 | ||
Intangible assets | 387,434 | |||
Total non-cash asset purchase | $ | 425,771 | ||
Stock issued for purchase out of treasury shares | $ | 425,771 | ||
Total non-cash consideration | $ | 425,771 |
The $387,434 of intangible assets were impaired in 2013 as it was determined to not have any value as of December 31, 2013.
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
Intelleflex Corporation
On September 19, 2013, the Company acquired Intelleflex Corporation. The acquisition was accounted for as a purchase of a business under ASC 805.
The allocation of the purchase price is as follows
Cash | $ | 781,872 | ||
Inventory | 988,157 | |||
Prepaid expenses and other assets | 209,550 | |||
Fixed assets | 510,079 | |||
Intangible assets | 1,012,672 | |||
Accounts payable and other liabilities | (1,010,357 | ) | ||
Total | $ | 2,491,973 | ||
Cash | $ | 1,300,000 | ||
Retirement of debt | 1,191,973 | |||
Total consideration | $ | 2,491,973 |
The intangible assets represent acquired patents that were independently valued. The remaining useful life of these patents are 13.5 years as of the date purchased.
NOTE 10: COMMITMENTS
Operating Leases
The Company leases many of its operating and office facilities for various terms under long-term, non-cancelable operating lease agreements. These leases expire at various dates through 2018. Rent expense was approximately $415,000 and $265,000 for the years ended December 31, 2014 and 2013. The following is a schedule of future minimum lease payments required under the operating leases:
Years ending December 31:
2015 | $ | 278,994 | ||
2016 | 283,773 | |||
2017 | 95,750 | |||
2018 | 68,032 |
NOTE 11: DISCONTINUED OPERATIONS
SA Concepts
In November 2014, the Company sold its subsidiary, SA Concepts. In the sale, the Company sold the net assets back to an original shareholder of SA Concepts for his return of 2,000,000 Class A shares of stock. The value of the treasury stock in this transaction of $616,276 was equal to the value of the net assets of SA Concepts sold. Therefore, there was no gain or loss attributable to the disposal of this subsidiary. The operations of SA Concepts for the years ended December 31, 2014 and 2013 are reflected as loss from discontinued operations in the consolidated statements of operations in accordance with ASC 205-50.
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
The following table sets forth for the years ended December 31, 2014 and 2013 indicated selected financial data of the Company’s discontinued operations of its SA Concepts subsidiary.
December 31, 2014 | December 31, 2013 | |||||||
Revenues | $ | 379,420 | $ | 403,238 | ||||
Cost of sales | 818,291 | 279,320 | ||||||
Gross profit (loss) | (438,871 | ) | 123,918 | |||||
Operating and other non-operating expenses | 1,009,731 | (804,896 | ) | |||||
Loss from discontinued operations | (1,448,602 | ) | (680,978 | ) | ||||
Gain from sale of SA Concepts | - | - | ||||||
Loss from discontinued operations | $ | (1,448,602 | ) | $ | (680,978 | ) |
Eco-Southeast LLC
In March 2013, the Company sold its 50% ownership in this subsidiary, Eco Southeast which contained the Company’s plastic manufacturing division. In the sale, the Company sold the net assets back to Sable Manufacturing for the return of 6,500,000 Class A shares of stock. The value of the treasury stock in this transaction of $2,334,320 was equal to the value of the net assets of Southeast sold. Therefore, there was no gain or loss attributable to the disposal of this subsidiary. The operations of Southeast for the period ended December 31, 2013 is reflected as loss from discontinued operations in the consolidated statements of operations in accordance with ASC 205-50.
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
The following table sets forth for the years ended December 31, 2014 and 2013 indicated selected financial data of the Company’s discontinued operations of its Southeast subsidiary.
December 31, 2014 | December 31, 2013 | |||||||
Revenues | $ | - | $ | 997,156 | ||||
Cost of sales | - | 970,202 | ||||||
Gross profit | - | 26,954 | ||||||
Operating and other non-operating expenses | - | (6,987 | ) | |||||
Gain from discontinued operations | - | 19,967 | ||||||
Gain from sale of Southeast | - | - | ||||||
Gain from discontinued operations | $ | - | $ | 19,967 |
NOTE 12:PROVISION FOR INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31, 2014 and 2013 differs from the amount which would be expected as a result of applying the statutory tax rates to the losses before income taxes due primarily to changes in the valuation allowance to fully reserve net deferred tax assets.
Realization of deferred tax assets is dependent upon sufficient future taxable income during the period that deductible temporary differences and carry-forwards are expected to be available to reduce taxable income. As the achievement of required future taxable income is uncertain, the Company recorded a valuation allowance.
As of December 31, 2014 | As of December 31, 2013 | |||||||
Deferred tax assets: | ||||||||
Net operating loss before non-deductible items | $ | (25,892,402 | ) | $ | (11,949,414 | ) | ||
Tax rate | 34 | % | 34 | % | ||||
Total deferred tax assets | 8,803,417 | 4,062,801 | ||||||
Less: Valuation allowance | (8,803,417 | ) | (4,062,801 | ) | ||||
Net deferred tax assets | $ | - | $ | - |
As of December 31, 2014, the Company has a net operating loss carry forward of $25,892,402 expiring through 2034. The Company has provided a valuation allowance against the full amount of the deferred tax asset due to management’s uncertainty about its realization. Furthermore, the net operating loss carry forward may be subject to further limitation pursuant to Section 382 of the Internal Revenue Code. The valuation allowance was increased by $4,740,616 in fiscal year 2014.
ECOARK, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2014 AND 2013
nOTE 13: CONCENTRATIONS
During the years ended December 31, 2014 and 2013, the Company had one major customer comprising 72% and 12% of sales. A major customer is defined as a customer that represents 10% or greater of total sales. Additionally, the Company had two customers as of December 31, 2014 and 2013 with accounts receivable balances of 54% and 49% of the total accounts receivable. The Company does not believe that the risk associated with these customers will have an adverse effect on the business.
The Company maintained cash balances in excess of the FDIC insured limit in both. The Company does not consider this risk to be material.
nOTE 14: SUBSEQUENT EVENTS
During 2015, the Company issued 225,000 shares of Class C Stock for services rendered valued at $281,250, 750,000 Class C Stock Options, collected the $31,250 subscription receivable from the 25,000 Class D Stock, and re-issued 3,512,417 of the Class A Treasury Shares. The Company re-issued these shares as they were able to raise $6,738,500.
During 2015, the Company was able to extend certain related party notes and repay $874,000 in related party notes.
In October 2015, the Company entered into a letter of intent to be acquired by Magnolia Solar Corp. in a share exchange. Should the Company close on this transaction, they will be reverse merged into Magnolia Solar, Inc. and be considered the accounting acquirer in this transaction. In the exchange, the Company will exchange 100% of their shares for control in Magnolia Solar Corp.
On December 4, 2015, Pioneer entered into an Asset Purchase Agreement with Pinnacle Sourcing, LLC to acquire assets valued at $15,000. The value was for the customer list of Pinnacle Sourcing, LLC. The transaction closed on December 7, 2015.
Annex E
MAGNOLIA SOLAR CORP.
PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements give effect to the acquisition of the outstanding common shares of EcoArk Inc. and Subsidiaries., (“EcoArk”) by Magnolia Solar Corp. (“MGLT” and the “Company”) and are based on estimates and assumptions set forth herein and in the notes to such pro forma statements.
EcoArk, an Arkansas corporation entered into a Share Exchange Agreement (the “Exchange Agreement”) with the Company, whereby the Company acquires all of the issued and outstanding shares of common stock of EcoArk in consideration for the issuance of 29,619,500 shares of common stock.
As a result of the transaction effected by the Exchange Agreement, at closing EcoArk becomes a wholly owned subsidiary of the Company.
In addition to the merger of the companies, prior to the merger, MGLT will complete a 1:250 reverse stock split which will reduce the number of currently issued common shares issued and outstanding from 50,336,198 (which includes 6,235,000 shares issued in conversion of stock options and warrants outstanding) to 201,345 common shares. MGLT will also, post-split convert their current $2,400,000 in debt into shares of common stock.
The acquisition of EcoArk is being accounted for as a reverse merger, whereby EcoArk is considered to be the accounting acquirer.
The following unaudited pro forma consolidated statement of operations for years ended December 31, 2015 and 2014 of the Company and EcoArk gives effect to the above as if the transactions had occurred at the beginning of the period. The unaudited pro forma consolidated balance sheet at December 31, 2015 assumes the effects of the above as if this transaction had occurred as of December 31, 2015.
MAGNOLIA SOLAR CORP.
PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial statements are based upon, and should be read in conjunctions with the Company’s audited financial statements as of and for the year ended December 31, 2015 and 2014 and the unaudited consolidated financial statements of EcoArk as of and for the year ended December 31, 2015 and audited consolidated financial statements of EcoArk as of and for the year ended December 31, 2014.
The unaudited pro forma consolidated financial statements and notes thereto contain forward-looking statements that involve risks and uncertainties. Therefore, our actual results may vary materially from those discussed herein. The unaudited pro forma consolidated financial statements do not purport to be indicative of the results that would have been reported had such events actually occurred on the dates specified, nor is it indicative of our future results.
Magnolia Solar Corp.
Unaudited Proforma Consolidated Balance SheetDecember 31, 2015 ( Dollars in Thousands)
ASSETS | MGLT | EcoArk | Consolidated | ||||||||||||||||||||||
Current Assets: | |||||||||||||||||||||||||
Cash and cash equivalents | $ | 46 | $ | 1,962 | F | $ | 10,000 | $ | – | $ | 12,008 | ||||||||||||||
Accounts receivable, net of allowance | 11 | 977 | – | – | 988 | ||||||||||||||||||||
Inventories, net of reserves | – | 643 | – | – | 643 | ||||||||||||||||||||
Prepaid expenses | – | 161 | – | – | 161 | ||||||||||||||||||||
Other current assets | – | 138 | – | – | 138 | ||||||||||||||||||||
Total Current Assets | 57 | 3,881 | 10,000 | – | 13,938 | ||||||||||||||||||||
Fixed Assets: | |||||||||||||||||||||||||
Property and equipment, net | – | 363 | – | – | 363 | ||||||||||||||||||||
Total Fixed Assets | – | 363 | – | – | 363 | ||||||||||||||||||||
Non-current Assets: | |||||||||||||||||||||||||
Intangible assets, net | 83 | 852 | – | – | 935 | ||||||||||||||||||||
Other assets | – | 25 | 25 | ||||||||||||||||||||||
Total Non-current Assets | 83 | 877 | – | – | 960 | ||||||||||||||||||||
TOTAL ASSETS | $ | 140 | $ | 5,121 | $ | 10,000 | $ | – | $ | 15,261 | |||||||||||||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | MGLT | EcoArk | Consolidated | ||||||||||||||||||||||
Current Liabilities: | |||||||||||||||||||||||||
Current portion of long-term debt | $ | 2,400 | $ | 3,175 | D | $ | 2,400 | $ | – | $ | 3,175 | ||||||||||||||
Current portion of long-term debt, related parties | – | 1,329 | – | – | 1,329 | ||||||||||||||||||||
Note payable - bank | – | – | – | – | – | ||||||||||||||||||||
Accounts payable | 682 | 1,116 | – | – | 1,798 | ||||||||||||||||||||
Accrued expenses | – | 374 | – | – | 374 | ||||||||||||||||||||
Accrued interest | – | 40 | – | – | 40 | ||||||||||||||||||||
Total Current Liabilities | 3,082 | 6,034 | 2,400 | – | 6,716 | ||||||||||||||||||||
Long-Term Liabilities | |||||||||||||||||||||||||
Long-term debt, net of current portion | – | – | – | – | – | ||||||||||||||||||||
Long-term debt - related parties, net of current portion | – | – | – | – | – | ||||||||||||||||||||
Total Long-Term Liabilities | – | – | – | – | – | ||||||||||||||||||||
TOTAL LIABILITIES | 3,082 | 6,034 | 2,400 | – | 6,716 | ||||||||||||||||||||
STOCKHOLDERS' EQUITY (DEFICIT) | |||||||||||||||||||||||||
Total Equity | |||||||||||||||||||||||||
Common stock (all series) | 47 | 588 | A | 588 | B | 6 | 36 | ||||||||||||||||||
C | 50 | D | 1 | ||||||||||||||||||||||
E | 30 | ||||||||||||||||||||||||
F | 2 | ||||||||||||||||||||||||
Additional paid-in capital | 3,454 | 36,164 | A | 5,855 | C | 50 | 46,174 | ||||||||||||||||||
B | 6 | D | 2,399 | ||||||||||||||||||||||
E | 30 | F | 9,998 | ||||||||||||||||||||||
Accumulated deficit | (6,443 | ) | (36,587 | ) | B | – | A | 6,443 | (36,587 | ) | |||||||||||||||
Subscription receivable | (55 | ) | (55 | ) | |||||||||||||||||||||
Treasury stock | (928 | ) | – | – | (928 | ) | |||||||||||||||||||
Non-controlling interest | (95 | ) | – | – | (95 | ) | |||||||||||||||||||
Total Stockholders' Equity (Deficit) | (2,942 | ) | (913 | ) | 6,529 | 18,929 | 8,545 | ||||||||||||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $ | 140 | $ | 5,121 | $ | 8,929 | $ | 18,929 | $ | 15,261 |
Magnolia Solar Corp.Unaudited Proforma Consolidated Statement of OperationsFor the Year Ended December 31, 2015 ( Dollars in Thousands, Except per Share)
MGLT | EcoArk | Adjustments | Consolidated | |||||||||||||||||
Net Sales | $ | 160 | $ | 7,880 | $ | - | $ | - | $ | 8,040 | ||||||||||
Cost of Sales | 102 | 6,882 | - | - | 6,984 | |||||||||||||||
Gross Profit (Loss) | 58 | 998 | - | - | 1,056 | |||||||||||||||
Operating Expenses | ||||||||||||||||||||
Salaries and related expenses | 161 | 3,914 | - | - | 4,075 | |||||||||||||||
Professional fees | 150 | 3,910 | - | - | 4,060 | |||||||||||||||
Other general and administrative expenses | 37 | 1,636 | - | - | 1,673 | |||||||||||||||
Depreciation, amortization and impairment | 36 | 1,226 | - | - | 1,262 | |||||||||||||||
Total operating expenses | 384 | 10,686 | - | - | 11,070 | |||||||||||||||
Total operating income (loss) | (326 | ) | (9,688 | ) | - | - | (10,014 | ) | ||||||||||||
Other income (loss) | (240 | ) | (785 | ) | - | - | (1,025 | ) | ||||||||||||
Total income (loss) before income taxes | (566 | ) | (10,473 | ) | - | - | (11,039 | ) | ||||||||||||
Provision for income taxes | - | - | - | - | - | |||||||||||||||
Net income (loss) | $ | (566 | ) | $ | (10,473 | ) | $ | - | $ | - | $ | (11,039 | ) | |||||||
Non-controlling interest | 29 | 29 | ||||||||||||||||||
Net income (loss) - controlling interest | $ | (566 | ) | $ | (10,502 | ) | $ | - | $ | - | $ | (11,068 | ) | |||||||
Per share, basic and diluted | $ | (0.01 | ) | $ | (0.18 | ) | $ | (0.32 | ) | |||||||||||
Weighted average number of common shares outstanding | ||||||||||||||||||||
Basic | 42,983 | 58,688 | 35,092 | |||||||||||||||||
Diluted | 42,983 | 58,789 | 35,092 |
Magnolia Solar Corp.
Unaudited Proforma Consolidated Statement of Operations
For the Year Ended December 31, 2014
MGLT | EcoArk | Adjustments | Consolidated | |||||||||||||||||
Net Sales | $ | 218,270 | $ | 5,932,093 | $ | - | $ | - | $ | 6,150,363 | ||||||||||
Cost of Sales | 135,356 | 6,077,157 | - | - | 6,212,513 | |||||||||||||||
Gross Profit (Loss) | 82,914 | (145,064 | ) | - | - | (62,150 | ) | |||||||||||||
Operating Expenses | ||||||||||||||||||||
Salaries and related expenses | 198,800 | 2,836,305 | - | - | 3,035,105 | |||||||||||||||
Professional fees | 138,260 | 5,310,795 | - | - | 5,449,055 | |||||||||||||||
Other general and administrative expenses | 43,629 | 1,630,577 | - | - | 1,674,206 | |||||||||||||||
Depreciation, amortization and impairment | 35,962 | 1,708,568 | - | - | 1,744,530 | |||||||||||||||
Total operating expenses | 416,651 | 11,486,245 | - | - | 11,902,896 | |||||||||||||||
Total operating income (loss) | (333,737 | ) | (11,631,309 | ) | - | - | (11,965,046 | ) | ||||||||||||
Other income (loss) | (239,981 | ) | (1,183,274 | ) | - | - | (1,423,255 | ) | ||||||||||||
Total income (loss) before income taxes | (573,718 | ) | (12,814,583 | ) | - | - | (13,388,301 | ) | ||||||||||||
Provision for income taxes | - | (800 | ) | - | - | (800 | ) | |||||||||||||
Net income (loss) from continuing operations | (573,718 | ) | (12,815,383 | ) | - | - | (13,389,101 | ) | ||||||||||||
Discontinued operations | - | (1,448,602 | ) | - | - | (1,448,602 | ) | |||||||||||||
Net income (loss) | $ | (573,718 | ) | $ | (14,263,985 | ) | $ | - | $ | - | $ | (14,837,703 | ) | |||||||
Non-controlling interest | - | (128,783 | ) | (128,783 | ) | |||||||||||||||
Net income (loss) - controlling interest | $ | (573,718 | ) | $ | (14,135,202 | ) | $ | - | $ | - | $ | (14,708,920 | ) | |||||||
Per share, basic and diluted | $ | (0.02 | ) | $ | (0.26 | ) | $ | (0.43 | ) | |||||||||||
Weighted average number of common shares outstanding | ||||||||||||||||||||
Basic | 37,469,963 | 55,180,281 | 33,920,845 | |||||||||||||||||
Diluted | 37,469,963 | 55,180,281 | 33,920,845 |
MAGNOLIA SOLAR CORP.
NOTES TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2015
NOTE A – ACCOUNTING TREATMENT APPLIED AS A RESULT OF THIS TRANSACTION
The acquisition of EcoArk is being accounted for as a reverse merger, whereby EcoArk is considered to be the accounting acquirer.
NOTE B – ADJUSTMENTS
NOTE C – PRO FORMA WEIGHTED AVERAGES SHARES OUTSTANDING
Pro forma shares outstanding assuming the transaction occurred as of December 31, 2015:
To record shares issued in proposed private placement ($10,000,000 @ $4 per share)
Annex E - 6