UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedMarch 31, 2016
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 \
For the transition period from ____________ to ____________
Commission File Number001-10346
GALENFEHA, INC.
(Exact name of registrant as specified in its charter)
| Nevada | 46-2283393 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
420 Throckmorton Street, Suite 200
Fort Worth, Texas 76102
(Address of principal executive offices) (Zip code)
(800) 280-2404
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer [ ] | Accelerated Filer [ ] |
| Non-Accelerated Filer [ ] | Smaller Reporting Company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of May 16, 2016, there were 86,126,100 shares of the registrant’s common stock outstanding, each with a par value of $0.001.
TABLE OF CONTENTS
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016
Galenfeha, Inc.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Galenfeha, Inc.
CONSOLIDATEDBALANCE SHEETS
(Unaudited)
| March 31, 2016 | December 31, 2015 | |||||
| ASSETS | ||||||
| CURRENT ASSETS | ||||||
| Cash | $ | 89,532 | $ | 47,333 | ||
| Accounts receivable | 102,771 | 107,424 | ||||
| Accounts receivable from related parties | 9,017 | 336 | ||||
| Inventory | 854,290 | 950,617 | ||||
| Prepaid inventory | 14,829 | - | ||||
| Prepaid expenses | 2,695 | 10,083 | ||||
| Total current assets | 1,073,134 | 1,115,793 | ||||
| FIXED ASSETS, net of accumulated depreciation of$26,361 and $21,419, respectively | 182,444 | 187,386 | ||||
| OTHER ASSETS | ||||||
| Goodwill | 389,839 | 389,839 | ||||
| Customer list, net of accumulated amortization of $7,828 and $5,928, respectively | 14,970 | 16,870 | ||||
| Deposits | 1,000 | 1,000 | ||||
| Total other assets | 405,809 | 407,709 | ||||
| TOTAL ASSETS | $ | 1,661,387 | $ | 1,710,888 | ||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
| CURRENT LIABILITIES | ||||||
| Accounts payable and accrued liabilities | $ | 149,128 | $ | 228,014 | ||
| Accounts payable to related parties | 91,562 | 123,282 | ||||
| Current maturities of long term debt | 88,980 | 95,771 | ||||
| Line of credit | 171,000 | 100,000 | ||||
| Related party convertible note, net of unamortized discounts of $0 | 125,000 | 125,000 | ||||
| Derivative liabilities | 325,130 | - | ||||
| Total current liabilities | 950,800 | 672,067 | ||||
| LONG TERM DEBT | ||||||
| Convertible notes, net of unamortized discount of $184,627 and $0, respectively | 7,873 | - | ||||
| Total liabilities | 958,673 | 672,067 | ||||
| STOCKHOLDERS’ EQUITY | ||||||
| Common stock | ||||||
| Authorized: 500,000,000 common shares, $0.001 par value, 86,126,100 issued and outstanding at March 31, 2016 and December 31, 2015 | 86,126 | 86,126 | ||||
| Additional paid-in capital | 3,132,285 | 3,162,529 | ||||
| Treasury stock | - | - | ||||
| Accumulated deficit | (2,515,697 | ) | (2,209,834 | ) | ||
| Total stockholders’ equity | 702,714 | 1,038,821 | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’EQUITY | $ | 1,661,387 | $ | 1,710,888 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Galenfeha, Inc.
CONSOLIDATEDSTATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | Three Months Ended | |||||
| March 31, 2016 | March 31, 2015 | |||||
| Revenues: | ||||||
| Third Parties | $ | 286,039 | $ | - | ||
| Related Parties | 17,382 | 316,702 | ||||
| Cost of Sales | 219,582 | 194,826 | ||||
| Gross Profit | 83,839 | 121,876 | ||||
| Operating Expenses: | ||||||
| General and administrative | 80,183 | 39,412 | ||||
| Payroll expenses | 109,030 | 111,048 | ||||
| Professional fees | 31,420 | 2,913 | ||||
| Engineering research and development | (21,174 | ) | 1,601 | |||
| Depreciation and amortization expense | 6,842 | 4,847 | ||||
| Total operating expenses | 206,301 | 159,821 | ||||
| Loss from continuing operations | (122,462 | ) | (37,945 | ) | ||
| Other (expense) income | ||||||
| Interest income | 3 | 15 | ||||
| Interest expense | (9,824 | ) | (34,824 | ) | ||
| Loss on derivative instruments | (173,580 | ) | - | |||
| Total other (expense) | (183,401 | ) | (34,809 | ) | ||
| Net loss | $ | (305,863 | ) | $ | (72,754 | ) |
| Net loss per share, basic and diluted | $ | (0.00 | ) | $ | (0.00 | ) |
| Weighted average number of common shares outstanding, basic and diluted | 86,126,100 | 78,442,000 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Galenfeha, Inc.
CONSOLIDATEDSTATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
| Additional | |||||||||||||||
| Common Stock | Paid-in | Accumulated | |||||||||||||
| Shares | Amount | Capital | Deficit | Total | |||||||||||
| Balance – December 31, 2015 | 86,126,100 | 86,126 | 3,162,529 | (2,209,834 | ) | 1,038,821 | |||||||||
| Reclass of conversion option to derivative liabilities | - | - | (6,175 | ) | - | (6,175 | ) | ||||||||
| Options expense | - | - | 24,703 | - | 24,703 | ||||||||||
| Common shares issued for services | - | - | (22,027 | ) | - | (22,027 | ) | ||||||||
| Non-vested options returned and cancelled | - | - | (26,745 | ) | - | (26,745 | ) | ||||||||
| Net loss | - | - | - | (305,863 | ) | (305,863 | ) | ||||||||
| Balance – March 31, 2016 | 86,126,100 | $ | 86,126 | $ | 3,132,285 | $ | (2,515,697 | ) | $ | 702,714 | |||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Galenfeha, Inc.
CONSOLIDATEDSTATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months | Three Months | |||||
| Ended | Ended | |||||
| March 31, 2016 | March 31, 2015 | |||||
| OPERATING ACTIVITIES | ||||||
| Net loss | $ | (305,863 | ) | $ | (72,754 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||
| Depreciation and amortization | 6,842 | 4,847 | ||||
| Non-vested options forfeited | (26,745 | ) | - | |||
| Common shares issued for services | (22,027 | ) | - | |||
| Options expense | 24,703 | - | ||||
| Loss on derivative instruments | 173,580 | - | ||||
| Amortization of debt discounts on convertible notes | 7,873 | 30,822 | ||||
| Changes in Operating Assets and Liabilities: | ||||||
| (Increase) Decrease in accounts receivable | 4,653 | (317,115 | ) | |||
| (Increase) Decrease in accounts receivable from related party | (8,681 | ) | - | |||
| (Increase) Decrease in inventory | 96,327 | (99,311 | ) | |||
| (Increase) Decrease in prepaid expenses and other assets | (7,441 | ) | - | |||
| Increase (Decrease) in accounts payable and accrued liabilities | (78,886 | ) | 45,682 | |||
| Increase (Decrease) in accounts payable to related parties | (31,720 | ) | - | |||
| Net cash used in operating activities | (167,385 | ) | (407,829 | ) | ||
| INVESTING ACTIVITIES | ||||||
| Purchase of fixed assets | - | (1,431 | ) | |||
| Cash paid for acquisition of subsidiary | - | (53,000 | ) | |||
| Net cash used in financing activities | - | (54,431 | ) | |||
| FINANCING ACTIVITIES | ||||||
| Proceeds from line of credit | 71,000 | - | ||||
| Payments on notes payable | - | (1,167 | ) | |||
| Proceeds from convertible debentures, net of original issue discounts | 145,375 | - | ||||
| Payment of deferred financing costs | - | (125,000 | ) | |||
| Payments on finance contracts | (6,791 | ) | - | |||
| Proceeds from sale of common stock | - | 1,087,200 | ||||
| Net cash provided by financing activities | 209,584 | 961,033 | ||||
| INCREASE IN CASH | 42,199 | 498,773 | ||||
| CASH AT BEGINNING OF PERIOD | 47,333 | 94,668 | ||||
| CASH AT END OF PERIOD | $ | 89,532 | $ | 593,441 | ||
| SUPPLEMENTAL INFORMATION | ||||||
| Cash paid for: | ||||||
| Interest expense | $ | 6,901 | $ | - | ||
| Income taxes | - | - | ||||
| NONCASH INVESTING AND FINANCING ACTIVITIES | ||||||
| Common stock issued for acquisition of subsidiary | $ | - | $ | 191,750 | ||
| Debt discount due to derivative liabilities | 145,375 | - | ||||
| Reclass of conversion option from equity to derivative liabilities | 6,175 | - |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Galenfeha, Inc.
Notes to Unaudited Consolidated Financial Statements
March 31, 2016
NOTE 1 - BASIS OF PRESENTATION
The accompanying financial statements have been prepared by the Company without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at March 31, 2016, and for all periods presented herein, have been made.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. It is suggested that these unaudited interim financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2015 audited financial statements included in its Form 10-K filed with the Securities and Exchange Commission. The results of operations for the period ended March 31, 2016 and the same period last year are not necessarily indicative of the operating results for the full years.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred net losses and net cash used in operations since inception. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon the Company’s ability to achieve a level of profitability. The Company intends on financing its future development activities and its working capital needs largely from the sale of public equity securities with some additional funding from other traditional financing sources, including term notes until such time that funds provided by operations are sufficient to fund working capital requirements. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONCENTRATIONS
During the three months ended March 31, 2016, 6% of sales were to a single related party customer. In addition, one other third party customer contributed to 64% of total revenue for three months ended March 31, 2016. For the three months ended March 31, 2015, 100% of sales were to a single related party customer.
As of March 31, 2016, accounts receivable from one related party customer comprised 8% of total accounts receivable and accounts receivable from one third party customer comprised 50% of accounts receivable. As of December 31, 2015, accounts receivable from one third party customer comprised 81% of accounts receivable, while another third-party customer comprised 12% of accounts receivable.
INVENTORIES
Inventories are stated at the lower of cost, determined on a first-in, first-out basis (“FIFO”), or market, including direct material costs and direct and indirect manufacturing costs. Inventory consists of the following amounts as of March 31, 2016 and December 31, 2015.
| March 31, 2016 | December 31, 2015 | ||||||
| Raw Materials | $ | 270,652 | $ | 311,673 | |||
| Work In Process | - | - | |||||
| Finished Goods | 583,638 | 638,944 | |||||
| - | |||||||
| Total Inventory | $ | 854,290 | $ | 950,617 |
FAIR VALUE ACCOUNTING
As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The three levels of the fair value hierarchy are described below:
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
The following table sets forth by level with the fair value hierarchy the Company’s assets and liabilities measured at fair value as of March 31, 2016:
| Level 1 | Level 2 | Level 3 | Total | ||||||||||
| Assets | |||||||||||||
| None | $ | — | $ | — | $ | — | $ | — | |||||
| Liabilities | |||||||||||||
| Derivative liabilities | $ | — | $ | — | $ | 325,130 | $ | 325,130 |
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets, ranging from three to forty years. A summary is as follows:
| March 31, 2016 | December 31, 2015 | ||||||
| Manufacturing assets | $ | 168,015 | $ | 168,015 | |||
| Vehicles | - | - | |||||
| Furniture and equipment | 19,318 | 19,318 | |||||
| Improvements | 21,472 | 21,472 | |||||
| 208,805 | 208,805 | ||||||
| Less accumulated depreciation | (26,361 | ) | (21,419 | ) | |||
| Property and equipment, net | $ | 182,444 | $ | 187,386 |
Depreciation expense related to property and equipment was $4,942 and $4,847 for the three months ended March 31, 2016 and 2015, respectively.
NOTE 5 – NOTES PAYABLE
In 2015, the Company incurred a loan of $13,875 relating to commercial general liability insurance. The note has an interest rate of 8.00%, payable in payments of $1,439 for 10 months. Additionally in 2015, the Company incurred a loan of $6,721 relating to workers compensation, commercial property, and commercial automobile insurance. The note has an interest rate of 0.00%, payable in payments of $1,703 for two months and $663 for five months. The outstanding balance on these finance agreements was $0 and $6,791, as of March 31, 2016 and December 31, 2015, respectively.
In August 2015, the Company incurred a loan of $78,593 that is secured by a customer purchase order. The loan has an interest rate of 4.75% payable in four payment of $19,843 with the first payment due on December 28, 2015. Since the prior customer purchase orders had been fulfilled and paid, the loan of $78,593 was repaid by a second loan of $88,980 on December 28, 2015 which was secured by current customer purchase orders. The second loan of $88,980 has an interest rate of 4.75% and is payable in one principal payment of $88,980 plus accrued interest on April 28, 2016. The outstanding balance on this loan was $88,980 as of March 31, 2016 and December 31, 2015.
The Company also took out a line of credit of $100,000 on August 5, 2015 which is payable on demand. The line of credit is secured by all present and future inventory, all present and future accounts receivable, other receivables, contract rights, instruments, documents, notes, and all other similar obligation and indebtedness that may now and in the future be owed to the Company, and all general intangibles. On January 15, 2016 the Company’s line of credit was increased from $100,000 to $200,000. The Company withdrew an additional $70,000 in funds from the line of credit and paid loan origination and documentation fees of $1,000 at closing to bring the total outstanding line of credit balance to $171,000 as of January 15, 2016. Under the terms of the new agreement the loan is a fixed rate (4.75%) revolving line of credit loan to the Company for $200,000 due on January 15, 2017.
Additionally, the line of credit is secured by a deposit account held at the Grantor’s institution which had a cash balance of $9,554 and $11,499 as of March 31, 2016 and December 31, 2015, respectively. Interest only payments were made during the three months ended March 31, 2016. The outstanding balance on the line of credit was $171,000 and $100,000 as of March 31, 2016 and December 31, 2015, respectively.
The current maturities and five year debt schedule for the notes is as follows:
| 2016 | $ | 88,980 | |
| 2017 | 171,000 | ||
| 2018 | - | ||
| 2019 | - | ||
| 2020 | - | ||
| Total current notes payable | $ | 259,980 |
NOTE 6 – CONVERTIBLE LOANS
At March 31, 2016 and December 31, 2015, convertible loans consisted on the following:
| March 31, 2016 | December 31, 2015 | ||||||
| February 2016 Note | $ | 82,500 | - | ||||
| March 2016 Note | 110,000 | - | |||||
| Total notes payable | 192,500 | - | |||||
| Less: Unamortized debt discounts | (184,627 | ) | - | ||||
| Total convertible loans, net | 7,873 | - | |||||
| Less: current portion of convertible loans | - | - | |||||
| Long-term convertible loans, net | $ | 7,873 | - |
February 2016 Note
Effective February 29, 2016 the Company entered into a Convertible Promissory Note (“Vista Note”) with Vista Capital Investments, LLC pursuant to which the Company issued Vista Capital Investments, LLC a convertible note in the amount of $275,000 with an original issue discount in the amount of $25,000. The principal amount due Vista Capital Investments, LLC is based on the consideration paid. The maturity date is two years from the effective date of each payment. On February 29, 2016 the Company received consideration of $75,000 for which an original issue discount of $7,500 was recorded. In addition, the Company recognized a discount of $5,625 on fees paid upon entering into this agreement. There were no additional borrowings under the Vista Note during the quarter ended March 31, 2016. The Vista Note carries an interest rate of 6% which shall be applied on the issuance date to the original principal amount. Accrued interest due under the Vista Note totaled $16,500 at March 31, 2016.
The Vista Note provides Vista Capital Investments, LLC the right at any time, to convert the outstanding balance (including accrued and unpaid interest) into shares of the Company’s common stock at 70% of the lowest trade price in the 25 trading days previous to the conversion, additional discounts may apply in the case that conversion shares are not deliverable or if the shares are ineligible. As a result of the derivatives calculation (see Note 8) an additional discount of $52,875 was recorded. Amortization of the debt discount totaled $3,503 for the three months ended March 31, 2016. The principal balance due, net of the amortized discount under the Vista Note was $3,503 at March 31, 2016.
March 2016 Note
Effective March 2, 2016 the Company entered into a Convertible Promissory Note (“JMJ Note”) with JMJ Financial pursuant to which the Company issued JMJ Financial a convertible note in the amount of $500,000 with an original issue discount in the amount of $50,000. The principal amount due JMJ is based on the consideration paid. The maturity date is two years from the effective date of each payment. On March 2, 2016 the Company received consideration of $100,000 for which an original issue discount of $10,000 was recorded. In addition, the Company recognized a discount of $7,500 on fees paid upon entering into this agreement There were no additional borrowings under the JMJ Note during the quarter ended March 31, 2016. The Company has not currently made any principal payments on the JMJ Note. If the Company doesn’t repay the JMJ Note on or before 90 days from the effective date the Company may not make further payments on this JMJ Note prior to the maturity date and a one-time interest charge of 12% will be applied to the principal amount. No provision for accrued interest was recorded as of March 31, 2016.
The JMJ Note provides JMJ Financial the right at any time, to convert the outstanding balance (including accrued and unpaid interest) into shares of the Company’s common stock at 60% of the lowest trade price in the 25 trading days previous to the conversion, additional discounts may apply in the case that conversion shares are not deliverable or if the shares are ineligible. As a result of the derivatives calculation (see Note 8) an additional discount of $92,500 was recorded. Amortization of the debt discount totaled $4,370 for the three months ended March 31, 2016. The principal balance due, net of the amortized discount under the JMJ Note was $4,370 at March 31, 2016.
NOTE 7 – CONVERTIBLE LOANS – RELATED PARTY
The Company issued a convertible promissory note to a related party in 2014 for $250,000 (see Note 12). The note is convertible into common stock of the Company at $0.50 per share. The intrinsic value of the beneficial conversion feature was determined to be $125,000 at the commitment date and the discount is being amortized over the one year life of the promissory note. As of March 31, 2016, $125,000 of the discount has been amortized as interest expense. Interest amortized for the three months ended March 31, 2016 and 2015 was $0 and $30,822, respectively. The Company repaid $125,000 under this note during the twelve months ended December 31, 2015 and the outstanding balance was $125,000 as of March 31, 2016.
This conversion option was accounted for as a derivative liability during the three months ended March 31, 2016 resulting in a reclassification of the fair value of the derivative liability of $6,175 from equity (see Note 8).
NOTE 8 – DERIVATIVE LIABILITY
During the three months ended March 31, 2016, the Company identified conversion features embedded within its convertible debt. The Company has determined that the conversion feature of the Notes represents an embedded derivative since the Notes are convertible into a variable number of shares upon conversion. Accordingly, the embedded conversion feature must be bifurcated from the debt host and accounted for as a derivative liability. Therefore, the fair value of the derivative instruments have been recorded as liabilities on the balance sheet with the corresponding amount recorded as discounts to the Notes. Such discounts will be accreted from the issuance date to the maturity date of the Notes. The change in the fair value of the derivative liabilities will be recorded in other income or expenses in the statement of operations at the end of each period, with the offset to the derivative liabilities on the balance sheet. The fair value of the embedded derivative liabilities were determined using the Black-Scholes valuation model on the issuance dates with the assumptions in the table below.
The change in fair value of the Company’s derivative liabilities for the three months ended March 31, 2016 is as follows:
| December 31, 2015 fair value | $ | - | |
| Additions recognized as derivative loss at inception | 292,899 | ||
| Additions recognized as note discount at inception | 145,375 | ||
| Reclass from equity to derivative liability | 6,175 | ||
| Gain on change in fair value | (119,319 | ) | |
| March 31, 2016 fair value | $ | 325,130 |
The loss on the change in fair value of derivative liabilities the three months ending March 31, 2016 totaled $173,580.
The fair value at the issuance and remeasurement dates for the convertible debt treated as derivative liabilities are based upon the following estimates and assumptions made by management for the three months ended March 31, 2016:
| Exercise prices | See Notes 6 and 7 |
| Expected dividends | 0% |
| Expected volatility | 188%-400% |
| Expected term | See Notes 6 and 7 |
| Discount rate | .59%-.85% |
NOTE 9 - SHAREHOLDERS’ EQUITY
COMMON STOCK
The authorized common stock of the Company consists of 500,000,000 shares with a par value of $0.001.
As of March 31, 2016 and December 31, 2015, 86,126,100 shares of the Company’s common stock were issued and outstanding.
In October 2014, the Company entered into an agreement for the issuance of 1,000,000 common shares for CAD/CAM Engineering Design Services for GLFH1200 series battery development. The shares vest in equal installments of 250,000 each year following the date of the agreement. On May 1, 2015, the Company issued 250,000 shares under this award. Since inception through March 31, 2016, $119,325 was expensed under this award and $21,425 remains to be expensed over the remaining service period. This nonemployee award is valued upon completion of services. The fair value of the award as of the reporting date of March 31, 2016 resulted in a reduction to expense during the three months ended March 31, 2016 of $22,027.
NOTE 10 - OPTIONS
During the year ended December 31, 2015, the Company granted an aggregate of 2,050,000 options to a military sales representative and three employees. Col. Ashton Naylor (Ret) received 100,000 options exercisable at $0.25 per share, Chris Watkins received 750,000 options exercisable at $0.25 per share, Jeff Roach received 1,000,000 options exercisable at $0.20 per share, and Brian Nallin received 200,000 options exercisable at $0.20 per share. These options expire on April 1, 2016; June 11, 2020, February 1, 2017, and December 31, 2017 respectively. The options granted to Brian Nallin vest immediately and the other options vest in equal tranches over periods ranging from 2 to 5 years. The aggregate fair value of the option grants was determined to be $430,839 using the Black-Scholes Option Pricing Model and the following assumptions: volatilities between 218% and 396%, risk free rates between .27% and 1.74%, expected terms between 1 and 5 years and zero expected dividends. The fair value of the award is being expensed over the vesting periods. $295,553 was expensed during the year ended December 31, 2015 and $24,703 was expensed during the three months ended March 31, 2016. $ Jeff Roach and Brian Nallin both voluntarily terminated employment with the Company on February 12, 2016 resulting in Jeff returning non-vested options back to the Company. This resulted in a reversal of prior period share based compensation and option expense of $26,745 during the three months ended March 31, 2016. As of March 31, 2016, $93,407 remains to be expensed over the remaining vesting period.
As of March 31, 2016, there were 1,800,000 options outstanding of which 1,200,000 were exercisable. The range of exercise prices and remaining weighted average life of the options outstanding at March 31, 2016 were $0.20 to $0.25 and 2.37 years, respectively. The aggregate intrinsic value of the outstanding options at March 31, 2016 was $0.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company entered into a lease agreement for office and research facilities in Louisiana. One lease is for $10,200 per year for 24 months beginning May 1, 2014. Beginning in May of 2016 this lease is now month to month and is $850 per month. The second lease is $2,600 per month for 24 months beginning on November 1, 2014.
Additionally, the Company leases space in Fort Worth, Texas for corporate facilities for $99 monthly or $1,188 per year. The terms of this lease are also month to month.
| Year Ended | Amount | ||
| 2016 | $ | 18,200 | |
| 2017 | - | ||
| 2018 | - | ||
| 2019 | - | ||
| 2020 | - | ||
| $ | 18,200 |
From time to time the Company may be a party to litigation matters involving claims against the Company. Management believes that there are no current matters that would have a material effect on the Company’s financial position or results of operations.
NOTE 12 – RELATED PARTY TRANSACTIONS
On November 1, 2014, the Company entered into a Convertible Promissory Note Agreement with Ray Moore Sr., a related party, in the amount of $250,000. The note bears an interest rate of 7% per annum until paid in full. Repayment of the loan is due on or before November 7, 2015. The lender shall have the right to convert this indebtedness to equity shares of Galenfeha at the rate of one share per $.50 of indebtedness for a total of 500,000 shares upon the expiration date, or at any time the Lender desired for the relieve of indebtedness of Maker. As of March 31, 2016, the principal and interest due on the note is $136,699 (the accrued interest of $11,699 is presented as accounts payable to related parties in the consolidated balance sheet).
Falcon Resources, LLC & MarionAv, LLC are two companies owned by Board Member, Trey Moore, and CEO/President, Lucien Marioneaux, Jr., respectively. These related party entities provide flight services to employees and directors of the Company. The total amount paid for flight services to Falcon Resources and MarionAv, LLC for the three months ending March 31, 2016 totaled $6,600 and $0, respectively. As of March 31, 2016, the Company had an outstanding accounts payable balance to Falcon Resources, LLC totaling $6,600.
Galenfeha sells a portion of its finished goods to Fleaux Services, LLC, a company owned by Board Member, Trey Moore. During the three months ended March 31, 2016, sales to the related company totaled $17,382. As of March 31, 2016, the Company had outstanding receivables from the related party company of $9,017. As of March 31, 2016, the Company had an outstanding accounts payable balance to Fleaux Services, LLC totaling $31,009. During the first quarter of 2016, the Company paid Fleaux Services, LLC $16,152 for inventory and shop supply purchases.
Galenfeha purchases component parts used in the assembly of inventory items from River Cities Machine, LLC, a company owned by CEO/President, Lucien Marioneaux, Jr. During the three months ended March 31, 2016 purchases from the related company totaled $960. As of March 31, 2016, the Company had an outstanding accounts payable balance to River Cities Machine, LLC totaling $38,847.
Other outstanding accounts payable balances to related parties totaled $3,407 as of March 31, 2016. The amounts are unsecured, due on demand and bear no interest.
NOTE 13 – SUBSEQUENT EVENTS
Effective April 22, 2016 the Company entered into a Convertible Promissory Note (“Auctus Fund Note”) with Auctus Fund, LLC pursuant to which the Company issued Auctus Fund, LLC a convertible note in the amount of $75,000 with an interest rate of 10%. The maturity date is January 22, 2017, upon which both principal and interest are due. The Auctus Fund Note provides Auctus Fund, LLC the right at any time, to convert the outstanding balance (including accrued and unpaid interest) into shares of the Company’s common stock at 60% of the lowest trade price in the 25 trading days previous to the conversion, additional discounts may apply in the case that conversion shares are not deliverable or if the shares are ineligible.
Effective April 18, 2016 the Company entered into a Convertible Promissory Note (“Adar Bay Note”) with Adar Bays, LLC pursuant to which the Company issued Adar Bays, LLC a convertible note in the amount of $50,000 with an interest rate of 8% and a 5% original issue discount totaling $2,500. The maturity date is April 18, 2017, upon which both principal, including the original issue discount, and interest are due. The Adar Bay Note provides Adar Bays, LLC the right at any time, to convert the outstanding balance (including accrued and unpaid interest) into shares of the Company’s common stock at 60% of the lowest trade price in the 20 trading days previous to the conversion, additional discounts may apply in the case that conversion shares are not deliverable or if the shares are ineligible.
On May 11, 2016, Mark Warren tendered his resignation from the board of directors, as well as the position of chairman. The board accepted Mr. Warren’s resignation, effective on said date, and is actively seeking a replacement.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in this report and those in our Form 10-K filed with the Securities and Exchange Commission on March 30, 2016. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in such forward-looking statements as a result of certain factors, including but not limited to, those described under “Risk Factors” included in Part II, Item IA of this report.
Background Overview
Galenfeha incorporated in the State of Nevada on March 14, 2013, as a for-profit company with a fiscal year end of December 31. Our executive office is located at 420 Throckmorton Street, Suite 200, Ft. Worth Texas 76102, and the Company’s manufacturing facility is located at 9204 Linwood Avenue, Suite 104, Shreveport, LA. 71106. Our Telephone numbers are Toll free1-800-280-2404, International1-817-945-6448, and our facsimile number is817-887-1455. Our email address isinfo@galenfeha.com and our website address iswww.galenfeha.com.
In 2014, GLFH developed new battery technology primarily designed to operate automation and measurement computers in remote oil field locations. Such technology provides an environmentally friendly, inherently safe, internally temperature regulated, uninterruptible power supply for oil and gas well location automation and measurement equipment. Throughout 2014 this battery system proved effective in rigorous field-testing and was placed in to marketable production, now known as LiFePO4 battery systems.
During initial production, GLFH developed a private label, unique, user interface driven, real-time battery state of charge and asset tracking system that is internally integrated within the Company’s line of LiFePO4 battery systems. The system communicates the current battery performance, and operates as a Cloud driven database to collect and collate individual client information and uses unique ESN numeric identifiers to reference each client’s specific asset performance and inventory. Asset-tracking utilizes a combination of CDMA technologies coupled with satellite geo-location referencing to accurately monitor and track the battery system in the event of theft.
Early third quarter 2014, GLFH began shipping its patent pending battery systems to a multi-state distributor in Shreveport, Louisiana. The battery system saw rapid acceptance within the industry, thus increasing oil and gas demand through the remainder of 2014.
In 2015, GLFH began researching the use of this battery technology outside of the oil and gas industry. In conjunction with alternative markets, GLFH successfully tested a proof-of-concept model for use in zero emission recreational vehicles such as golf carts and an off-road UTV gas/electric hybrid platform. Additionally, GLFH sought additional product lines to its battery systems to increase revenue while establishing a synergy among products such that each product line could add value to the other.
GLFH acquired DayLight Pump, LLC, a chemical injection pump manufacturing company, in early 2015 and all operations and manufacturing were relocated to Shreveport, Louisiana. Following slight enhancements to the DayLight Pump design, and following rigorous field-testing, DayLight Pumps, as we know them today were manufactured and placed into final production. As planned, these chemical injection stations incorporate the GLFH LiFePO4 battery systems, at various levels. DayLight Pumps with GLFH LiFePO4 battery systems were introduced into the commercial market mid-2015.
GLFH realized growth in overall product sales in 2015 for reasons threefold: 1.) Increased market acceptance of our products, 2.) Embedding the battery technology within our chemical injection pump systems which not only serves to further validate product viability but also assisted in expanding beyond automation and measurement to the production sector of the petroleum industry, 3.) Introduction of our technology outside the petroleum industry in to additional markets. 2015 goals were met regarding zero emissions vehicle testing, the successful acquisition of Daylight Pump, LLC, as well as the initial design of a second-generation battery management system. Chemical injection pumps and accessories showed significant increase gross revenue, as desired and the company was able to branch out of the oil and gas market to the United States Armed Forces in the testing of GLFH LiFePO4 battery systems for use in automated range targeting systems. Armed Forces testing was completed mid-year 2015 with two facilities performing simultaneous field-testing which ultimately proved successful. Third quarter 2015 saw the first shipment of GLFH LiFePO4 battery systems to Fort Campbell. Such a milestone is of note as it represents a first not only for GLFH, but also the acceptance and usage of the LiFePO4 chemistry by the United States Government.
2015 also proved successful in that a solidified distribution network was established with a number of national and long-standing regional distribution partners opening the GLFH product line to nationwide distribution. Promptly following the establishment of the distribution network, hands-on product training sessions were conducted personally with each distribution hub while initial stocking orders were placed and shipped across the nation.
Since the Company’s inception, the Company has accomplished key milestones outlined in its 2014-2015 statement of work. A majority of the monies spent to date have been for initial financing actives related to creating a public company, product development, including research and field-testing as well as for the purchase of inventory and ordinary day-to-day operations. We anticipate that in 2016, the Company will increase profitability, and that cash flow will be such as to allow for the production of additional inventory items to reduce lead-times for product sales, continued market growth and the development of those products desired within our market sectors which may add to the synergies already enjoyed.
Liquidity
Assets
At March 31, 2016, we had total assets of $1,661,387, of which $89,532 was in cash.
Results of Operations for the Three Months ending March 31, 2016
Revenues
Revenues for the three months ended March 31, 2016 and 2015 were $303,421, and $316,702, respectively. Of the $303,421; $286,039 were to third parties and $17,382 were to related parties. All of the sales attributable to the $316,702 were to related parties. The decrease is from the Company loosing distribution contracts with oil and gas supply companies due to lack of demand in the oil and gas industry.
Cost of Revenues
Cost of Revenues for the three months ended March 31, 2016 and 2015 were $219,582 and $194,826, respectively. Costs were cost of materials and manufacturing supplies with the increase due to further implementation of operations and fulfillment of orders not previously tested and designed by the Company.
Operating Expense
Total operating expenses for the three months ended March 31, 2016 and 2015 were $206,301 and $159,821, respectively. Expenses increased as the Company incurred larger operational expenses relating to selling chemical injection pumps and batteries compared to 2015 when the Company only had operational costs associated with selling their one major product line of batteries.
Net Operating Loss and Net Loss
Net operating loss for the three months ended March 31, 2016 and 2015 was $122,462 and $37,945 respectively. The Company realized a higher net loss because of share based employee compensation, increased professional fees associated with compliance, third party sales representatives, insurance purchased, and fulfillment of orders not previously tested and designed by the Company.
Net loss for the three months ended March 31, 2016 and 2015 was $305,863 and $72,754 respectively. The Company realized a higher net loss because of increased interest and amortization expense relating to amortization of debt discounts on convertible promissory notes, and fair market value adjustments on derivative contracts associated with procuring additional financing.
Equity Distribution
Since our incorporation, we have raised capital through private sales of our common equity. As of March 31, 2016, we have issued 86,126,100 shares of our common stock to various shareholders,.
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Item 3. Quantitative & Qualitative Disclosures about Market Risks
Not applicable.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
As of the end of period covered by this report, the Company carried out an evaluation, with the participation of the Company's Chief Executive Officer and Principal Financial Officer, of the effectiveness of the Company's disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Company's Chief Executive Officer and Principal Financial Officer concluded that the Company's disclosure controls and procedures were not effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms.
(b) Changes in internal controls over financial reporting.
No changes were made to the Company's internal controls in the quarterly period covered by this report that have materially affected, or are reasonably likely materially to affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None
Item 1A. Risk Factors
A description of the risks associated with our business, financial condition and results of operations is set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the SEC on March 30, 2016. These factors continue to be meaningful for your evaluation of the Company and we urge you to review and consider the risk factors presented in the Annual Report on Form 10-K. We believe there have been no changes that constitute material changes from these risk factors.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
Item 3. DEFAULTS UPON SENIOR SECURITEIES
None
Item 4. MINE SAFETY DISCLOSURES
Not applicable
Item 5. OTHER INFORMATION
None
Item 6. EXHIBITS
(a) Exhibits:
| Number | Description | |
| 31.1 | ||
| 32.1 |
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Galenfeha, Inc.
| Date: May 16, 2016 | By: | /s/ Lucien Marioneaux |
| Name: | Lucien Marioneaux | |
| President and Chief Executive Officer | ||
| (Principal Financial Officer, Principal | ||
| Accounting Officer) |