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 ended September 30, 2010
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION FROM __________ TO __________.
Commission File Number: 0-54036
CIRALIGHT GLOBAL, INC.
(Exact name of registrant as specified in its charter)
Nevada 26-4549003
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
670 E. Parkridge, Suite 112 Corona, CA 92879
(Address of principal executive offices) (Zip code)
(877) 520-5005
(Registrant's telephone number)
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 the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
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]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of November 10, 2010, there were
12,886,854 outstanding shares of the Registrant's Common Stock, $0.001 par
value.
CIRALIGHT GLOBAL, INC.
Report on Form 10-Q
For the Quarter Ended September 30, 2010
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Balance Sheets as of September 30, 2010 (Unaudited) and
December 31, 2009 3
Statements of Operations for the Three and Nine Months Ended
September 30, 2010, for the Three Months Ended September 30,
2009 and for the Period from February 26, 2009 (inception)
to September 30, 2009 (Unaudited) 4
Statements of Cash Flows for the Nine Months Ended
September 30, 2010 and for the Period from February 26, 2009
(inception) to September 30, 2009 (Unaudited) 5
Notes to Unaudited Financial Statements as of September 30, 2010 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 28
Item 4. Controls and Procedures 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 1A. Risk Factors 31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits 32
SIGNATURES 35
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CIRALIGHT GLOBAL, INC
BALANCE SHEETS
September 30, December 31,
2010 2009
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash & cash equivalents $ 48,570 $ 265,753
Accounts receivable 149,633 300,547
Notes receivable - related party 73,821 69,865
Inventory 240,385 176,521
Prepaid expenses and other current assets 62,862 135,391
----------- -----------
Total current assets 575,271 948,077
----------- -----------
Property and equipment, net 11,748 20,337
Intangible assets, net 29,277 30,523
----------- -----------
Total assets $ 616,296 $ 998,937
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 176,983 $ 54,419
Advance payable - related party 15,000 --
Bonus payable - related party 25,860 --
Convertible notes payable - related party -- 324,927
Convertible note payable 25,148 --
Other payables 9,476 202,847
----------- -----------
Total current liabilities 252,467 582,193
----------- -----------
Stockholders' equity
Preferred stock - $.001 par value; 10,000,000 shares authorized,
1,000,000 Redeemable Series A Preferred shares issued and outstanding 1,000 1,000
Common stock - $.001 par value; 50,000,000 shares authorized,
12,876,854 and 10,368,000 shares issued and outstanding, respectively 12,877 10,368
Additional paid-in capital 1,857,591 1,225,665
Accumulated deficit (1,507,639) (820,289)
----------- -----------
Total stockholders' equity 363,829 416,744
----------- -----------
Total liabilities and stockholders' equity $ 616,296 $ 998,937
=========== ===========
The accompanying notes are an integral part of these financial statements.
3
CIRALIGHT GLOBAL, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
For the Three Months Ended Nine Months February 26, 2009
September 30, Ended (inception) to
------------------------------ September 30, September 30,
2010 2009 2010 2009
------------ ------------ ------------ ------------
Sales $ 205,189 $ 311,342 $ 614,182 $ 520,761
Cost of goods sold 183,361 236,237 407,522 402,182
------------ ------------ ------------ ------------
Gross profit 21,828 75,105 206,660 118,579
------------ ------------ ------------ ------------
Operating expenses
Research and development expenses 28,754 4,214 45,055 4,214
Selling and marketing expenses 73,651 29,535 157,733 52,072
General and administrative expenses 186,457 267,294 695,269 354,329
------------ ------------ ------------ ------------
Total operating expenses 288,862 301,043 898,057 410,615
------------ ------------ ------------ ------------
Loss from operations (267,034) (225,938) (691,397) (292,036)
------------ ------------ ------------ ------------
Other income
Interest income 1,410 36 4,047 36
------------ ------------ ------------ ------------
Total other income 1,410 36 4,047 36
------------ ------------ ------------ ------------
Provision for income taxes -- -- -- --
------------ ------------ ------------ ------------
Net loss $ (265,624) $ (225,902) $ (687,350) $ (292,000)
============ ============ ============ ============
Basic and diluted loss per share $ (0.02) $ (0.03) $ (0.05) $ (0.04)
============ ============ ============ ============
Weighted average shares used
in per share calculation 12,876,854 6,686,449 12,876,854 6,686,449
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
4
CIRALIGHT GLOBAL, INC
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months February 26, 2009
Ended (inception) to
September 30, September 30,
2010 2009
--------- ---------
Cash flows from operating activities:
Net Loss $(687,350) $(292,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Common stock issued for compensation
and services 178,111 1,600
Options issued for services 1,301 --
Depreciation and amortization 9,837 10,352
Contribution of rent from a related party 4,500 --
Bad debt expense 6,909 --
Changes in operating assets and liabilities
Increase in inventory (63,864) (56,484)
Decrease (increase) in accounts receivable 144,005 (181,369)
Decrease (increase) in prepayments and deposits 72,529 (139,148)
Increase in note receivable - related party (3,956) --
Increase in accounts payable 122,564 1,157
Increase in interest payable 13,323 --
Increase in advances payable - related party 15,000 --
Increase in bonus payable - related party 25,860 --
(Decrease) increase in other payables (193,371) 85,807
--------- ---------
Net cash used in operating activities (354,604) (570,085)
--------- ---------
Cash flows from investing activities:
Acquisition of business assets -- (3,500)
--------- ---------
Net cash used in investing activities -- (3,500)
--------- ---------
Cash flows from financing activities:
Cash from sale of common stock 70,000 772,888
Proceeds from note payable 75,000 --
Stock offering costs (7,579) (9,873)
--------- ---------
Net cash provided by financing activities 137,421 763,015
---------
Net decrease in cash (217,183) 189,430
Cash, beginning of period 265,753 --
--------- ---------
Cash, end of period $ 48,570 $ 189,430
========= =========
Supplemental cash flow information:
Interest paid $ -- $ --
========= =========
Income taxes paid $ -- $ --
========= =========
Non-cash investing and financing activities
Common stock issued for services $ 178,111 $ 1,600
========= =========
Stock options issued for services $ 1,301 $ --
========= =========
Debt and liabilities settled with common stock $ 388,102 $ --
========= =========
Accrued interest expense added to principal amount of debt $ 14,461 $ --
========= =========
The accompanying notes are an integral part of these financial statements.
5
CIRALIGHT GLOBAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
1. Background and Basis of Presentation:
Ciralight Global, Inc. (the "Company") was incorporated in the State of Nevada
on February 26, 2009. The Company is in the business of designing, developing,
and distributing proprietary advanced day lighting systems for traditional
non-residential markets that benefit from natural lighting.
In April 2009, we entered into an Exchange of Stock for Assets Agreement with
Mr. George Adams, Sr. ("Adams Agreement") to acquire certain assets including,
but not limited to, a U.S. patent, patent applications pending in Canada,
Europe, Mexico and the United States, artwork, trademarks, equipment, furniture,
databases, technical drawings, promotional materials, trade names and inventory
parts and marketing rights related to the Suntracker One(TM) and Suntracker
Two(TM) daylighting products previously owned and distributed by Ciralight,
Inc., a Utah corporation, such assets having been foreclosed on by Mr. Adams,
who was the secured creditor of Ciralight, Inc. Ciralight, Inc. is a predecessor
to the Company, although we have no affiliation, contractual or otherwise, with
Ciralight, Inc. or any of its employees, officers or directors.
Ciralight, Inc., the company whose assets were foreclosed on by Mr. Adams, was
also in the business of designing, developing, and distributing proprietary
advanced day lighting systems for traditional non-residential markets that
benefit from natural lighting. Ciralight, Inc. ceased operations on March 14,
2009, following the foreclosure by Mr. Adams. Since the acquisition of the
assets was through a foreclosure, the former company and its officers remain
liable for the Ciralight Inc.'s debts and the Company has no financial
responsibility for those debts. None of the employees or management of Ciralight
Inc. are involved in the Company. The business operations of our Company are
located in Irvine, California and the Company operates with four employees, the
Chief Executive Officer, the Chief Financial Officer / Chief Operations Officer,
a warehouse manager and an executive assistant.
In April 2009, we acquired all of the above described assets from Mr. Adams,
except for the U.S. patent and the patent applications pending in Canada,
Europe, Mexico and the United States, in exchange for 3,200,000 shares of our
common stock and 1,000,000 shares of our Series A Preferred Stock. On December
15, 2009, we acquired the U.S. patent and patent applications pending in Canada,
Europe, Mexico and the United States from Mr. Adams in exchange for the issuance
by us of an additional 400,000 shares of our common stock and a convertible
promissory note in the amount of $250,000. The note is convertible into shares
of our common stock at a conversion rate of one share per $.25 of outstanding
principal and interest. As a result of this transaction, Mr. Adams is our
largest shareholder. Aside from our U.S. patent and our four pending patent
applications, we have no other patent rights.
In order to provide working capital, Ciralight Global, Inc. sold common stock
through a private placement that raised $1,300,000 with the sale of 5,200,000
shares at a price of $.25 per share from April 30, 2009 and January 15, 2010.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the
current year presentation.
2. Liquidity and Operations:
The Company had net losses of $687,350 and $292,000 for the nine month period
ended September 30, 2010 and for the period from February 26, 2009 (inception)
to September 30, 2009, respectively.
As of September 30, 2010, the Company had cash and cash equivalents of $48,570.
In addition, the Company had accounts receivable of approximately $149,000,
inventory on hand at a cost valuation of approximately $240,000, with a market
valuation of over $500,000, all fully paid for, and accounts payable of
approximately $177,000.
6
CIRALIGHT GLOBAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
3. Summary of Significant Accounting Policies:
Cash and Cash Equivalents - The Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
The Company maintains its cash accounts primarily with banks located in Utah.
The total cash balances are insured by the FDIC up to $250,000 per bank. At
times, the amount of the Company's cash and cash equivalent exceeds the balance
insured by the FDIC.
Accounts Receivable - The Company's accounts receivable are unsecured and the
Company is at risk to the extent such amounts become uncollectible. Management
continually monitors accounts receivable balances and provides for an allowance
for doubtful accounts at the time collection becomes questionable based on
payment history or age of the receivable. The Company sells products and
services generally on terms of receiving a 50% deposit prior to shipment and the
remaining 50% within 21 days of date of shipment. The Company charges nominal
financing fees on late payments. Accounts receivable are charged to the
allowance for bad debts when the Company has exhausted all reasonable means of
collection. At September 30, 2010, management deemed that all accounts
receivable were fully collectible and that no bad debt reserve was required.
Inventory - Inventory consists of finished units, parts and packaging materials
and is stated at lower of historical cost or current cost. Management will
establish a reserve for damaged and discontinued inventory when determined
necessary. At September 30, 2010 no reserve was required.
Property and Equipment - Property and equipment are stated at historical cost,
which consists of the net book value of the assets carried on the prior
company's books. Depreciation is computed over the estimated useful lives of the
assets using the straight-line method generally over a 3- to 5-year period.
Leasehold improvements will be amortized on the straight-line method over the
life of the related lease. Expenditures for ordinary maintenance and repairs are
charged to expense as incurred. Upon retirement or disposal of assets, the cost
and accumulated depreciation are eliminated from the account and any gain or
loss is reflected in the statement of operations. Depreciation expense for
property and equipment is recorded as either cost of goods sold or general and
administrative expense, depending on the use of the assets.
Stock Offering Costs - During 2009 and the first and third quarters of 2010, the
Company recorded the organizational costs associated with private placement
offerings as additional paid in capital and expensed the costs associated with
taking the company public.
Impairment of Long Lived Assets - The Company evaluates its long-lived assets
for impairment, in accordance with FASB ASC 360-10, when events or changes in
circumstances indicate that the related carrying amount may not be recoverable.
Impairment is considered to exist if the total estimated future cash flow on an
undiscounted basis is less than the carrying amount of the related assets. An
impairment loss is measured and recorded based on the discounted estimated
future cash flows. Changes in significant assumptions underlying future cash
flow estimates or fair values of assets may have a material effect on the
Company's financial position and results of operations. No such impairment was
indicated at September 30, 2010.
Shipping and Handling Costs - The Company includes shipping and handling costs
that are billed to our customers in revenue and the actual costs incurred for
shipping and handling are included in costs of goods sold in accordance with the
provisions of FASB ASC 605-45-45-20. The related costs are considered necessary
to complete the revenue cycle.
Revenue Recognition - The Company recognizes revenue from product sales when
persuasive evidence of an arrangement exists, shipment has occurred, the
seller's price to the buyer is fixed or determinable and collectability is
reasonably assured.
7
CIRALIGHT GLOBAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
3. Summary of Significant Accounting Policies: (continued)
Warranty Costs - Commencing April 1, 2009, the Company provided a five-year
warranty covering the labor and materials associated with its installations.
Effective September 1, 2009, the Company changed the coverage to ten years in
the U.S. The Company's "advanced skylights" are warranted by the manufacturer
for 10 years, generally. The Company (at its option) will repair, replace or
give credit for the original purchase price on any of its products or parts. An
accrual for a loss contingency has been made, since warranty expenses to date
have been consistent and a reasonable estimate of future expenses can be made,
in accordance with FASB ASC 460-10-50-8 (c).
Changes in the liability for product warranty were as follows:
Product
Warranty
--------
Liability at December 31, 2009 $ 9,476
Settlements made during the period (9,956)
Change in liability for warranties issued during the period 4,508
Change in liability for preexisting warranties 5,448
--------
Liability at September 30, 2010 $ 9,476
========
Research and Development Expenses - Research and development expenses are
charged to operations in the period incurred. The amount expensed for the nine
month period ended September 30, 2010 was $45,055.
Selling and Marketing Expenses - Selling and marketing expenses are expensed as
incurred. These expenses were $157,733 for the nine month period ended September
30, 2010.
The Adams Agreement described in Note 1 above, also granted Mr. Adams a royalty
fee of $20.00 for each Suntracker One(TM) and Suntracker Two(TM) unit or any
future units that are based on the patent rights we acquired from him. The
maximum royalty fees payable under the Adams Agreement is $2,000,000 based on
the sale of 100,000 units. As of September 30, 2010, accrued royalties in the
amount of $25,860, related to our sale of 1,101 units, were awarded at the
request of Mr. Adams to our President and CEO, Jeffrey Brain, for his dedication
and hard work in making our company successful. At September 30, 2010, there is
a bonus payable in the amount of $25,860 to Mr. Brain.
General and Administrative Expenses - General and administrative expenses are
expensed as incurred. These expenses were $695,269 for the nine month period
ended September 30, 2010.
Concentrations of Credit Risk - Credit risk represents the accounting loss that
would be recognized at the reporting date if counterparties failed completely to
perform as contracted. Concentrations of credit risk (whether on or off balance
sheet) that arise from financial instruments exist for groups of customers or
counterparties when they have similar economic characteristics that would cause
their ability to meet contractual obligations to be similarly affected by
changes in economic or other conditions.
Financial instruments potentially subjecting the Company to concentrations of
credit risk consist principally of accounts receivable. As of September 30,
2010, one distributor had balances representing approximately 25% of the
Company's accounts receivable.
Use of Estimates - The preparation of the financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the balance sheet and the reported amounts of revenue
and expenses during the reporting period. Significant estimates include the
Company's debt discount, and share-based compensation expense. Actual results
could differ from these estimates.
8
CIRALIGHT GLOBAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
3. Summary of Significant Accounting Policies: (continued)
Stock-Based Compensation - The Company accounts for stock-based compensation
under the provisions of FASB ASC 718 (Statement of Financial Accounting
Standards No. 123 (revised 2004), "SHARE-BASED PAYMENT"), which requires the
Company to measure the stock-based compensation costs of share-based
compensation arrangements based on the grant date fair value and generally
recognizes the costs in the financial statements over the employee's requisite
service period. Stock-based compensation expense for all stock-based
compensation awards granted was based on the grant date fair value estimated in
accordance with the provisions of FASB ASC 718.
The Company measures compensation expense for its non-employee stock-based
compensation under FASB ASC 505-10 and 50, "Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services". The fair value of the option issued is used to
measure the transaction, as this is more reliable than the fair value of the
services received. The fair value is measured at the value of the Company's
common stock on the date that the commitment for performance by the counterparty
has been reached or the counterparty's performance is complete. The fair value
of the equity instrument is charged directly to compensation expense and
additional paid-in capital.
By recording employee stock-based compensation using the fair value recognition
provisions of Accounting Standards Codification ("ASC") Topic 718 ("ASC 718")
using the modified prospective transition method, and recording non-employee
stock-based compensation expense in accordance with ASC Topic 505, the Company
recognized stock compensation expense of $178,111for the nine months ended
September 30, 2010.
Income Taxes - The Company accounts for its income taxes under the provisions of
FASB-ASC-10 "Accounting for Income Taxes." This statement requires the use of
the asset and liability method of accounting for deferred income taxes. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax reporting purposes, at the applicable enacted
tax rates. The Company provides a valuation allowance against its deferred tax
assets when the future realizability of the assets is no longer considered to be
more likely than not.
Convertible Notes Payable - The Company accounts for its convertible notes
payable under the provisions of FASB ASC 470 (Staff Position No. APB 14-1
"Accounting for Convertible Debt Instruments that may be Settled in Cash upon
Conversion (including partial cash settlement"). FASB ASC 470 clarifies that
convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) are not addressed by FASB ASC 470-20-65-1
(paragraph 12 of APB Opinion No. 14, "Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants"). Additionally, FASB ASC 470 specifies that
issuers of such instruments should separately account for the liability and
equity components in a manner that will reflect the entity's nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods.
The Company accounts for uncertain tax positions in accordance with FASB ASC
740-10, 30 and 270, "Accounting for Uncertainty in Income Taxes." The
application of income tax law is inherently complex. As such, the Company is
required to make certain assumptions and judgments regarding its income tax
positions and the likelihood whether such tax positions would be sustained if
challenged. Interest and penalties related to uncertain tax provisions are
recorded as a component of the provision for income taxes. Interpretations and
guidance surrounding income tax laws and regulations change over time. As such,
changes in the Company's assumptions and judgments can materially affect amounts
recognized in the Company's consolidated balance sheets and statement of
operations.
9
CIRALIGHT GLOBAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
4. Balance Sheet Information:
Cash and Cash Equivalents consisted of the following at September 30, 2010:
Checking account $37,507
Savings accounts 10,663
Petty cash 400
-------
Total Cash and cash equivalents $48,570
=======
Notes receivable - related party - As of September 30, 2010, the Company holds a
note receivable from the prior President and Chief Executive Officer of the
Company, Randall Letcavage, with an outstanding balance of $73,821, which
includes accrued interest. This note accrues interest at an annual rate of 8%
from the effective date of January 15, 2010. Certain terms of this note
receivable were amended and replaced on March 18, 2010, with the following
terms: The Company was granted a security interest in and to 329,647 shares of
Company common stock owned by Randall Letcavage as collateral for the repayment
of the note receivable and the note receivable is due and payable on November 1,
2010.
Inventory consisted of the following at September 30, 2010:
Finished units and components $217,030
Packaging crates and materials 23,355
--------
Total Inventory $240,385
========
Prepaid expenses and other current assets consist of the following at September
30, 2010:
Purchase order prepaid deposits $56,862
Deposits on account 6,000
-------
Total Prepayments and deposits $62,862
=======
Purchase order prepaid deposits represent the prepayment required under the
agreements with several suppliers of our inventory components.
Property and equipment are stated at cost, net of accumulated depreciation.
Expenditures for maintenance and repairs are expensed as incurred; additions,
renewals and betterments are capitalized. Depreciation of property and equipment
is provided using the straight-line method with estimated lives ranging from 3
to 5 years as follows:
Furniture and equipment $ 7,950
Vehicles 2,771
Tooling costs 22,983
Convention display 1,817
--------
Property and equipment 35,521
--------
Less Accumulated depreciation (23,773)
--------
Total Property and equipment, net $ 11,748
========
Depreciation expense for the nine month period ended September 30, 2010 was
$8,590 and was recorded as cost of goods sold. The use of the above property and
equipment determines if the depreciation is recorded as cost of goods sold or as
general and administrative expenses.
10
CIRALIGHT GLOBAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
4. Balance Sheet Information: (continued)
Intangible assets are stated at cost, net of accumulated amortization.
Amortization of intangible assets is provided using the straight-line method
with estimated lives of 20 years as follows:
Patent and patent applications $ 30,593
Less Accumulated amortization (1,316)
--------
Total Intangible assets, net $ 29,277
========
Amortization expense for the nine month period ended September 30, 2010 was
$1,247, was related to the Company's patent rights and was recorded as cost of
goods sold.
Organizational Costs - The Company's startup and organizational expenses were
expensed as legal and accounting fees under general and administrative expenses.
Advance Payable - related party - As of September 30, 2010, the Company had an
advance payable to Mr. Feck, one of the Company's directors, in the amount of
$15,000, relating to his payment of certain Company retooling costs on July 7,
2010. The Company plans to repay Mr. Feck when the funds are available.
Bonus Payable - related party - As of September 30, 2010, accrued royalties in
the amount of $25,860, related to our sale of 1,293 units, were awarded, at the
request of Mr. Adams, to our President and CEO, Jeffrey Brain, for his
dedication and hard work in making our company successful. At September 30,
2010, there is a bonus payable in the amount of $25,860 to Mr. Brain.
Convertible Note Payable - As of September 30, 2010, the Company had one
Convertible Note Payable as shown below:
Convertible note payable $ 25,148
========
Convertible Notes Payable:
As of March 31, 2009, the Company had a loan payable to Mr. Feck, one of the
Company's directors, in the amount of $35,629, relating to his payments of
certain Company general and administrative expenses between March 13, 2009 and
March 31, 2009. At September 30, 2009, the Company had a loan payable to Mr.
Feck in the amount of $48,507, relating to his payments of certain Company
expenses between March 13, 2009 and September 15, 2009. On October 1, 2009 the
loan was converted into a convertible note, which was issued to Mr. Feck. On
December 1, 2009, Mr. Feck elected to convert this note into 200,000 shares of
our common stock.
As of June 30, 2010, the Company had two Convertible Notes Payable with related
parties. On December 15, 2009, the Company secured the title to the one U.S.
patent and patent applications pending in Canada, Europe, Mexico and the United
States as provided in the Adams Agreement, described in Note 1, above. As
required in the Adams Agreement, as amended, on December 15, 2009, the Company
executed a Convertible Promissory Note in the amount of $250,000 to Mr. Adams
and issued to Mr. Adams an additional 400,000 shares of common stock in
consideration of Mr. Adams' transfer of ownership of the U.S. patent and the
patent applications pending in Canada, Europe, Mexico and the United States to
the Company. The $250,000 note with Mr. Adams bore interest at the prime rate
plus 2%, was due on December 15, 2012 and Mr. Adams had the right to convert the
principal amount of the note into shares of the Company's common stock at $.25
per share. During the quarter ending September 30, 2010, the Company executed
two additional Convertible Promissory Notes, each in the amount of $25,000 with
11
CIRALIGHT GLOBAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
4. Balance Sheet Information: (continued)
the same terms as the $250,000 note, to Mr. Adams. The balance of the notes,
including accrued interest, was $310,806 on September 24, 2010 when Mr. Adams
converted the balance of the notes into 1,243,224 shares of the Company's common
stock, pursuant to the terms of the notes with a conversion value of $.25 per
share. In addition, Terry Adams, the son of Mr. George Adams, Sr., loaned the
Company $73,788 on November 5, 2009 in exchange for a Convertible Promissory
Note for the amount loaned. The $73,788 note with Terry Adams bore interest at
the prime rate plus 2%, was due on December 15, 2012 and Terry Adams had the
right to convert the principal amount of the note into shares of the Company's
common stock at $.25 per share. The balance of the note, including accrued
interest, was $77,296 on September 24, 2010 when Terry Adams converted the
balance of the note into 309,184 shares of the Company's common stock, pursuant
to the terms of the note with a conversion value of $.25 per share
As of September 30, 2010, the Company had one Convertible Note Payable with Mr.
David Iwata. On August 20, 2010, the Company executed a Convertible Promissory
Note in the amount of $25,000 to Mr. Iwata. The $25,000 note with Mr. Iwata
bears interest at the prime rate plus 2%, is due on August 19, 2012 and Mr.
Iwata has the right to convert the principal amount of the note into shares of
the Company's common stock at $.50 per share. The balance of the convertible
note at September 30, 2010 was $25,148, as shown above.
Other Payables - As of September 30, 2010, the Company had Other Payables
consisting of the following:
Accrued warranty expense $ 9,476
========
Royalty Fees Payable - The Adams Agreement described in Note 1 above, granted
Mr. Adams a royalty fee of $20.00 for each Suntracker One(TM) and Suntracker
Two(TM) unit or any future units that are based on the patent rights we acquired
from him. The maximum royalty fees payable under the Adams Agreement is
$2,000,000 based on the sale of 100,000 units. As of September 30, 2010, accrued
royalties in the amount of $25,860, related to our sale of 1,293 units, were
awarded, at the request of Mr. Adams, to our President and CEO, Jeffrey Brain,
for his dedication and hard work in making our company successful. As stated
above, at September 30, 2010, there is a bonus payable in the amount of $25,860
to Mr. Brain and no royalty fees payable.
5. Stockholders' Equity:
On July 29, 2010, the Company was deemed Effective by the Securities and
Exchange Commission.
Common stock:
The Company is authorized to issue up to 50,000,000 shares of common stock with
a par value of $0.001, under terms and conditions established by the Board of
Directors.
The Company had 12,876,854 issued and outstanding common stock shares as of
September 30, 2010. Details of the issued and outstanding common stock shares
are shown below:
Amount of
Description shares issued
----------- -------------
Stock issued for acquisition of assets 3,600,000
Stock issued for legal services (founder's shares) 240,000
Stock issued for consulting services (founder's shares) 240,000
Stock issued as compensation (founder's shares) 1,120,000
Stock issued to private offering subscribers 5,212,000
Stock issued for compensation and services rendered 712,446
Stock issued for conversion of notes payable 1,752,408
12
CIRALIGHT GLOBAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
5. Stockholders' Equity (continued)
On April 1, 2009, 3,200,000 shares of common stock were issued, at a value of
$.09 per share, as a result of the Adams Agreement, described in Note 1, above.
On April 1, 2009, 1,600,000 shares of common stock were issued as founder's
shares, at a value of $.00 per share, for compensation expense and legal and
consulting services rendered in the formation of the Company and for
developmental work on our business plan. During the period from April 1, 2009 to
December 31, 2009, 4,968,000 shares of common stock were issued, at a value of
$.25 per share, resulting from sales of our stock through a Private Placement
Offering. On December 1, 2009, 200,000 shares of common stock were issued, at a
value of $.25 per share, resulting from the conversion of a $50,000 note
payable, discussed in Note 8. In addition, also a result of the Adams Agreement,
described in Notes 1 and 4, above, 400,000 shares of common stock were issued.
The assets acquired, as a result of the Adams Agreement, described in Notes 1
and 4, above, were in exchange for consideration of $354,200. The consideration
consisted of 3,200,000 shares of common stock at $.09 per share equaling
$288,000; 400,000 shares of common stock at $.25 per share equaling $100,000;
1,000,000 shares of preferred stock at par value equaling $1,000 and a note
payable of $250,000. The assets acquired consisted of inventory, accounts
receivable, property and equipment, a U.S. patent and patent applications
pending in Canada, Europe, Mexico and the United States at a value of $274,076.
The assets acquired were valued at their predecessor values, since George Adams
was a related party of the predecessor company. Management recognized additional
paid in capital for the difference of $80,124 between the predecessor value of
the assets acquired and the value of the consideration paid, as additional
acquisition costs, in order to properly recognize the predecessor cost of the
assets involved and for other costs associated with this transaction.
During the three month period ended March 31, 2010, a total of 944,446 shares of
common stock at $.25 per share were issued on January 15, 2010, consisting of
232,000 shares from sales of our stock through a Private Placement Offering,
352,941 shares as anti-dilution shares for compensation and services rendered
and 359,505 shares for accrued compensation and bonus compensation.
During the three month period ended September 30, 2010, a total of 1,564,408
shares of common stock were issued. On September 24, 2010, 1,552,408 shares of
common stock were issued, at a value of $.25 per share, resulting from the
conversion of an aggregate of $388,102 of convertible notes payable - related
parties, discussed in Note 4. In addition, from August 9, 2010 through September
30, 2010, 12,000 shares of common stock were issued, at a value of $1.00 per
share, resulting from sales of our stock through a Private Placement Offering.
13
CIRALIGHT GLOBAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
5. Stockholders' Equity: (continued)
Preferred stock:
The Company is authorized to issue 10,000,000 shares of preferred stock, par
value $0.001 per share. Currently, we have 1,000,000 shares of preferred stock
issued and outstanding. As part of the purchase contract for the acquisition of
assets, we issued 1,000,000 shares of Series A Preferred Stock to the seller of
those assets, Mr. George Adams, Sr. The Series A Preferred Stock has the
following rights and preferences:
Shares Issued: 1,000,000 shares have been issued to George Adams, Sr. No other
shares of preferred stock shall be issued by the Company that would grant the
holder(s) equal or superior rights to the Series A Preferred Stock.
Voting Rights: As long as the holder of our Series A Preferred Stock owns all
1,000,000 shares of the Company's Series A Preferred Stock and at least
3,200,000 shares of the Company's common stock, such holder shall have the right
to vote 51% of the total votes necessary for the election of directors and for
any acquisition or merger transaction.
Redemption Rights: The Company will have the right to redeem shares of the
Series A Preferred Stock by paying Mr. Adams $1.00 per share. Such redemption
may occur any time the Company has money legally available for such redemption.
6. Stock Options and Warrants:
As of September 30, 2010, the Company had not issued any warrants.
In January 2010, we entered into a stock option agreement with an individual in
recognition of his past activities in the development of the products
manufactured by the Company. The individual has the option to purchase up to
75,900 shares of common stock at $.75 per share. The option expires the sooner
of one year after the effective date of the Company's registration statement or
five years from the date of the stock option agreement.
Stock options exercisable into an aggregate of 75,900 shares of the Company's
common stock were outstanding on September 30, 2010, of which all were vested.
No options were exercised during the nine months ended September 30, 2010. The
Company estimates the fair value of its stock options on the date of grant by
using the Black-Scholes pricing model in accordance with the provisions of
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure." Under the Black-Scholes pricing
model, the Company used the following weighted-average assumptions to determine
the fair value of the stock options issued: a dividend yield of zero percent, an
expected volatility of 86.5%, a risk-free interest rate of 0% and a remaining
contractual life of between 1.0 and 5.7 years.
The following table summarizes the activity of stock options for the nine
months ended September 30, 2010:
Weighted
Number of Average
Shares Exercise
Outstanding Price
----------- -----
Balance, December 31, 2009 -- $ --
Options granted 75,900 .22
Options exercised -- --
Options forfeited or expired -- --
------ ------
Balance, September 30, 2010 75,900 $ .22
====== ======
14
CIRALIGHT GLOBAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
6. Stock Options and Warrants: (continued)
The Company's stock is not yet trading nor does it have an extended history of
stock prices or volatility, thus the Company utilized the volatility rates and
average contractual life variables from another reporting company within the
same industry sector in order to calculate the Black-Scholes pricing model. The
weighted average fair value of options granted during the three months ended
June 30, 2010 was $0.22 per option and there were no options exercised during
the same period. The value recorded for the outstanding exercisable options at
September 30, 2010 was $1,301.
7. Commitments and Contingencies:
Operating Leases -- The Company has not entered into any long term leases. The
Company is currently leasing approximately 3,500 square feet of warehouse space
in Corona, California, on a verbal month to month basis from one of our
Directors, Frederick Feck. Commencing October 1, 2009, the Company paid $3,000
per month for the Corona, California warehouse space. For business office space,
the Company has chosen to share space with iCapital to reduce its administrative
cost by sharing costs, avoiding setup costs for phones, internet, furnishings,
etc as well as office staffing. Commencing May 1, 2009, the Company paid $3,000
per month for the office space which is located in Irvine, California on a
verbal month to month lease. Commencing April 1, 2010, we began renting an
executive suite in Corona, California for $150 a month on a month to month basis
and terminated the arrangement and rental payments for the executive offices in
Irvine, California. Commencing January 1, 2010, a portion of our CEO, Jeffrey
Brain's, residence is utilized as an office. The monthly rental expense of $500
per month is recorded as additional paid in capital on the Company's books.
In February 2010, we entered into an eighteen month services agreement with a
construction data company regarding Smart BIM; the construction and maintenance
of databases relating to customers, sales leads and marketing strategies. As a
result of the agreement, commencing April 1, 2010, we pay $1,140 per month for a
period of eighteen months.
The Company, as of September 30, 2010 has no additional financial commitments
that would represent long term commitments on behalf of the Company.
Capital Leases - The Company has not entered into any kind of capital leases for
furnishings, equipment or for any other purposes.
Prepaid Inventory - Our agreements with several of our inventory component
suppliers generally provide that between 50% and 60% of the purchase order price
is due upon the placement of an order, with the remaining balance due upon
completion and shipment of the order, normally within 30 days. Purchase order
prepaid deposits are included in the balance sheet as Prepaid expenses and other
current assets. As of September 30, 2010, purchase order prepaid deposits
totaled $56,862 with primarily four of our major suppliers.
8. Related Party Transactions:
During fiscal 2009, the Company acquired assets through the Adams Agreement
described in Note 1, above. Mr. Adams is considered a related party, since he
was the largest secured creditor of Ciralight Inc., the company from which he
acquired certain assets in foreclosure and subsequently sold the assets to the
Company, and he is the largest shareholder in the Company. These assets were
valued at their predecessor values. As described in Note 4 above, the Company
borrowed money from Terry Adams, the son of Mr. George Adams, Sr., in exchange
for a Convertible Promissory Note.
As described in Note 4, above, on September 30, 2010, the Company holds a note
receivable from the prior President and Chief Executive Officer of the Company,
Randall Letcavage.
15
CIRALIGHT GLOBAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
8. Related Party Transactions: (continued)
As described in Note 7, above, the Company leases warehouse space from one of
our directors, Frederick Feck and a portion of our CEO, Jeffrey Brain's,
residence is utilized as an office. The Company has recorded contributed capital
of $4,500 relating to the value of the use of the residence for the benefit of
the Company.
In January 2010, the Company entered into a non-exclusive distributorship
agreement with Globalight Energy Solutions LLC, which is partly owned by Smokey
Robinson, the legendary entertainer, Randall Letcavage, our Chief Executive
Officer, Jeffrey Brain, our Chief Financial Officer and Chief Operating Officer,
and some other persons not associated with the Company. Smokey Robinson is the
single largest shareholder in the distribution company and has agreed to assist
the Company in promotions and media relations to promote the company products.
Randall Letcavage and Jeff Brain have had a business relationship with Smokey
Robinson and secured his participation in the distribution company to help
promote products. The value of having an icon celebrity involved is countless
dollars in potential free media and promotions and, therefore, it was deemed a
valuable arrangement for the Company. The distribution company will be a
minority certified company that can assist in securing certain contracts. The
distribution company will be non-exclusive and operate under the same terms,
conditions and pricing as the other distribution companies and, therefore, will
not receive any beneficial or special treatment over our other dealers or
distributors.
In January 2010, we entered into a nonexclusive distributorship agreement with
Chaparral Green Energy Solutions, LLC, an entity in which our securities
attorney, David E. Wise, Esq., owns a 50% equity interest. This non-exclusive
dealer agreement with the Company is to sell products in Texas and is on the
same terms, conditions and pricing as other dealer agreements. Thus, Mr. Wise's
company will not receive any beneficial or special treatment over our other
dealers or distributors.
The terms and conditions of the dealer agreement with Chaparral Green Energy
Solutions, LLC and the distributorship agreement with Globalight Energy
Solutions, LLC are the same as for the other dealer and distributorship
agreements. Therefore, these two agreements do not contain preferential or more
favorable terms or conditions than agreements with our other dealers or
distributors, except for the fact that the Company did not require Globalight
Energy Solutions, LLC to pay the standard distributorship fee of $15,000. In
lieu of Globalight Energy Solutions, LLC paying the standard distributorship fee
of $15,000, Smokey Robinson agreed to use his name, contacts and likeness to
promote the Company products. Our board of directors believes that the value to
the Company of Mr. Robinson's promotion of our products is greater than the
$15,000 distributorship fee to the Company.
In January 2010, we also entered into nonexclusive dealer agreements with both
Green Tech Design-Build, Inc., an entity located in Salt lake City, Utah, and
Eco-Smart, Inc., an entity located in Sarasota, Florida. In addition, we entered
into an exclusive international distribution agreement with Zeev Shimon & Sons,
Ltd., an entity located in Petah-Tikva, Israel.
9. Share Based Compensation
In January 2010, 352,941 common stock shares at $.25 per share, with an
aggregate value of $88,235, were issued as compensation and for services
rendered in order to satisfy the anti-dilution rights. The Chief Executive
Officer and Chief Financial Officer of the Company were each due $30,000 in
aggregate compensation resulting from $3,000 per month accrued for each of them
from March through December 2009. In addition, the Chief Financial Officer was
due additional compensation of $29,876 for the period from February 26, 2009
(inception) to December 31, 2009. Our board of directors granted anti-dilution
rights to Jeffrey Brain, iCapital Finance, Inc. (a company owned by Randall
Letcavage, our former Chief Executive Officer, and his business partner,
Rosemary Nguyen), Randall Letcavage and David E. Wise, our securities counsel.
These anti-dilution rights entitled Jeffrey Brain, iCapital Finance, Inc.,
Randall Letcavage and David E. Wise to acquire additional shares of our common
stock at $.25 per share in order to maintain their original percentage ownership
in the our common stock. The rights entitled the holders to acquire additional
shares as a result of the private offering conducted by the Company. The
anti-dilution rights agreement entitled the holders to acquire their additional
shares prior to March 31, 2010, at the same share price of $.25 that subscribers
were purchasing stock for in the private offering. The holders exercised their
rights during December 2009.
16
CIRALIGHT GLOBAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
10. Income Taxes:
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
At December 31, 2009, the Company had net operating loss carryforwards of
approximately $630,000 that may be offset against future taxable income from the
year 2010 through 2029. No tax benefit has been reported in the September 30,
2010 or December 31, 2009 consolidated financial statements, since the potential
tax benefit is offset by a valuation allowance of the same amount.
Due to the change in ownership provisions of the Tax Reform Act of 1986, net
operating loss carryforwards for Federal income tax reporting purposes are
subject to annual limitations. Should a change in ownership occur, net operating
loss carryforwards may be limited as to use in future years.
The Financial Accounting Standards Board ("FASB") has issued Financial
Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109 ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes. FIN 48 requires a company to determine whether it is more likely
than not that a tax position will be sustained upon examination based upon the
technical merits of the position. If the more-like1y-than-not threshold is met,
a company must measure the tax position to determine the amount to recognize in
the financial statements. As a result of the implementation of FIN 48, the
Company performed a review of its material tax positions in accordance with
recognition and measurement standards established by FIN 48. At the adoption
date of April 1, 2009, the Company had no unrecognized tax benefit which would
affect the effective tax rate if recognized.
11. Legal Matters:
On October 15, 2009, we filed a lawsuit in the Superior Court of the State of
California for the County of Orange, Central Justice Center (Case No. 30-2009,
00314998) ("Complaint") against Jacque Stevens, Rex Miller, Greg Schmalz, A-1
Daylighting, Consultech, Daylight Specialist and DOES 1-25. The Complaint
includes five causes of action by us against the defendants: Tortious
Interference with Contract, Commercial Disparagement, Conspiracy, Breach of
Contract, Unfair Business Practices and Libel. The Complaint alleges that we
entered into a nondisclosure agreement as part of an agreement to work toward
completing a joint venture/private label of our solar lighting systems with
Firestone Building Products and that defendants attempted to interfere with our
business relationship with Firestone Building Products by disparaging our
products (misrepresentations regarding prior sales, installations and quality of
service and that we provided or substituted defective or improper parts in our
products). We are seeking general, special and punitive or exemplary damages and
injunctive relief against the defendants.
While some of the defendants have answered the Complaint, none of them has filed
a counterclaim against us in this case. We are in settlement negotiations with
various defendants in this case. We do not believe we have any legal exposure in
this case.
17
CIRALIGHT GLOBAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
11. Legal Matters: (continued)
On January 14, 2010, we were served with process in two lawsuits, which we
deemed to frivolous. Both of these lawsuits was filed in the Superior Court of
the State of California for the County of Orange, Central Justice Center (Case
No. 30-2010, 00334139) ("Lawsuit A"). Lawsuit A is styled First Team Marketing
and Communications vs. Ciralight Global, Inc., Ciralight, Inc. and DOES 1-25.
Lawsuit A is a suit on an open book account in the amount of approximately
$62,000. We believe that this suit should have been brought against Ciralight,
Inc., a defunct corporation, with whom we have no affiliation or relationship.
The second of these lawsuits (Case No. 30-2010, 003344479) ("Lawsuit B") is
styled Greg Schmalz Consultants LLC vs. Ciralight Global, Inc., Ciralight, Inc.
and DOES 1-25. Lawsuit B is a suit on an open book account in the amount of
approximately $34,000. We believe this suit should have been brought against
Ciralight, Inc., a defunct corporation, with whom we have no affiliation or
relationship. We do not believe we have any exposure in either Lawsuit A or B.
Our legal counsel is in the process of filing demurrers and motions to strike
against both lawsuits.
12. Change in Officers and Directors:
On March 18, 2010, Randall Letcavage resigned as Chief Executive Officer,
President and a director of the Company in order to continue and concentrate on
his other businesses. Going forward, Mr. Letcavage will be available to assist
and contribute to the Company in a less demanding role.
On March 19, 2010, a majority of Company directors resolved to accept Randall
Letcavage's resignation as of March 18, 2010, appointed Jeffrey Brain to serve
as the Company's Chief Executive Officer and President in addition to his
existing positions of Chief Operating officer and Chief Financial Officer and
appointed Terry Adams a member of the Board of Directors of the Company at such
time as the Company obtains Director and Officer liability insurance. As of
March 23, 2009, Terry Adams is not a Director, since the insurance coverage has
not been obtained
13. Subsequent Events:
The Company has performed an evaluation of subsequent events in accordance with
ASC Topic 855. Other than the events noted below, the Company is not aware of
any subsequent events which would require recognition or disclosure in the
financial statements.
On October 5, 2010, 10,000 shares of the Company's common stock were issued for
cash, resulting from sales of our stock through a Private Placement Offering.
During October and November of 2010, the Company has continued to enter into
numerous Dealer Agreements with authorized dealers regarding the sale,
installation and servicing of our products.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY FORWARD - LOOKING STATEMENT
The following discussion should be read in conjunction with our financial
statements and related notes.
Certain matters discussed herein may contain forward-looking statements
that are subject to risks and uncertainties. Such risks and uncertainties
include, but are not limited to, the following:
* the volatile and competitive nature of our industry,
* the uncertainties surrounding the rapidly evolving markets in which we
compete,
* the uncertainties surrounding technological change of the industry,
* our dependence on its intellectual property rights,
* the success of marketing efforts by third parties,
* the changing demands of customers and
* the arrangements with present and future customers and third parties.
Should one or more of these risks or uncertainties materialize or should
any of the underlying assumptions prove incorrect, actual results of current and
future operations may vary materially from those anticipated.
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS AND FINANCIAL
CONDITION OF CIRALIGHT GLOBAL, INC., FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2010 (UNAUDITED), THE THREE MONTH PERIOD SEPTEMBER 30, 2009
(UNAUDITED) AND THE PERIOD FROM FEBRUARY 26, 2009 (INCEPTION) TO SEPTEMBER 30,
2010 (UNAUDITED), SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS,
AND THE NOTES TO THOSE FINANCIAL STATEMENTS THAT ARE INCLUDED IN ITEM 1
ELSEWHERE IN THIS FILING. REFERENCES TO "WE," "OUR," OR "US" IN THIS SECTION
REFERS TO THE COMPANY AND ITS SUBSIDIARIES. OUR DISCUSSION INCLUDES
FORWARD-LOOKING STATEMENTS BASED UPON CURRENT EXPECTATIONS THAT INVOLVE RISKS
AND UNCERTAINTIES, SUCH AS OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS.
ACTUAL RESULTS AND THE TIMING OF EVENTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF
FACTORS, INCLUDING THOSE SET FORTH UNDER THE RISK FACTORS, FORWARD-LOOKING
STATEMENTS AND BUSINESS SECTIONS IN THIS PROSPECTUS. WE USE WORDS SUCH AS
"ANTICIPATE," "ESTIMATE," "PLAN," "PROJECT," "CONTINUING," "ONGOING," "EXPECT,"
"BELIEVE," "INTEND," "MAY," "WILL," "SHOULD," "COULD," AND SIMILAR EXPRESSIONS
TO IDENTIFY FORWARD-LOOKING STATEMENTS.
OVERVIEW
We are a manufacturer and wholesaler of "advanced skylights" for use in
warehouses, schools, retail stores, airports, military installations and
residential buildings. We develop, market and sell the Suntracker One(TM) and
Suntracker Two(TM) units and we are currently marketing our advanced daylighting
system under the name Smart Skylight(TM).
We were incorporated in the state of Nevada on February 26, 2009, under the
name "Ciralight West, Inc." On March 13, 2009, we changed our name to "Ciralight
Global, Inc." In April 2009, we entered into an Exchange of Stock for Assets
Agreement with Mr. George Adams, Sr. to acquire certain assets including, but
not limited to, a United States patent, patent applications pending in Canada,
Europe, Mexico and the United States, artwork, trademarks, equipment, furniture,
databases, technical drawings, promotional materials, trade names and inventory
parts and marketing rights related to the Suntracker One(TM) and Suntracker
Two(TM) daylighting products previously owned and distributed by Ciralight,
Inc., a Utah corporation, such assets having been foreclosed on by Mr. Adams,
who was the secured creditor of Ciralight, Inc. We did not acquire any equity
securities, debts, liabilities or financial obligations of Ciralight, Inc., the
Prior Company. Ciralight, Inc. is a predecessor to Ciralight Global, Inc.,
although we have no affiliation, contractual or otherwise, with Ciralight, Inc.
or any of its employees, officers or directors. Ciralight, Inc. ceased
operations on January 27, 2009.
19
In April 2009, we acquired all of the above described assets from Mr.
Adams, except for the United States patent and the patent applications pending
in Canada, Europe, Mexico and the United States, in exchange for 3,200,000
shares of our common stock and 1,000,000 shares of our Series A Preferred Stock.
In December 2009, we acquired the United States patent and the patent
applications pending in Canada, Europe, Mexico and the United States from Mr.
Adams in exchange for the issuance by us of an additional 400,000 shares of our
common stock and a convertible promissory note in the amount of $250,000. The
promissory note we issued to Mr. Adams is convertible into shares of our common
stock at a conversion rate of one share per $.25 of outstanding principal and
interest. As a result of this transaction, Mr. Adams is our largest shareholder
and has voting control over us.
As described in the above paragraphs, Ciralight, Inc. is a predecessor to
Ciralight Global, Inc., since the major portion of the business and assets of
Ciralight, Inc. were acquired by Ciralight Global, Inc. in a series of related
successions in each of which the acquiring person or entity acquired the major
portion of the business and assets of Ciralight, Inc.
In order to raise working capital, we commenced a Private Placement
Offering in the amount of $800,000 in April 2009. Our common stock was offered
at a fixed price of $.25 per share. We raised the $800,000 by mid October 2009
and the investors purchased a 40% stake in the company for a total of 3,200,000
shares.
In October 2009, the Company elected to extend the private offering in
order to raise an additional $500,000 in working capital by offering 2,000,000
additional shares at $.25 per share. We raised the additional $500,000 by mid
January 2010, at which time the offering was closed.
As of the date of this 10-Q filing, we continue to add between one and
three new dealers for our patented, energy-saving Smart Skylights(TM) each week.
We recently contracted with Denver-based AIA Industries, Inc., a leader in
custom manufacture of quality plastic and structural glass skylights for
residential and commercial applications, to distribute Ciralight's sun-tracking
GPS Smart Skylights(TM) in addition to their own line of standard and circular
skylights. This is significant because AIA makes their own custom line of
skylights and decided to become a dealer for Ciralight because they feel that
our Smart Skylights(TM) technology is the future of eco-friendly, energy-saving,
natural light for businesses and homes.
We are concluding a strategic dealership agreement with Progressive
Roofing, a four-state, 8-office design/build and maintenance company responsible
for such projects as the Phoenix Cardinals Stadium in Glendale, AZ, the Palo
Verde Nuclear Plant in Tonopah, NV, Hartsfield Airport, Atlanta, GA, the Westin
Casuarina Resort in Grand Cayman, Bahamas, and many more trophy buildings.
Progressive has locations in California, Nevada, New Mexico and Texas, all
sunshine states, and for which installations of our Smart Skylights(TM) make the
most sense.
We also named Mexico City-based The Global Industry Solution, SA as an
authorized Ciralight Global dealer for Mexico, joining our other international
dealerships in Spain, El Salvador, Canada, South Korea, Turkey, Europe, Israel
and Denmark. We are currently in negotiations with companies in Japan,
Indonesia, Brazil, Columbia, China, Bolivia, Chili, and Poland.
Ciralight Global will exhibit its patented product line at "Greenbuild
2010", November 17-19, in booth 778 at McCormick Place West, Chicago, the
world's largest expo hall devoted to green building. Ciralight Global and The
Energy Solution Group, one of Ciralight's local dealers, will take part in
"Rethinking Energy Modeling: Incorporating Non-Traditional Approaches in
Simulations for Daylighting," as well as demonstrating the energy-saving
features of its Smart Skylights(TM). Other exhibitors include world famous
multinational corporations such as General Electric, BASF, Johnson Controls,
Georgia Pacific, the U.S. Department of Energy and the General Services
Administration. If you are in Chicago at that time, please stop by and see our
display.
The emphasis on energy-efficient "Green" buildings, maintenance and
sustainability make our Smart Skylights(TM) a very desirable addition when
architects and builders are planning new construction.
20
We are making good progress towards introducing our Smart Skylights(TM) for
homes, which, like our commercial Smart Skylights(TM), will be eligible to
receive federal, state and local tax credits and utility incentives as an Energy
Saving Green product. Our home Smart Skylights(TM) will deliver the same energy
saving benefits as our commercial Smart Skylights(TM), such as improved lighting
and improved health due to more natural light and reduced household utility
costs. Our 4'x8' Smart Skylight(TM), the Suntracker Three(TM), will begin
shipping within weeks and we are presently receiving orders for this new popular
addition to our product line.
We recently made a presentation to supervisors in a very populous U.S.
county, which when their decision is made, and if it is in our favor, could
result in a strong entry to our bottom line. We recently completed new
installations at the Columbus Zoo in Ohio, Market of Choice in Corvallis,
Oregon, Fanshawe College and Northern College in Canada, LG facilities in
Turkey, and Sahurita High School Gym and Riverside Elementary School in Arizona.
Next week we are shipping 48 of our Smart Skylights(TM), for a new Whole Foods
Market in Austin Texas and 27 for BD Biosciences in Northern California. We
continue to progress on dialogue we have had in the last few months with such
potential customers as the U.S. Army Corp of Engineers, City of Los Angeles
Mayor's Office, City of Los Angeles Building & Safety Department, California
Institute of Technology, American Honda Motor Co., U.S. Naval Facilities
Command, Toyota Motor Sales USA, Parsons Construction Co., Turner Construction
Company, Los Angeles Community Colleges District, Los Angeles Unified School
District, NASA, University of Alabama, Los Angeles County, and others.
Ciralight's existing customer base, such as certain locations of Giant
Foods, Office Depot, Ace Hardware, Emerson, Boeing, Johnson & Johnson, Staples,
Whole Foods, Walt Disney Studios, and others, continue to evaluate the results
they have achieved in lowering their costs of energy, and are in fact, either
adding more locations, or are in process of doing so.
Ciralight Global is the only global provider of active daylighting products
capable of turning off electric lights for up to 10 hours a day. Our energy
saving Smart Skylights(TM) use sun-tracking GPS technology and mirrors to track
the sun throughout the day and drive natural light into buildings. The result is
a bright, healthy, glare-free light, just as Nature intended. Unlike traditional
skylights, our Smart Skylights(TM) do not create the heat associated with normal
Skylights. Ciralight Global's flagship products, the Smart SunTrackerOne(TM) and
SunTrackerTwo(TM) skylights, are a solar powered lighting solution for
commercial buildings, schools, factories, public facilities and retail stores
looking to save energy. In addition to significant energy and cost savings, the
benefits from Smart Skylights(TM) are many including better worker performance,
increased sales, and a reduced impact on the environment. We are proud of our
Green energy saving products and services and are committed to producing and
selling the highest quality and most cost saving skylights. Every time Ciralight
Smart Skylights(TM) are installed on a building, it is a significant move toward
a greener planet.
RISKS, UNCERTAINTIES AND TRENDS RELATING TO THE COMPANY AND INDUSTRY
The industrial lighting industry is intensely competitive. We have numerous
competitors in the United States and elsewhere. Several of these competitors
have already successfully marketed and commercialized products that compete with
our products. Our success is dependent up our ability to effectively and
profitably produce, market and sell our products. Our business strategy and
success is dependent on the skills and knowledge of our management team and
consultants. The marketability and profitability of our products is subject to
unknown economic conditions, which could significantly impact our business,
financial condition, the marketability of our products and our profitability. We
are vulnerable to the current economic crisis which may negatively affect our
profitability. Our success depends, in part, on the quality of our products.
Our Smart Skylight(TM) products provide natural daylighting that is a key
component in many current construction and existing structures. Smart
Skylights(TM) are maintenance free, powered by the sun and completely
self-contained. We are currently marketing our Smart Skylight(TM) products to
warehouse owners, roofing companies, shopping centers, schools and military
installations in the United States. We are working on establishing sales in
Canada, Mexico and overseas. The market for advanced skylights is growing year
over year due to pressures on building owners, tenants, schools and government
agencies to reduce energy consumption and expense. The "green" movement, carbon
footprint ideology and other environmental initiatives should provide increased
growth in our market segment.
21
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our management's discussion and analysis of our financial condition and
results of operations are based on our condensed financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires us
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our estimates and
assumptions. We base our estimates on historical experience and on various other
factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note
3 to our financial statements, we believe that the following accounting policies
are the most critical to aid the reader in fully understanding and evaluating
this discussion and analysis:
BASIS OF PRESENTATION - The accompanying financial statements have been
prepared in accordance with generally accepted accounting principles for
financial information and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission for smaller reporting
companies. In the opinion of management, all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the results of
operations of the Company for the Three and Nine Month Periods Ended September
30, 2010 (Unaudited), the Three Month Period Ended September 30, 2009
(Unaudited) and for the Period from February 26, 2009 (inception) to September
30, 2009 (Unaudited), have been reflected herein.
INVENTORIES - Inventories, consisting primarily of finished skylight units
and parts for sale, are recorded using the average cost method. Inventory
acquired from the prior company was booked at the historical cost of the prior
company.
REVENUE RECOGNITION - Revenue on our skylights and parts are recognized
when the units or parts ship to the customer.
EARNINGS PER SHARE - Earnings per share is computed in accordance with the
provisions of Financial Accounting Standards (FASB) Accounting Standards
Codification (ASC) Topic 260 (SFAS No. 128, "EARNINGS PER Share"). Basic net
income (loss) per share is computed using the weighted-average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted-average number of common shares outstanding during the
period, as adjusted for the dilutive effect of the Company's outstanding
convertible preferred shares using the "if converted" method and dilutive
potential common shares. Potentially dilutive securities include warrants,
convertible preferred stock, restricted shares, and contingently issuable
shares.
STOCK-BASED COMPENSATION - The Company accounts for stock-based
compensation under the provisions of FASB ASC 718 (Statement of Financial
Accounting Standards No. 123 (revised 2004), "SHARE-BASED PAYMENT"), which
requires the Company to measure the stock-based compensation costs of
share-based compensation arrangements based on the grant date fair value and
generally recognizes the costs in the financial statements over the employee's
requisite service period. Stock-based compensation expense for all stock-based
compensation awards granted was based on the grant date fair value estimated in
accordance with the provisions of FASB ASC 718.
SHIPPING AND HANDLING COSTS - The Company includes shipping and handling
costs that are billed to our customers in revenue and the actual costs incurred
for shipping and handling are included in cost of goods sold in accordance with
the provisions of FASB ASC 605-45-45-20. The related costs are considered
necessary to complete the revenue cycle.
WARRANTY COSTS - Commencing April 1, 2009, the Company provided a five-year
warranty covering the labor and materials associated with its installations.
Effective September 1, 2009, the Company changed the coverage to ten years in
the U.S. The Company's "advanced skylights" are warranted by the manufacturer
22
for 10 years, generally. The Company (at its option) will repair, replace or
give credit for the original purchase price on any of its products or parts. An
accrual for a loss contingency has been made, since warranty expenses to date
have been consistent and a reasonable estimate of future expenses can be made,
in accordance with FASB ASC 460-10-50-8 (c).
COMPREHENSIVE INCOME (LOSS) - FASB ASC Topic 220 (Statement of Financial
Accounting Standards No. 130, "REPORTING COMPREHENSIVE INCOME") establishes
standards for reporting comprehensive income (loss) and its components in a
financial statement that is displayed with the same prominence as other
financial statements. Comprehensive income (loss), as defined, includes all
changes in equity during the period from non-owner sources, such as foreign
currency translation adjustments.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2009, the FASB issued FASB ASC 825-10-50 and FASB ASC 270 ("FSP
107-1 AND APB 28-1 INTERIM DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL
INSTRUMENTS"), which increases the frequency of fair value disclosures to a
quarterly basis instead of on an annual basis. The guidance relates to fair
value disclosures for any financial instruments that are not currently reflected
on an entity's balance sheet at fair value. FASB ASC 825-10-50 and FASB ASC 270
are effective for interim and annual periods ending after June 15, 2009. The
adoption of FASB ASC 825-10-50 and FASB ASC 270 did not have a material impact
on results of operations, cash flows, or financial position
In May 2009, the FASB issued FASB ASC 470 (Staff Position No. APB 14-1
"ACCOUNTING FOR CONVERTIBLE DEBT INSTRUMENTS THAT MAY BE SETTLED IN CASH UPON
CONVERSION (INCLUDING PARTIAL CASH SETTLEMENT)"). FASB ASC 470 clarifies that
convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) are not addressed by FASB ASC 470-20-65-1
(paragraph 12 of APB Opinion No. 14, "ACCOUNTING FOR CONVERTIBLE DEBT AND DEBT
ISSUED WITH STOCK PURCHASE WARRANTS"). Additionally, FASB ASC 470 specifies that
issuers of such instruments should separately account for the liability and
equity components in a manner that will reflect the entity's nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. FASB ASC
470 is effective for financial statements issued for fiscal years beginning
after December 15, 2008 and interim periods within those fiscal years. The
adoption of FASB ASC 470 did not have an effect on our consolidated financial
statements.
In May 2009, the FASB issued FASB ASC 855 (SFAS No. 165, "SUBSEQUENT
EVENTS"), which establishes general standards of accounting for and disclosure
of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. In particular, FASB ASC 855
sets forth (a) the period after the balance sheet date during which management
of a reporting entity should evaluate events or transactions that may occur for
potential recognition or disclosure in the financial statements, (b) the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and (c) the
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. FASB ASC 855 is effective for interim or
annual financial reporting periods ending after June 15, 2009. The adoption of
FASB ASC 855 did not have an impact on results of operations, cash flows, or
financial position.
In June 2009, the FASB issued FASB ASC 810 (SFAS No. 167, "AMENDMENTS TO
FASB INTERPRETATION NO. 46(R)"). FASB ASC 810 applies to FASB ASC 105 entities
and is effective for annual financial periods beginning after November 15, 2009
and for interim periods within those years. Earlier application is prohibited. A
calendar year-end company must adopt this statement as of January 1, 2010. The
Company does not anticipate the adoption of FASB ASC 810 to have a material
impact on results of operations, cash flows, or financial position.
In June 2009, the FASB issued FASB ASC 860 (SFAS No. 166, "ACCOUNTING FOR
TRANSFERS OF FINANCIAL ASSETS-AN AMENDMENT OF FASB STATEMENT NO. 140"). FASB ASC
860 applies to all entities and is effective for annual financial periods
beginning after November 15, 2009 and for interim periods within those years.
Earlier application is prohibited. A calendar year-end company must adopt this
statement as of January 1, 2010. This statement retains many of the criteria of
FASB ASC 860 (FASB 140, "ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL
ASSETS AND EXTINGUISHMENTS OF LIABILITIES") to determine whether a transfer of
financial assets qualifies for sale accounting, but there are some significant
changes as discussed in the statement. Its disclosure and measurement
requirements apply to all transfers of financial assets occurring on or after
the effective date. Its disclosure requirements, however, apply to transfers
that occurred BOTH before and after the effective date. In addition, because
FASB ASC 860 eliminates the consolidation exemption for Qualifying Special
Purpose Entities, a company will have to analyze all existing QSPEs to determine
whether they must be consolidated under FASB ASC 810. The Company does not
anticipate the adoption of FASB ASC 860 to have a material impact on results of
operations, cash flows, or financial position.
23
In August 2009, the FASB issued ASU 2009-05, "MEASURING LIABILITIES AT FAIR
VALUE." ASU 2009-05 applies to all entities that measure liabilities at fair
value within the scope of FASB ASC 820, "FAIR VALUE MEASUREMENTS AND
DISCLOSURES." ASU 2009-05 is effective for the first reporting period (including
interim periods) beginning after issuance, October 1, 2009, for the Company. The
Company does not anticipate the adoption of ASU 2009-05 to have a material
impact on results of operations, cash flows, or financial position.
In October 2009, the FASB ratified FASB ASC 605-25 (the EITF's final
consensus on Issue 08-1, "REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES").
FASB ASC 605-25 is effective for fiscal years beginning on or after June 15,
2010. Earlier adoption is permitted on a prospective or retrospective basis. The
Company is currently evaluating the impact of this pronouncement on its
consolidated financial statements.
COMPARISON OF THE THREE MONTH PERIODS ENDED SEPTEMBER 30, 2010 AND 2009
NET SALES. Net sales for the three months ended September 30, 2010 were
$205,189 compared to net sales of $311,342 for the three months ended September
30, 2009. While raising capital and redesigning our products, we have
accumulated a substantial amount of orders. These orders will begin to be
shipped as we commence filling the back orders.
Sales and demand for our products have been increasing each quarter. While
implementing efficiencies, our gross profit was $21,828 for the three months
ended September 30, 2010 compared to $75,105 for the three months ended
September 30, 2009.
COST OF SALES. Cost of sales for the three months ended September 30, 2010
was $183,361 on net revenue of $205,189, representing 89%, and providing a gross
profit of 11%. Cost of sales for the three months ended September 30, 2009 was
$236,237 on net revenue of $311,342, representing 76%, and providing a gross
profit of 24%.
Cost of sales will begin to decrease each quarter due to the changes we
implemented in the business operations. These included stricter controls over
the movement of inventory to reduce losses, damage, and waste, making
improvements to the products in order to reduce warranty work, implementing cost
effective shipping options available through better pre-planning and scheduling,
managing inventory levels by scheduling production to match demand forecasts,
changing to more quality oriented suppliers, negotiating more favorable
manufacturing agreements, and implementing cost reducing design changes.
GROSS PROFIT. Gross profit for the three months ended September 30, 2010
was $21,828, providing a gross profit margin of 11%. Gross profit for the three
months ended September 30, 2009 was $75,105, providing a gross profit margin of
24%.
During 2009, in an effort to address issues experienced by customers that
purchased product from the prior company, Ciralight, Inc., we sold replacement
parts or parts that had been purchased, but never shipped to old customers, at
our cost. Our gross profit increased, even though we sold product at cost in
order to resolve past issues from the prior company. All of the open issues and
problems reported by former customers have been resolved. With the elimination
of resolution of past issues, continued product enhancements and refinements to
our production process, we anticipate higher gross profit margins in the future.
OPERATING EXPENSES. Our operating expenses consist of research and
development expenses, selling and marketing expenses and general and
administrative expenses. For the three months ended September 30, 2010 and 2009,
total operating expenses were $288,862 and $301,043, respectively. As a
percentage of sales, operating expenses were approximately 140% for the three
months ended September 30, 2010.
Reduced operating expenses will result from a number of changes in the
manner in which the business was operated. In 2009 our Company operated with
only four employees and outsourced required additional services on an as needed
basis. No employees from the prior company were employed or brought over to our
Company. They were not part of the rights we acquired and this has created a
culture of efficiency and accountability. We eliminated the practice of having
consultants and sales people on retainers. Compensation is tied to work
completed. We elected not to directly hire sales personnel and instead require
24
that they work for third party dealers and distributors, thus reducing the
overhead cost of carrying and supporting an extended staff.
Additional expense reductions are attributable to our occupancy expenses.
During the three months ended September 30, 2010, our occupancy expenses were
$9,598 for our offices and warehouse.
INCOME TAXES. For the three months ended September 30, 2010, management has
decided not to record the tax benefit.
COMPARISON OF THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2010 AND THE PERIOD FROM
FEBRUARY 26, 2009 (INCEPTION) TO SEPTEMBER 30, 2009
NET SALES. Net sales for the nine month period ended September 30, 2010
were $614,182 compared to $520,761 for the period from February 26, 2009
(inception) to September 30, 2009.
Low sales have been attributable to the transition time required for our
Company to move, setup and commence the new operations, set up our sales force,
as well as address former company customer, investor and supplier issues, raise
our working capital, and a self-imposed 60 day period, during which we refrained
from making new sales while product improvements were being completed. As a
result of the efficiencies we implemented, our gross profit was $206,660 for the
nine month period ended September 30, 2010 compared to $118,579 for the period
from February 26, 2009 (inception) to September 30, 2009.
COST OF SALES. Cost of sales for the nine month period ended September 30,
2010 was $407,522 on net revenue of $614,182, representing 66%, and providing a
gross profit of 34% compared to the period from February 26, 2009 (inception) to
September 30, 2009 in which cost of sales was $402,182 on net sales of $520,761,
representing 77%, and providing a gross profit of 23%.
Reducing cost of sales was achieved by implementing a number of changes in
the business operations. These included stricter controls over the movement of
inventory to reduce losses, damage, and waste, making improvements to the
products in order to reduce warranty work, implementing cost effective shipping
options available through better pre-planning and scheduling, managing inventory
levels by scheduling production to match demand forecasts, changing to more
quality oriented suppliers, negotiating more favorable manufacturing agreements,
and implementing cost reducing design changes.
GROSS PROFIT. Gross profit for the nine month period ended September 30,
2010 was $206,660, providing a gross profit margin of 34% compared to gross
profit for period from February 26, 2009 (inception) to September 30, 2009 of
$118,579, providing a gross profit margin of 23%.
During 2009 and 2010, in an effort to address issues experienced by
customers that purchased product from the prior company, Ciralight, Inc., we
sold replacement parts or parts that had been purchased, but never shipped to
old customers, at our cost. Our gross profit increased, even though we sold
product at cost in order to resolve past issues from the prior company. All of
the open issues and problems reported by former customers have been resolved.
With the elimination of resolution of past issues, continued product
enhancements and refinements to our production process, we anticipate higher
gross profit margins in the future.
OPERATING EXPENSES. Our operating expenses consist of research and
development expenses, selling and marketing expenses and general and
administrative expenses. For the nine month period ended September 30, 2010,
total operating expenses were $898,057; as a percentage of sales, operating
expenses were approximately 146%. For the period from February 26, 2009
(inception) to September 30, 2009, total operating expenses were $410,615; as a
percentage of sales, operating expenses were approximately 79%.
Reduced operating expenses will result from a number of changes in the
manner in which the business was operated. In 2009 our Company operated with
only four employees and outsourced required additional services on an as needed
basis. No employees from the prior company were employed or brought over to our
Company. They were not part of the rights we acquired and this has created a
25
culture of efficiency and accountability. We eliminated the practice of having
consultants and sales people on retainers. Compensation is tied to work
completed. We elected not to directly hire sales personnel and instead require
that they work for third party dealers and distributors, thus reducing the
overhead cost of carrying and supporting an extended staff.
INCOME TAXES. For the nine month period ended September 30, 2010,
management has decided not to record the tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS - FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2010 and FOR THE
PERIOD FROM FEBRUARY 26, 2009 (INCEPTION) TO SEPTEMBER 30, 2009.
Net cash used in operating activities was $354,604 and $570,085 for the
nine month period ended September 30, 2010 and for the period from February 26,
2009 (inception) to September 30, 2009, respectively. Net cash used in operating
activities the nine months ended September 30, 2010 was attributable primarily
to an increase in inventory and decreases in other payables for the period. Net
cash used in operating activities for the period from February 26, 2009
(inception) to September 30, 2009, was attributable to increases in inventory,
accounts receivable and prepaid expenses.
There was no net cash used in investing activities for the nine month
period ended September 30, 2010 and for the period from February 26, 2009
(inception) to September 30, 2009, net cash used in investing activities was
$3,500 as a result of the acquisition of the business assets.
Net cash provided by financing activities was $137,421 and $763,015 for the
nine month period ended September 30, 2010 and for the period from February 26,
2009 (inception) to September 30, 2009, respectively. Net cash provided by
financing activities for both periods was attributable to sales of the Company's
common stock through a private offering and from the issuance of related party
notes.
MATERIAL IMPACT OF KNOWN EVENTS ON LIQUIDITY
The disruption in the credit markets has had a significant adverse impact
on a number of financial institutions. As of September 30, 2010, however, our
liquidity and capital investments have not been materially adversely impacted,
and we believe that they will not be materially adversely impacted in the near
future. We will continue to closely monitor our liquidity and the credit
markets. We cannot, however, predict with any certainty the impact to us of any
further disruption in the credit environment.
There are no other known events that are expected to have a material impact
on our short-term or long-term liquidity.
CAPITAL RESOURCES
We have financed our operations primarily through cash flows from
operations and debt and equity financings. We commenced a private placement
offering in the amount of $800,000 in April 2009. Our common stock was offered
at a fixed price of $.25 per share. We raised the $800,000 by mid October 2009
and the investors purchased a 40% stake in the company for a total of 3,200,000
shares.
In October 2009, the Company elected to extend the private offering in
order to raise an additional $500,000 in working capital by offering 2,000,000
additional shares at $.25 per share. We raised the additional $500,000 by mid
January 2010, at which time the offering was closed.
We believe that our current cash and cash equivalents and anticipated cash
flow from operations will be sufficient to meet our anticipated cash needs,
including our cash needs for working capital and capital expenditures, for at
least the next six months.
26
While we would like to grow our business with our cash flow, a robust
increase in orders for our products, delays in collection of our accounts
receivable and/or the occurrance of unforeseen expenses would likely necessitate
our continuing our capital raising transaction into the first quarter of 2011.
We may also seek to raise additional cash to fund future investments or
acquisitions we may decide to pursue. To the extent it becomes necessary to
raise additional cash in the future, we may seek to raise it through the sale of
debt or equity securities, funding from joint-venture or strategic partners,
debt financing or loans, issuance of common stock, or a combination of the
foregoing. We are currently raising capital through a private placement
memorandum. However we reserve the right to raise additional capital in the
future in which case the percentage ownership of our shareholders would be
diluted. We cannot provide any assurances that we will be able to secure the
additional cash or working capital we may require to continue our operations.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
CONTRACTUAL OBLIGATIONS
We have certain fixed contractual obligations and commitments that include
future estimated payments. Changes in our business needs, cancellation
provisions, changing interest rates, and other factors may result in actual
payments differing from the estimates. We cannot provide certainty regarding the
timing and amounts of payments. We have presented below a summary of the most
significant assumptions used in our determination of amounts presented in the
tables, in order to assist in the review of this information within the context
of our consolidated financial position, results of operations, and cash flows.
The following table summarizes our contractual obligations as of September
30, 2010, and the effect these obligations are expected to have on our liquidity
and cash flows in future periods.
Payments Due by Period
------------------------------------------------
Less than
Total 1 year 1-3 Years 3-5 Years 5 years +
----- ------ --------- --------- ---------
Contractual Obligations:
Convertible note payable $ 25,000 $ -- $ 25,000 $ -- $ --
Interest Payments (1) 2,625 -- 2,625 -- --
Advance payable 15,000 15,000 -- -- --
Operating Leases 37,800 37,800 -- -- --
Services Agreement 13,680 13,680
Commitments to Purchase Inventory 56,462 56,462 -- -- --
-------- -------- -------- ------- ------
Totals: $150,647 $123,022 $ 27,625 $ -- $ --
======== ======== ======== ======= ======
- ----------
(1) The one convertible note payable is due on or before December 15, 2012,
bears interest at the rate of Prime Rate (as quoted in the Wall Street
Journal) plus 2% per annum and estimated interest payment is expected to be
paid upon payment or satisfaction of the note..
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any other financial guarantees or other
commitments to guarantee the payment obligations of any third parties. We have
not entered into any derivative contracts that are indexed to our shares and
classified as stockholders' equity or that are not reflected in our financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable.
ITEM 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
We conducted an evaluation under the supervision and with the participation
of our management, including Jeffrey S. Brain, our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. The term "disclosure controls and
procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
and Exchange Act of 1934, as amended ("Exchange Act"), means controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by the company in the reports it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures also include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company's management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate, to allow timely decisions regarding required
disclosure. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded as of December 31, 2009, and again as of September
30, 2010, that our disclosure controls and procedures have been improved and
were maintained effectively at the reasonable assurance level in our internal
controls over financial reporting discussed immediately below.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. Our internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those policies and procedures
that:
(1) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of our
assets;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with U.S. GAAP, and that our receipts and expenditures are being made
only in accordance with the authorization of our management and
directors; and
(3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2009, and again at September 30, 2010. In
making this assessment, management used the framework set forth in the report
entitled Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework
summarizes each of the components of a company's internal control system,
including (i) the control environment, (ii) risk assessment, (iii) control
activities, (iv) information and communication, and (v) monitoring. This annual
report does not include an attestation report of our registered public
28
accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permits us to provide only management's report in this annual
report.
IDENTIFIED MATERIAL WEAKNESSES AND SIGNIFICANT DEFICIENCIES
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the financial statements will not be prevented or detected.
Management identified the following internal control deficiency which we had
assessed as a material weakness as of September 30, 2010, March 31, 2010 and
December 31, 2009 during its assessment of our internal control over financial
reporting as follows:
1. We did not have adequate segregation of duties over certain areas of
our financial reporting process.
The internal control deficiency identified above will only be completely
corrected if the company expands and has the capacity to adequately segregate
the duties to mitigate risk in financial reporting. Expansion will depend mostly
on the ability of management to begin operations and generate enough income to
warrant growth in personnel.
We did not have effective comprehensive entity-level internal controls
specific to the structure of our board of directors and organization of critical
committees. Due to our expected expansion, as disclosed in this Form 10-Q,
without correcting this significant deficiency and ensuring that our board of
directors has the proper oversight and committees are properly established, the
control environment in subsequent years may not be effective.
We had engaged a regionally-recognized independent consulting firm assisted
management with its assessment of the effectiveness of our internal control over
financial reporting, including scope determination, planning, staffing,
documentation, testing, remediation and retesting and overall program management
of the assessment project. In conclusion, our Chief Executive Officer and Chief
Financial Officer surmised that the Company has improved the effective internal
control over financial reporting as of September 30, 2010.
MANAGEMENT'S REMEDIATION INITIATIVES
We are in the further process of evaluating our material and significant
deficiencies. We have already begun to remediate many of the deficiencies.
However, others will require additional people, including adding to our board of
directors, which will take longer to remediate.
In an effort to remediate the identified material weaknesses and other
deficiencies and enhance our internal controls, we have initiated, or plan to
initiate, the following series of measures:
1. Identify and retain one or two new directors for our board of
directors including a member who is appropriately credentialed as a
financial expert with a goal of having sufficient independent board of
directors oversight;
2. Ensure all entity level controls are applied at all levels of the
organization and are scalable for acquisition or merge targets;
3. Establish comprehensive formal general accounting policies and
procedures and require directors or employees to sign off such
policies and procedures as documentation of their understanding of and
compliance with company policies;
29
4. Make all directors or employees subject to our Code of Ethics
(including those employees in acquisition targets) and require all
employees and directors to sign our Code of Ethics on an annual basis
and retain the related documentation; and,
5. Implement better segregation of duties given the size of our company.
We believe that the above five initiatives had been at least partially, if
not fully, implemented by September 30, 2010. Additionally, we plan to test our
updated controls and remediate our deficiencies by December 31, 2010.
CONCLUSION
The above identified improvement, material weaknesses and deficiency did
not result in material audit adjustments to our 2010 financial statements.
However, it is reasonably possible that, if not re-mediated, one or more of the
identified material weaknesses noted above could result in a material
misstatement in our reported financial statements that might result in a
material misstatement in a future annual or interim period.
In light of the identified material weaknesses, management, performed (1)
significant additional substantive review of those areas described above, and
(2) performed additional analyses, including but not limited to a detailed
balance sheet and statement of operations analytical review that compared
changes from the prior period's financial statements and analyzed all
significant differences. These procedures were completed so management could
gain assurance that the financial statements and schedules included in this Form
10-Q fairly present in all material respects the Company's financial position,
results of operations and cash flows for the periods presented.
The changes noted above, are the only changes during our most recently
completed fiscal quarter that have materially affected or are reasonably likely
to materially affect, our internal control over financial reporting, as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.
On July 29, 2010, the Company's Form S-1 Registration Statement was
declared effective by the Securities and Exchange Commission, thus we have not
been required to include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's reports have not been subject to attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in its Annual Report.
(b) Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2010, we did not make any changes in
Internal Control over Financial Reporting.
30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On October 15, 2009, we filed a lawsuit in the Superior Court of the State
of California for the County of Orange, Central Justice Center (Case No.
30-2009, 00314998) ("Complaint") against Jacque Stevens, Rex Miller, A-1
Daylighting, Consultech, Daylight Specialist and DOES 1-25. The Complaint
includes five causes of action by us against the defendants: Tortious
Interference with Contract, Commercial Disparagement, Conspiracy, Breach of
Contract, Unfair Business Practices and Libel. The Complaint alleges that we
entered into a nondisclosure agreement as part of an agreement to work toward
completing a joint venture/private label of our solar lighting systems with
Firestone Building Products and that defendants attempted to interfere with our
business relationship with Firestone Building Products by disparaging our
products (misrepresentations regarding prior sales, installations and quality of
service and that we provided or substituted defective or improper parts in our
products). We are seeking general, special and punitive or exemplary damages and
injunctive relief against the defendants.
While some of the defendants have answered the Complaint, none of them has
filed a counterclaim against us in this case. We do not believe we have any
legal exposure in this case.
The Company is not aware of any other threatened or pending litigation
against the Company.
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the quarter ended September 30, 2010, the Company issued the
following unregistered shares of Common Stock:
Number of Aggregate Nature of
Date of Issue Shares Issued Sales Price Transaction
------------- ------------- ----------- -----------
8/24/2010 1,000 $ 1,000 Cash purchase
9/8/2010 5,000 $ 5,000 Cash purchase
8/24/2010 1,000 $ 1,000 Cash purchase
9/24/2010 5,000 $ 5,000 Cash purchase
9/29/2010 1,243,224 $ 310,806 Debt conversion
9/29/2010 309,184 $ 77,296 Debt conversion
10/5/2010 10,000 $ 10,000 Cash purchase
Management believes the above shares of Common Stock that were issued
pursuant upon conversion of two outstanding convertible notes were exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended.
Management believes the above shares of Common Stock that were issued for cash
were exempt from registration pursuant to the exemption from registration under
Regulation D, Rule 506 of the Securities Act of 1933, as amended. No broker or
underwriter was involved in any of the above transactions. The proceeds from the
cash sales are being used for working capital.
31
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
See Exhibit Index below for exhibits required by Item 601 of regulation
S-K.
32
EXHIBIT INDEX
List of Exhibits attached or incorporated by reference pursuant to Item 601
of Regulation S-K:
Exhibit No. Description
- ----------- -----------
3(i).1* Articles of Incorporation of Ciralight West, Inc. filed February 26,
2009, with the Secretary of State of Nevada
3(i).2* Certificate of Amendment to the Articles of Incorporation filed on
March 13, 2009, with the Secretary of State of Nevada (changing name
to Ciralight Global, Inc.).
3(i).3* Certificate of Amendment to the Articles of Incorporation filed on
April 22, 2009, with the Secretary of State of Nevada.
3(ii)* By-Laws of Ciralight Global, Inc.
4.1* $250,000 Prime Rate Plus 2% Convertible Note Due 2012 payable to
George Adams, Sr.
4.2* Certificate of Designation of Series A Preferred Stock filed on July
22, 2009, with the Secretary of State of Nevada
4.3* Ciralight Global, Inc. Certificate of Common Stock (Specimen)
4.4* $48,507.29 Prime Rate Plus 2% Convertible Note Due 2012 payable to
Frederick Feck
4.5* $73,788.00 Prime Rate Plus 2% Convertible Note Due 2012 payable to
Terry Adams
4.6* Stock Subscription Agreement (unsigned and undated prototype)
10.1* Exchange of Stock for Assets Agreement dated as of April 1, 2009, by
and between Ciralight Global, Inc. and George Adams, Sr.
10.2* Amendment to Exchange of Stock for Assets Agreement by and between
Ciralight Global, Inc. and George Adams, Sr. dated December 15,
2009.
10.3* Assignment of Issued United States Patent and Pending United States
Patent Application dated December 17, 2009
10.4* Domestic Non-Exclusive Dealer Agreement (undated and unsigned
prototype)
10.5* Domestic Non-Exclusive Distribution Agreement (undated and unsigned
prototype)
10.6* Domestic Non-Exclusive Dealer Agreement by and between Ciralight
Global, Inc. and Globalight Energy Solutions, LLC dated as of
December 1, 2009
10.7* Domestic Non-Exclusive Dealer Agreement by and between Ciralight
Global, Inc. and Chaparral Green Energy Solutions, LLC dated as of
January 1, 2010
10.8* Promissory Note in the principal amount of $69,865.00 dated January
15, 2010 from Randall Letcavage payable to Ciralight Global, Inc.
33
10.9* Assumption of the Financial Consulting Agreement - Memorandum of
Understanding by and between Ciralight Global, Inc. and iCapital
Finance, Inc. dated April 20,2009
10.10* Promissory Note and Security Agreement in the principal amount of
$69,865 dated March 20, 2010 from Randall Letcavage payable to
Ciralight Global, Inc. (in replacement of Promissory Note attached
as Exhibit 10.8).
10.11* Domestic Non-Exclusive Dealer Agreement dated December 1, 2009, by
and between Ciralight Global, Inc. and Green Tech Design-Build, Inc.
10.12* International Distribution Agreement dated January 15, 2010, by and
between Ciralight Global, Inc. and ZEEV Shimon & Sons, Ltd.
10.13* International Dealership Agreement dated June 18, 2009, by and
between Ciralight Global, Inc. and RSB Construction LTD.
10.14* Domestic Non-Exclusive Dealer Agreement dated April 1, 2010, by and
between Ciralight Global, Inc. and J-MACS Consulting, LLC.
10.15* Domestic Non-Exclusive Dealer Agreement dated April 15, 2010, by and
between Ciralight Global, Inc. and The Energy Solutions Group
Worldwide, LLC.
10.16* Domestic Non-Exclusive Dealer Agreement dated April 15, 2010, by and
between Ciralight Global, Inc. and Kemper & Associates, Inc., d/b/a
Total Roofing & Reconstruction.
10.17* Domestic Non-Exclusive Dealer Agreement dated December 1, 2009, by
and between Ciralight Global, Inc. and Eco-Smart, Inc.
10.18* Commercial Lease Agreement dated April 1, 2010, by and between
Ciralight Global, Inc. and Frederick Feck.
10.19* Material Liability Agreement dated September 3, 2009, by and between
Ciralight Global, Inc. and Suntron Corporation.
10.20* Material Terms and Conditions of Verbal Office Lease for Executive
Offices in Irvine, California.
10.21* Material Terms and Conditions of Verbal Office Lease for
Warehouse/Offices in Corona, California
14* Code of Business Conduct and Ethics
21* Subsidiaries.
31.1** Certification under Section 302 of Sarbanes-Oxley Act of 2002.
32.1** Certification under Section 906 of Sarbanes-Oxley Act of 2002.
- ----------
* Exhibits incorporated by reference to Registrant's Form S-1 Registration
Statement, Registration No. 333-165638.
** Filed herewith.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
CIRALIGHT GLOBAL, INC.
Date: November 12, 2010 /s/ Jeffrey S. Brain
--------------------------------------------
Jeffrey S. Brain
President, Chief Executive Officer and Chief
Financial Officer (Principal Accounting,
Executive and Financial Officer)
35