This annual report on Form 10-K, press releases and certain information
provided periodically in writing or verbally by our officers or our agents contain statements which constitute forward-looking
statements. The words “may”, “would”, “could”, “will”, “expect”, “estimate”,
“anticipate”, “believe”, “intend”, “plan”, “goal”, and similar expressions
and variations thereof are intended to specifically identify forward-looking statements. These statements appear in a number of
places in this Form 10-K and include all statements that are not statements of historical fact regarding the intent, belief or
current expectations of us, our directors or our officers, with respect to, among other things: (i) our liquidity and capital resources,
(ii) our financing opportunities and plans, (iii) our ability to attract customers to generate revenues, (iv) competition in our
business segment, (v) market and other trends affecting our future financial condition or results of operations, (vi) our growth
strategy and operating strategy, and (vii) the declaration and/or payment of dividends.
Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results
may differ materially from those projected in the forward-looking statements as a result of various factors. Factors that might
cause such differences include, among others, those set forth in Part II, Item 7 of this annual report on Form 10-K, entitled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”, and including without limitation the “Risk
Factors” section contained in Part I, Item 1A. Except as required by law, we undertake no obligation to update any of the
forward-looking statements in this annual report on Form 10-K after the date hereof.
Readers of this annual report on Form 10-K should note that, in
order to provide materially relevant disclosure regarding certain of Findex’s historical, operational expenses not otherwise
appropriately accounted for in our consolidated financial statements given the applied accounting treatment described elsewhere
in this annual report on Form 10-K, certain disclosure is contained in the text of this report relating to such expenses, including
e.g.
executive compensation, director compensation, and audit fees, that does not numerically align with the corresponding
figures contained in our consolidated financial statements.
OVERVIEW
Findex.com, Inc. is headquartered
in Lake Park, Florida with its base of business operations co-located in the same facility. The Company is currently comprised
of two operating companies, EcoSmart Surface & Coating Technologies, Inc., a Florida corporation (“EcoSmart”),
and Advanced Cement Sciences, LLC (formerly Advanced Nanofibers, LLC), a Florida limited liability company (“ACS”).
Although up until December 2018, ACS had been only partially owned by us (a minority 31.05%), as of December 2018, both entities
are now our wholly-owned subsidiaries. EcoSmart has historically been the driver of both operating overhead and revenue. It was
acquired by us in a merger in 2014 and centers around a proprietary line of specialty surface coatings that have a broad range
of value-adding industrial, commercial, residential and consumer applications. With a line of products carrying the brand name
“EcoSmart,” both the business unit (as distinct from the corporate subsidiary in which it is housed) and the line of
products itself are currently in the process of being re-branded under the name “RexPro (Sealers and Coatings),
”
which is how it is referred to hereinafter throughout this Annual Report on Form 10-K. A recent
material development in the RexPro business plan is an extension, currently underway but only in the earliest of stages, to vertically
integrate its interior flooring and exterior hardscape coatings products business with a service business focused on the applications
of those products. ACS is a Florida-based, engineered cement technology and products firm founded in mid-2016 and currently focused
on developing and commercializing a line of proprietary admixtures to be used in the production of ultra-lightweight, high-strength
concrete and high-performance stucco. Despite its lack of material revenue to date, ACS is a venture that our management had been
very actively involved in developing since 2016 and into which we have invested significantly, but that, due to a lack of available
company financial resources coupled with ACS’s lack of near-term prospects for generating material revenue, has been the
subject in recent months of considerably reduced allocations of our available capital and human resources, a trend we expect to
continue unless and until our financial condition substantially improves.
REXPRO ADVANCED COATINGS
Our RexPro advanced coatings division, currently our core business
and expected to remain so for the indefinite future, centers around a portfolio of cutting-edge chemistry technologies that we
acquired in 2014 as part of the merger with EcoSmart and have since further developed. The formulations and related trade secrets
comprising these base coating technologies have restorative and protective value-adding application across a wide variety of industries
and products. Among others, these include the following:
|
▪
|
HVAC Units and Related Peripheral Equipment
|
|
▪
|
Automobiles and Motorcycles
|
|
▪
|
Boats and Other Marine Vessels
|
|
▪
|
Heavy Truck and Construction Equipment
|
|
▪
|
Oil, Gas & Mining Infrastructure
|
|
▪
|
Interior Flooring and Exterior Hardscape Surface Products
|
Broadly viewed, the surface is an integral aspect of virtually every
physical object and often plays a fundamental role in many of the processes, beyond mere connectivity and structural support, that
govern chemical and biological interactions involving the product. In some instances, the surface serves to protect the internal
elements of the object that it surrounds; in others, it provides an entry point into those chemical or biological systems. In most,
combinations of these attributes are present, and the potential variations are both vast in number and complex in structure.
Our specialty coatings business produces, markets, and distributes
a line of effectively invisible glass-based specialty coatings – “smart surfaces” – that have a wide range
of industrial, commercial, and household applications that fortify the substrate surface through a variety of protective and other
features. Conventional coatings, which are bonded by mechanical means to whatever surface to which they are applied, tend to fail,
ultimately, in the bonding to the substrate, typically due to poor surface preparation or variation of temperature exposures. Uniquely,
our products consist of inorganic and organic combinatorial chemistry that causes them to bond chemically with the substrate, whether
metal, cement-based, or organic (e.g. plastics). By utilizing covalent bonding that penetrates into the substrate and reacts directly
with the free ion within, the otherwise resulting disbondment is avoided. The result is a much longer lasting and stronger coating,
and, in turn, a longer life for the substrate that has been treated.
With an addition of only 1-3 thousandths of an inch in surface thickness
(depending on which product is used), no loss of either hardness, on the one hand, or pliability, on the other, and no reduction
in photon (light) penetration, the platform technology – either on its own or when coupled with any of an array of available
proprietary formula additives – offers the following unique combination of beneficial protective, maintenance-reducing, performance-enhancing
and cosmetically-enhancing properties to most surfaces, including metals, plastics, paints, fabrics, vinyl, wood, masonry, or concrete,
in each case without regard to temperature, climate or most other environmental conditions, without hazard to either human, animal
or plant health/life, and for a period of up to as many as approximately 15-20 years:
Protective
Benefits
|
|
Against
Physical Surface Damage
|
|
Against
Surface Appearance / Cosmetic Degradation
|
|
▪
|
Resistant
to Abrasion / Scratching
|
|
▪
|
Resistant
to Dust / Dirt / Grime
|
|
▪
|
Resistance
to Corrosion
|
|
▪
|
Resistant
to Staining
|
|
▪
|
Resistant
to Oxidation
|
|
▪
|
Resistant
to Color Fading
|
|
▪
|
Resistant
to (Effects of) Weather / Elements
|
|
▪
|
Resistant
to Fingerprints
|
|
▪
|
Resistant
to (Effects of) UV
|
|
▪
|
Resistant
to Marking / Graffiti
|
|
▪
|
Resistant
to (Effects of) All But Most Extreme Alkaline or Acidic Chemicals
|
|
▪
|
Oleophobic
(Oil-Repellent)
|
|
▪
|
Resistant
to (Effects of) Acid Rain
|
|
|
|
|
▪
|
Resistant
to (Effects of) Guano (excrement of birds, bats, seals, etc.)
|
|
|
|
|
▪
|
Resistant
to Termite Infestation
|
|
|
|
|
Against
Human Health Risks / Contagion
|
|
Against
Human Physical / Safety Risks
|
|
▪
|
Resistant
to Bacterial Growth / Germs (sometimes referred to as “Self-Sterilizing”)
|
|
▪
|
Slip-Resistant
When Wet
|
|
▪
|
Resistant
to Mold / Fungal Spore Growth
|
|
|
|
|
▪
|
Resistant
to Small and Large Viruses
|
|
|
|
Maintenance-Reducing
(So-Called “Self-Cleaning”) Benefits
|
▪
|
Hydrophobic
(Water-Repellent)
|
|
▪
|
Oleophobic
(Oil-Repellent)
|
|
▪
|
Resistant
to Dust / Dirt / Grime
|
|
▪
|
Rinses
Clean with Only Water and/or Mild Detergent
|
Performance-Enhancing
Benefits
|
▪
|
Improved
Hydrodynamics / Drag Reduction / Fuel Efficiency
|
|
▪
|
Improved
Aerodynamics / Drag Reduction / Fuel Efficiency
|
|
▪
|
Energy
Efficiency
|
Cosmetically-Enhancing
Benefits
|
▪
|
Enhanced
Color Clarity
|
|
▪
|
Enhanced
Gloss / Sheen
|
|
▪
|
Enhanced
Reflection
|
Certain of the Science
Behind Our Technology
The most unique feature shared by our coatings is a slight positive
surface charge they possess once applied. For certain of our coatings products, it is this slight positive surface charge that
is responsible for their most unique and valuable properties identified above, including the hydrophobicity, oleophobicity, microbial
and fungal resistance, dust-repellance, and enhanced hydrodynamics.
Hydrophobicity is a term largely unfamiliar to many outside scientific
circles, but that describes a quality with which most everybody has a basic familiarity. Surfaces may be characterized as either
hydrophilic or hydrophobic depending on whether or not they attract or repel water or other water-based liquids. Hydrophilic and
hydrophobic surfaces are abundant in both nature as well as in synthetic materials, and they exist both organically and inorganically
in terms of chemical composition. A hydrophilic surface can be wet and may adsorb water; a hydrophobic surface cannot and will
not – it is compositionally incapable of becoming wet. An example of a hydrophilic surface encountered routinely in daily
life are sponges, which, of course, readily soak up whatever water with which they come into contact, at least to the point of
saturation. Hydrophobic materials and coatings, by contrast, prevent water from pooling on their surfaces. In scientific terms,
hybrophobicity is caused by surfaces that disrupt the hydrogen bonding in water; so as to minimize the disruption in its molecular
makeup, the water droplet pushes itself away from the surface to minimize its contact area, thus becoming very tightly bound. Hydrophobic
materials are generally easy to identify because water forms into droplets upon contact with them after which they tend to roll
around freely, like marbles on a flat Formica countertop, as occurs commonly on the freshly waxed exterior of a car or recently
cleaned windshield with new wiper blades. The more hydrophobic the material (all the way up to and including so-called “superhydrophobic”
surfaces), the stronger this effect, until the water effectively floats or skims across the surface with what amounts to very low
friction. Naturally occurring hydrophobic surfaces include many species of plant leaves and flower petals, as well as many types
of bird feathers and the outer body parts of a variety of insects; the lotus leaf is among the most hydrophobic of naturally occurring
hydrophobic surfaces. Synthetic hydrophobic surfaces include such household-name brands as Scotchgard
™
treated
fabric, Teflon
®
coated metal, or Rain-X
®
coated glass.
Oleophobicity is a property very comparable to hydrophobicity, but
it relates to oil-repellancy, not water-repellancy. There are important technical differences, but, for practical and basic observational
purposes, they are very similar.
In terms of chemistry, our platform smart surface, and the coating
variations identified above for which it serves as a basis, are inorganic, formed as they are of chemically “grown”
glass. The process by which they form upon application can be likened to the process, witnessed by many daily in science classrooms,
labs, or at home with popular science kits, whereby quartz crystals are effectively “grown” in a solution. This is
important because it results in the establishment of a uniquely firm chemical bond between the coating and the surface, far stronger
than would exist through either a mechanical or light bonding (the traditional alternatives), fundamentally setting the coatings
apart from most others. When coupled with the unusually thin layer they inhabit – approximately 1-3 thousandths of an inch
– the combination of properties leaves them notably flexible, permitting their use in connection with such items as fabrics,
plastics, and pliable floor-boards, yet hard, durable, and resilient, particularly when refined with select additives.
The additives used in our various coating formulations available
to customers fall into three basic categories. In the first category are color tints, which, in recent years, have seen major technology
advancements in terms of durability, variety and depth of color, reflectivity, and fade-resistance. We have available to us a wide
range of the most advanced offerings in this regard. In the second category are additives intended to provide increased hardness
and wear-resistance. Here, too, we have access to what we believe are some of the most superior materials available. In the third
category are EPA-approved, “on-contact” mechanical microbial germ and virus (so-called) “quat” (industrial
and commercial quaternary ammonium) killers. These additives work in such a way as to prohibit the mutation of microbials which
can otherwise become resistant over time to chemical kill mechanisms such as antibiotics and are capable of fortifying any of our
coatings with additional protection against bacteria and relatively large viruses/microbials, including, for example, Methicillin-resistant
Staphylococcus Aureus (more commonly known as “MRSA), Clostridium difficile bacterial infection (more commonly known as “C-diff”),
and Influenza A virus subtype H1N1 (more commonly known as “H1N1” or “Swine Flu”). By combining our coatings
– which, based on their positive surface charge, already powerfully discourage the growth of many of the smaller, more common
viruses which can exist between active elements of existing “on-contact” killers (such as the Norovirus, for example,
a concern long plaguing the vacation cruise ship industry) – with a quat and certain other additives available to us, a unique,
broader spectrum of microbial protection is afforded.
Product Applications
and Markets
With the array of beneficial properties identified above, certain
but not all of which have been independently lab-tested and verified, the range of potential applications of our specialty coatings
is notably far-reaching, spanning across numerous industrial, commercial, and household segments. While we are currently focusing
our pursuit almost exclusively on only one of these potential applications, and there can be no assurance that we will ever directly
pursue any one or more of the others, through an ongoing process of selection since we acquired the base technologies in 2014,
we have identified certain of these potential markets as worthy of further exploration and possible commercialization by us over
time. These determinations have been based principally in each case on the following criteria:
|
▪
|
the relative size, age and projected growth trend of the subject market
|
|
▪
|
the experience, observational/anecdotal intelligence, and testing results previously obtained in relation to the application
|
|
▪
|
the relative strength of the value proposition to prospective customers
|
|
▪
|
the comparative time-to-market
|
|
▪
|
the comparative cost-to-market coupled with the extent of our existing industry relationships and available resources
|
|
▪
|
the relative geographic accessibility of the market
|
|
▪
|
the seasonality of the market, if any
|
|
▪
|
the relative barriers-to-entry within the market
|
|
▪
|
the relative, projected length of the particular sales cycle
|
|
▪
|
the projected gross profit margins
|
|
▪
|
both the presence within the subject market, together with the relative quality, of meaningfully competitive products, and
|
|
▪
|
the relative size and strength of the individual competitors
|
Through an analysis that relied on the above criteria, and though
we have not commissioned or otherwise undertaken or obtained any comprehensive market study in respect of any one or more of the
above-listed potential product applications, the select vertical markets which we have identified as worthy of our further pursuit
include the following:
|
▪
|
Interior Flooring and Exterior Tile, Pavers and Other Hardscapes
|
|
▪
|
Industrial and Residential HVAC Equipment, Commercial Refrigeration Systems, and Power Generators
|
|
▪
|
Automobiles and Motorcycles
|
|
▪
|
Vessels and Marine Infrastructure
|
|
▪
|
Heavy Trucks and Construction Equipment/Vehicles
|
|
▪
|
Oil, Gas & Mining Infrastructure/Equipment
|
The following is a brief overview of each of the foregoing market
verticals, certain of our initiatives in advancing our commercialization of them, and the general status of our involvement in
relation thereto, in each case as of the date of this Annual Report on Form 10-K:
|
▪
|
Interior Flooring and Exterior Tile, Pavers and Hardscapes.
This is the market segment involving surfaces consisting, on the interior side, of engineered wood, laminates, resilient flooring (including vinyl composition tile [“VCT”], luxury vinyl tile [“LVT”], luxury vinyl plank [“LVP”], solid vinyl tile [“SVT”], vinyl sheet, linoleum, and wood plastic composite [“WPC”]), polished concrete, poured-on-site terrazzo, ceramic, porcelain and terrazzo tile, natural stone, and bathroom tile and grout, and, on the exterior side, of poured and stamped polished concrete, poured-on-site terrazzo, pavers, ceramic, porcelain and terrazzo tile, natural stone, brick and engineered wood. It has been targeted by us based on a broad combination of all of the factors identified above, and, as the focal point of our current business plan, is discussed in much greater depth below.
|
|
▪
|
Industrial and Residential HVAC Equipment, Commercial Refrigeration Systems, and Power Generators.
This is the market segment application consisting of coatings for HVAC and commercial refrigeration systems intended to serve as protection from corrosion, including in salt water, acid, alkaline and chemical environments, and from clogging by particles of mold, pollen, dust, and soot. Substantial testing in this area by a variety of industry participants has shown that there is a significant efficiency loss factor on these types of units due to natural oxidation and the restricted airflow resulting from dirt build-up on the condenser coils. With a product that repels moisture and contaminants, improves surrounding air quality, controls corrosion and reduces unit degradation – even in the hottest and most corrosive environments and climates – thereby meaningfully extending new or used unit life, offers increased operating/energy efficiency by decreasing aggregate kilowatt hours and thereby reducing energy consumption costs up to 12-20% over the life of a subject condensing unit, and substantially reduces maintenance requirements, management believes a significant opportunity exists for the Company within this market. Accordingly, we have invested considerably in pursuing these applications in our product development and commercialization initiatives to date, and, in 2018, we entered into an exclusive North American and Caribbean distribution rights arrangement for HVAC and refrigeration with a third-party applicator group and from which we expect, although there can be no assurance, to realize ongoing, fixed-rate recurring revenue for an indeterminate period based on our continued manufacturing and sale of product. Through this group, our RexPro HVAC coatings are increasingly being featured on units manufactured by Carrier, Bryant, Daikin, Panasonic, Rheem, Trane, and Ruud, among others.
|
|
▪
|
Automobiles and Motorcycles
. This is the market segment application consisting of coatings for the restoration-to-new-looking, preservation and protection of automobile and motorcycle exteriors, and for which we believe we have developed a uniquely valuable product. Until recently, we owned the patent rights to the underlying formula associated with that product. During the first quarter of 2019, however, we assigned our rights under such patent to a third-party which we believe intends to private label the product and from which, although there can be no assurance, we expect to realize ongoing, fixed-rate recurring revenue for an indeterminate period commencing sometime in 2019 based on our continued contract manufacturing of it, and sale to, them.
|
|
▪
|
Vessels and Marine Infrastructure
. This is the market segment application consisting of coatings for the restoration-to-new-looking, preservation and protection of boats/vessels as well as all kinds of marine-based infrastructure such as docks, and industrial scaffolds and rigs. Following a period of material product modifications to overcome certain performance issues (principally surrounding the gradual yellowing of treated surfaces), we believe we have developed a uniquely valuable, market-ready product for this market and we are currently exploring potential third-party distribution opportunities through which to sell and from which, if and when established, we would derive recurring revenue from manufacturing.
|
|
▪
|
Heavy Trucks and Construction Equipment/Vehicles.
This is the market segment application involving foundational heavy terrain construction equipment fleets and individual units. It comprises a wide range of vehicles in the heavy construction industry, including gators, bulldozers, excavators, dump trucks, cement mixers, and other, similar types of equipment in relation to which our coatings offer strong prevention against rust, oxidation, corrosion and abrasion breakdown. We believe that our coatings could result in notably significant savings in maintenance costs as well as extended life for these types of equipment/vehicles used in these highly corrosive environments. As of the date of this Annual Report on Form 10-K, and although there can be no assurance that it will continue, we are currently generating recurring revenue from a single re-manufacturer customer and periodic revenue from sales to other customers within this vertical market. Following certain performance setbacks and failures during testing with concrete trucks in recent years, we are also continuing with late-stage research and development initiatives aimed at further improving the performance quality of our product in this large and growing vertical.
|
|
▪
|
Oil and Gas Drilling, Mining and Related Heavy Equipment.
This is the market segment application surrounding a vast array of opportunities to sell certain of our coatings to prevent rust, oxidation, corrosion and abrasion breakdown in the oil, gas and mining industries. We believe that our coatings could result in notably significant savings in maintenance costs as well as extended life for equipment, tools, and infrastructure used in these highly corrosive environments. In this market segment, our coatings can be used as protective pipe linings and as a protective barrier on the exteriors of storage tanks, micro-turbines, hydraulic systems, fleet vehicles, rail cars and shipping containers. Based on recent industry reports, and with industrial coatings generally comprising more than approximately a third of the worldwide aggregate coatings market, the oil and gas segment is one viewed by us as holding some of the greatest growth potential. Based on certain results of early-stage field and lab tests conducted by prospective customers, and though there can be no assurance, management believes the effectiveness of its products for this purpose is already higher than many competing products, and that the market and demand for these products is potentially very significant. As available resources permit, we intend to actively target and pursue potential distribution and/or licensing opportunities of our market-ready product in this vertical through select industry operators.
|
SHIFT IN LONG-TERM STRATEGIC DIRECTION:
FOCUS ON INTERIOR FLOORING AND EXTERIOR HARDSCAPE
COATINGS AND VERTICALLY INTEGRATE INTO APPLICATIONS SERVICES FOR THOSE PRODUCTS
Having taken control in 2014 of the variety of thematic coating
chemistries and related business opportunities discussed above, management was faced with the challenge of sorting through them
and making determinations as to which the company would pursue itself, when and how to go about the process for those it determined
to pursue itself, which made sense for the company to off-load to licensee or distribution partners, or to simply convey outright
through assignment but potentially manufacture for the assignee, and how in each case to make the most of, and from, these various
arrangements.
Largely to the exclusion of many of the other opportunities we have
to potentially pursue, and owing to a variety of strategic determinations that have been made by us in recent months coupled with
a substantial revision to our business plan, our RexPro interior flooring and exterior tile, paver and hardscape line of coatings
products is our current focal point in terms of business development, including our own, direct marketing and sales. Further, we
have determined to extend our coatings business in this market to not only include product manufacturing and distribution, but
also, in a meaningful departure from our historical operations, to vertically integrate by expanding into the applications services
side of the business. These strategic determinations and the resultant material change in our going-forward business plan were
arrived at on the basis of the following observations made, data accumulated, and related conclusions reached, in each case by
management over the past several years:
|
▪
|
Due to the amount of physical product used in the periodic maintenance process being a relatively minor component in the overall cost of applications servicing, the overwhelming volume of gross revenue in the industry goes to those performing the applications, not those making and selling the product to be applied
|
|
▪
|
Our interior flooring and exterior tile, paver and other hardscape products are demonstrated and proven (including by many nationally recognized brands), getting very positive reception in the market, viewed by some participants in the industry with a well-developed knowledge of the market as the ‘best-in-class,’ and are able to be sold by us at notably high gross margins
|
|
▪
|
Market demand for these products and related maintenance services tends to be price-inelastic (i.e. it does not fluctuate much in response to price movement in either direction)
|
|
▪
|
The “special services” aspect of the applications services business – the part encompassing relatively specialized services requiring expertise in something more than standard, nightly cleaning/janitorial services, and including interior flooring and exterior tile, paver and hardscape servicing – is highly fragmented, and, to at least some degree because it is specialized and requires a relatively higher skill labor, the gross margins realizable in the special services aspect of the applications services business are believed by us to be comparable to those realizable in our relatively high margin product manufacturing and distribution aspect
|
|
▪
|
The applications services business has relatively low client acquisition costs (offset to some degree, however, by correspondingly low industry-wide client retention rates despite the presence of certain inevitable switching costs)
|
|
▪
|
Due to the basic necessity of the products and related maintenance services for property owners, managers and tenants, the industry is highly recession-proof
|
|
▪
|
Dependence on a universe of untrained, wholly-independent contractors to perform applications presents an array of very challenging issues in terms of efficiently growing our business
|
|
▪
|
Because of their relative efficacy, our interior flooring and exterior tile, paver and other hardscape products often result in a net reduction in the necessity for applications frequency, thereby incentivizing property owners, property managers and tenants/lessees to use it much more than independent contractor service providers (who make more money generally by performing more services), and by selling the applications services ourselves (directly to property owners, property managers and tenants/lessees, that is), we are likely to have much more influence over those product purchase decisions
|
|
▪
|
Although the challenges in causing a product to stand out in a crowded field are many, even when the product is better (at least arguably) in most qualities than most of the other leading products, one way to potentially and meaningfully reduce the difficulty could be selling it as part of a fast-growing service operation that delivers those benefits because they are effectively ‘baked into’ the overall value delivered
|
|
▪
|
In relation to some of the other vertical opportunities available to us, further product research, development and testing, or market research and receptivity-analysis, needs to be conducted
|
|
▪
|
Our internal knowledge, experience and contacts in the other verticals to which our products apply are not currently as well-developed as they are in the interior flooring and exterior tile, paver and other hardscape vertical, but we can leverage our technology assets through partnering with others better equipped than ourselves to pursue those markets, and in order to maximize our chances for success, our financial and human resources are most productively allocated for the time being on a single vertical, at least for the most part
|
Although we believe that we are adequately prepared to experience
success if and when we complete a required, substantial and near-term financing, especially given our control over our proprietary
products, our decision to vertically integrate by entering the applications services aspect of the flooring and hardscape coatings
industry represents a major shift in our business, and one in relation to which we have no direct experience and only limited indirect
experience, and we must for this reason be viewed properly as a start-up venture in this aspect of our business, which we are depending
on becoming a major aspect.
Industry
The following depicts a basic breakdown of the interior flooring
and exterior tile, paver and other hardscape products industry, and explains where it is that our products fit within the scheme.
Products Overview
The commercial flooring and hardscape coatings industry can be viewed
in terms of two basic categories: interior flooring products and exterior hardscape products. In general, the interior flooring
products category breaks out into floor waxes, on the one hand, and floor finishes, on the other. Categorically, exterior hardscape
products are all just varieties of surface finishes.
Floor waxes are generally made with Carnauba wax, a natural base
extracted from the leaves of Brazilian palm trees, but often combined to varying degrees with polyacrylics, polyurethanes or epoxies
to result in what are effectively organic wax synthetics. Both floor finishes and exterior hardscape products, by contrast, are
generally organic or inorganic synthetics primarily comprised of several components including acrylic, urethane, epoxy or siloxane
polymers, alkali-soluble resins, surfactants, plasticizers and wax emulsion.
Natural Wax Finishes v. Organic
and Inorganic Synthetic Finishes
Both natural wax finishes and organic and inorganic synthetic (commonly
referred to – often mistakenly – as “acrylic”) finishes can be very effective in serving the maintenance
needs of property owners, managers and tenants. Natural wax finishes are the more traditional option, with synthetics having come
along more recently, but rapidly gaining market share, and for good reason.
The most notable difference between wax finishes and synthetic finishes
is the maintenance required to sustain the finish. Whereas wax finishes need to be periodically stripped and reapplied due to foot-traffic,
hand-trucks and other inventory transport units in order to retain their efficacy as protective coatings – and burnished
(
i.e.
polished and buffed) regularly in order to sustain their visual appeal – such requirements are substantially
reduced or in some cases eliminated altogether for synthetic finishes. Synthetic finishes are generally viewed as being stronger
and more durable.
Organic and Inorganic Synthetic
Finishes
Organic and inorganic synthetic finishes generally share a number
of common constituents. These include the following:
|
▪
|
Acrylic, urethane, epoxy or siloxane polymers are different types of particles or solids in the finish that give it the strength and durability against foot traffic and resilience to dirt getting ground into the finish. A higher concentration of solids makes for a more durable finish.
|
|
▪
|
Alkali-soluble resins are the component that allows the finish to self-level, giving the finish an even coat. This enables the finish to set in less time and makes it easier to strip when it comes time to refinish the floor.
|
|
▪
|
Surfactants are another constituent that play an integral role in ensuring even coats. They do this by helping the finish spread evenly across the floor.
|
|
▪
|
Plasticizers act as a hardener of the surface, keeping the finish from cracking once it has set.
|
|
▪
|
Wax emulsion is used to affect the glossiness, hardness and slip-resistance of the finish. Synthetic wax emulsion has been increasingly used in many floor finishes as a substitute for the natural carnauba waxes traditionally used in floor wax.
|
Synthetic finishes are generally composed of one of three constituent
bases: water, solvent or siloxane. Our RexPro products are siloxane-based.
Waxes and Synthetic Finishes:
Basic Product Purposes
In general, products in our category are used for purposes of obtaining
the following:
|
▪
|
Lasting enhanced appearance and odor elimination
|
|
▪
|
Health, safety and anti-microbial cleanliness
|
|
▪
|
Protection against high-traffic wear-‘n-tear
|
|
▪
|
Slip-resistance and related liability mitigation
|
|
▪
|
Reduced maintenance costs
|
|
▪
|
Substrate durability and longevity
|
The leading products are generally those that do more or all of
these things more effectively than others, and that do so more easily than others by requiring lower frequency maintenance. Up
to a point, price-sensitivity is not a major factor in the purchase-decision because the best products are generally more effective
and, when used, lead over time to reduced maintenance costs.
The Market
Strictly with respect to our RexPro interior flooring products and
applications, we serve an industry that finished 2017 with combined new product sales in the United States of approximately $10.5
billion. This included resilient flooring, laminates, hardwood, and tile products, but does not include polished concrete, which
is not technically a floor-covering but is another substrate in relation to which we consider our products to be high-value and
which is rapidly growing in popularity among all of our targeted major customer-client groups.
Of note, the floor-covering product categories identified above
(resilient flooring, laminates and tile) that are the fastest-growing, and increasingly taking market share from carpet and rugs,
are also the categories which largely constitute the substrate surfaces for purposes of our own category of long-term surface protectants
in relation to which we believe our products are best suited and proving to be most effective.
In general, our products can be viewed as having their highest value
in relation to any property that is associated with relatively high foot-traffic. Specifically, and among others, they apply to
all of the categories of properties listed below:
Residential
§
Homes and Apartments
§
Apartment Building Common Areas
§
Elderly Care Homes and Facilities
|
Hospitality
§
Hotels
§
Motels
§
Conference Centers and Facilities
§
Catering/Event Halls
|
Retail
§
Malls
§
Grocery Stores/Chains
§
Big-Box Stores/Chains
§
Other Stores/Chains
§
Auto Dealerships
|
Institutional
§
Schools and Universities
§
Community Centers
§
Child Day Care Centers
§
Churches, Synagogues, Mosques and Other Places of Worship
§
Prisons
|
Medical
§
Hospitals
§
Diagnostic Centers
§
Clinics
§
Urgent Care Facilities
§
Medical Offices
§
Physical Therapy Centers
§
Labs
|
Health & Fitness
§
Gyms and Health Clubs
§
Basketball Courts
§
Racquetball and Squash Courts
§
Dance and Martial Arts Studios/Centers
|
Food & Beverage Service
§
Restaurants/Chains
§
Fast-Food Outlets
|
Industrial
§
Manufacturing Plants
§
Processing Facilities
§
IT Systems Housing Facilities
§
Warehousing facilities and Freight Depots
|
Recreation & Leisure
§
Movie Theaters
§
Indoor and Outdoor Sports and Entertainment Arenas
§
Performing Arts Centers
§
Exhibition Halls and Civic Centers
§
Museums
§
Art Galleries
§
Bars & Nightclubs
§
Bowling Alleys
§
Pool Halls
|
Public
§
Airport Terminals
§
Train Stations
§
Bus Depots
§
Post Offices
§
Highway Rest Stops
|
Other Workplace
§
Office Building Common Areas
§
Offices
§
Television and Radio Studios
|
Private Social Clubs
§
VFW, Elks Lodge, Rotary Club, American Legion, Lions Club International, Knights of Columbus,
etc.
§
Country Clubs
|
Our Products
Committed to highest quality and superior performance, our RexPro
interior flooring and exterior tile, paver and hardscape coatings products have been developed by us to preserve, prolong and protect
the asset-life cycle of these surface substrates with an all-in-one, high-performance, industrial-strength maintenance system.
Our interior commercial and residential flooring products have utility
in relation to all of the following surfaces/substrates:
|
▪
|
Engineered Wood and Laminates
|
|
▪
|
Resilient Flooring: VCT, WPC, LVT, LVP, SVT, Vinyl Sheet, Linoleum
|
|
▪
|
Polished Concrete, Poured-on-Site Terrazzo
|
|
▪
|
Ceramic, Porcelain and Terrazzo Tile
|
|
▪
|
Natural Stone
|
|
▪
|
Bathroom Tile and Grout
|
Our exterior commercial and residential hardscape products have
utility in relation to all of the following surfaces/substrates:
|
▪
|
Polished Concrete, Poured-on-Site Terrazzo
|
|
▪
|
Pavers
|
|
▪
|
Ceramic, Porcelain and Terrazzo Tile
|
|
▪
|
Natural Stone
|
|
▪
|
Brick
|
|
▪
|
Engineered Wood
|
Current users of our interior flooring and exterior hardscape products
include Hilton, The United States Veteran’s Administration (hospitals), Walmart, Wegmans, Food Lion, Best Western, Marriott,
Bed, Bath & Beyond, Florida East Coast Railway and Duke University, among many other less recognizable names. Entities currently
in testing or otherwise experimenting with our products in these verticals include Budweiser, The Ohio State University, and Studio
Movie Grill, also among many other less recognizable names.
Interior Flooring and Exterior Hardscape
Coatings: Competitive Products
Although there are dozens of others, there are certain products
we consider to be our most serious competition in each of the interior and exterior categories. For interior surface (flooring)
products, these include NeverStrip, Epic, Adsil MicroGuard, EcoProcote, ETS 180, and SaniGLAZE. For exterior surface (hardscape)
products, these include Black Diamond, Epic, Adsil MicroGuard, Endura, Valspar, Rock Solid and Glaze-‘n-Seal.
We believe that our products compete very effectively in both of
the above categories. While in respect of some product attributes, we may be found to perform less favorably than some competitive
products, we do not believe that the degree to which that conclusion is true is material, and, in contrast, we do believe that,
when taken as a whole, our products offer the most complete variety of superior attributes.
While there exists considerable overlap in qualitative attributes,
the type of surface involved generally dictates customer’s priorities in terms of defining value and overall superiority,
and ultimately driving purchase decisions. In order of relative importance, and depending on the surface type, it is our belief
based on experience in the market that those priorities can be generalized as follows for these surfaces, which constitute a large
percentage of our sales:
Hardscapes
|
VCT and Other Resilient Flooring
|
Tile and Grout
|
|
|
|
Lasting Aesthetic Renewal and Stain-Resistance
|
Cost-Savings Due To Longevity
|
Lasting Odor Elimination
|
|
|
|
Slip-Resistance / Liability
|
Lasting Aesthetic Enhancement and Stain-Resistance
|
Lasting Aesthetic Enhancement and Stain-Resistance
|
|
|
|
Enhanced Toughness/Strength Against Foot Traffic Wear-‘n-Tear
|
Sanitary Antimicrobial Resistance To Bacteria, Mold and Mildew Growth
|
Sanitary Antimicrobial Resistance To Bacteria, Mold and Mildew Growth
|
|
|
|
Sanitary Antimicrobial Resistance To Bacteria, Mold and Mildew Growth
|
Slip-Resistance / Liability Mitigation
|
Slip-Resistance / Liability Mitigation
|
|
|
|
Toughness/Strength/Durability
|
Toughness/Strength/Durability
|
Toughness/Strength/Durability
|
|
|
|
Cost-Savings Due To Longevity
|
Lasting Odor Elimination
|
Cost-Savings Due To Longevity
|
When considered collectively, we believe that our products are among
the highest-performing and most effective in the market with respect to all of these attributes. When considered individually,
we believe that, with respect to some of the attributes, we are the single best performer.
The attributes that cause contractors to make a purchase decision
in our category includes all of the same attributes considered important to property owners, managers and tenants/lessees. As a
group, however, and generally, we believe that contractors will also place a high degree of importance on each of the following,
all of which relate to ease-of-application, and in relation to which we consider ourselves meaningfully superior in the marketplace:
|
▪
|
Pot-life (which is the length of time that the product remains useful following catalyzation, thereby reducing product loss factor and enabling margin preservation)
|
|
▪
|
Compressed dry-time (which enables expedited applications at locations with short daily closure periods, such as fast food restaurants)
|
|
▪
|
Substrate versatility (which simplifies process decision-making and can serve to increase product sales for manufacturers across unrelated applications)
|
With respect to large square-footage applications, most of which
in our markets involve resilient flooring in general and VCT in particular, the potential cost-savings to the property owner or
tenant associated with the use of one product over others can be a significant factor in the purchase decision. The reason for
this is that the potential cost-savings can be very substantial over time. Although there can be no assurance, we believe that,
when compared to traditional wax floor finishing products (which are widely used across all types of properties currently), and
based on reasonable cost assumptions, use of our V-Shield™ product (our designated product intended for use on vinyl flooring)
can reduce maintenance costs by as much as 60-70% over a five-year period.
Management believes that the combination of the above product attributes,
when coupled with the trade secrets underlying our product formulations, positions the Company to be able to benefit from certain
market pricing power in relation to our interior flooring and exterior tile, paver and hardscape coatings products.
APPLICATIONS SERVICES
Industry Basics
The maintenance services industry can be viewed in terms of two
groups, both of which – as a practical matter because of the way the contracting opportunities present themselves –
overlap to some degree with one another:
|
▪
|
Janitorial/Cleaning
. This group comprises those service professionals that perform standard, relatively routine and low-skill, commoditized (and thus low wage/margin), daily/nightly cleaning services.
|
|
▪
|
Special Services
. This group, in contrast, comprises those service professionals that perform more specialized, relatively higher-skill, less price-sensitive (and thus higher wage/margin) periodic services, including floor finishing and bathroom tile and grout maintenance.
|
Our Vertical Integration Strategy
Our recently adopted strategy involves our vertically integrating
our interior flooring and exterior hardscape surface products business through the development of an extensive North American network
of fully-trained and qualified, affiliated but quasi-independent, special services contract applicators that are called upon by
the company on an as-needed basis to perform product applications services for client-customer accounts established, maintained
and controlled directly by the company through its regional business units.
Regional Operating Units and Service Applications
Contracting Work
Our plan, currently being implemented, albeit incrementally, is
to divide the U.S. and Canada into a number of regional districts, each of which will be operated as a distinct business unit by
a regional operating unit manager with ultimate applications management responsibility for jobs performed within its respective
geographic territory, as well as overall unit P&L responsibility. Current plans call for our regional operating unit managers
to receive, in addition to salary, incentive compensation that entitles them to profit-sharing with other regional business units
as well cash bonuses based on individual business unit performance (that rewards increases in free cash flow and return on invested
capital [“ROIC”], and charges and credits them for capital deployment and returns relative to a set hurdle rate).
Upon intake of a given applications work order, management at the
regional operating unit level assembles from its database pool of trained applicators a job crew consisting of a crew leader, whose
responsibility it will be to manage the job, and an appropriate number of supporting crew members given the size and other requirements
of the job. Current plans call for our individual job crew leaders to receive incentive compensation in the form of cash bonuses
per job based upon meeting margin objectives relative to pro-forma job P&L and by reference to objectively established target
benchmarks for:
|
▪
|
Number of Square Feet
|
|
▪
|
Level of Job Complexity
|
|
▪
|
Number of Trained Service Applicators in Job Crew
|
|
▪
|
Total Number of Job Crew Man-Hours
|
|
▪
|
Total Cost of Materials
|
|
▪
|
Quality Grade Upon Completion
|
|
▪
|
Pre-Bonus Project Profit Margin
|
The database pool of trained applicators shall have been gradually
developed over time through recruiting initiatives of prospects by the regional operating unit managers, and their subsequent and
satisfactory attendance at the company’s centralized training facility in South Florida. Prospective network participants
are expected to be recruited primarily from the following categorical sources/groups:
|
▪
|
National commercial cleaning/janitorial franchises
|
|
▪
|
Very large national commercial cleaning/janitorial
non
-franchise operators
|
|
▪
|
Large and mid-size regional commercial cleaning/janitorial
non
-franchise operators
|
|
▪
|
Large, affiliated networks and associations of independent contractors
|
|
▪
|
Local commercial cleaning/janitorial
non
-franchise operators (ranging from one and two-man operations, including mom-‘n-pop operators, to small companies)
|
|
▪
|
Relatively small, regional or local affiliated networks and associations of independent contractors
|
|
▪
|
Specialty commercial hard-surface restoration and service providers
|
In the early stages of developing our applications services network,
we expect to rely to varying degrees on certain members of our existing, experienced project management team and crew members to
travel to job sites throughout the U.S. and Canada to perform the required applications services or to support others that have
been brought in by us to form the nucleus of a developing regional team.
We currently have over fifty go-to crews throughout North America
with whom we have existing contacts and to whom we can turn to for recruitment opportunities as well as support in performing service
jobs in the corresponding area, at least during the early-going as we’re developing our own network.
Applications Services Training
Training and certifying all network applicators is essential to
our success. Challenges like high employee turnover, confusing products and complicated procedures can make it difficult to effectively
train even the most promising candidates and keep our business running smoothly.
We currently train our recruits either at our centralized training
facility in South Florida, or, if and when necessary and circumstances permit, at other locations more local to their base of activity.
Training is conducted by our senior-most applicator professionals, each of whom have extensive experience both in the industry
at large and with our RexPro products in particular. In order to be eligible to work on one of our crews, applicator trainees must
complete the training program to the satisfaction of his/her trainer.
Although largely in a planning and developmental stage at this time,
we expect to increasingly rely on the use of technology to support our training initiatives and programs. This includes extensive
online instructional video content as well as downloadable forms for processing job administration, all designed for ease-of-review
on handheld devices.
Applications Services NextGen: Robotics
Although strictly in the earliest, conceptual stages of exploration,
and although there can be no assurance, management intends over time to introduce the use of robotics into its flooring and hardscape
applications services operations. While such a move would likely result in a substantial increase in recurring capital expense,
it is management’s belief that, once streamlined, if at all, it would also contribute significantly to bolstering gross profit
margins through decreases in unit (labor) costs coupled with increases in unit productivity.
Sales
A core element of our recently revised business plan is to leverage
both direct and distribution sales channels to aggressively expand key referral-based product adoption and market share in multiple
geographic locations. We are currently in the process of attempting to identify an appropriate sales consulting firm to conduct
a fundamental review of our sales operations, processes and team members, and deliver a detailed roll-out and growth plan, including
a hiring agenda and onboarding model that outlines a systematic and replicable process to ensure development of consistent, high-end
sales capabilities, as well as a playbook for sales training and development. In the meantime, however, it is expected by us to
largely build upon conclusions reached to date.
Direct sales throughout the State of Florida and the Southeastern
U.S. more generally is rapidly developing as a notable revenue stream that additionally serves as a local test-bed for sales best
practices and intelligence-gathering. Expansion into other areas, including, for example, a developing presence in the Northeastern
U.S., is already also well underway, as is the identification of a handful of other targeted regions across the U.S. believed by
us to eventually serve as strategic hubs. Each region will include a team comprised of business development, sales, and marketing
professionals. It is management’s view that the likelihood of successful expansion throughout the entirety of North America
will be dependent on a focus by us on those regions that share two primary criteria:
|
▪
|
they are statistically demonstrable hotbeds of relatively rapid population and industrial/retail growth; and
|
|
|
|
|
▪
|
they are characterized by a relatively high presence of “key influencers” vis-à-vis RexPro brand/technology endorsement (“key influencers” being defined as those individuals or organizations in a target market identified by us to be among those to whom we have proven our RexPro solutions to be effective, and with whom we have developed a relationship that manifests as active endorsement of our products’ performances, value, and applicability to other potential customers within their sphere of influence [typically, but not invariably, existing and active local flooring or other contractors]).
|
As available working capital permits, our sales organization will
include three separate levels, a continental group, a number of regional teams, and a number of local teams. The continental team’s
responsibility will be to target and sell to both U.S. national-scale and Canadian national-scale accounts. The regional teams’
responsibilities will be to target and sell to regional accounts headquartered in the team’s regional domain. The local teams’
responsibilities will be to target and sell to local accounts operating within the team’s local domain.
Although there can be no assurance, and generally, we expect our
account executives, as well as our sales managers, to be compensated through a combination of a base salary and commission. The
commission will consist of some sliding percentage of gross receipts on jobs performed based on profit margin achieved, and be
split in some way between the account executive and the corresponding sales manager. Further, these individuals remain entitled
to a continuing interest in such commissions for work performed for each account going forward but only for so long as they remain
with the Company. In applying this structure, management’s aim is to incentivize both individuals involved to build up a
portfolio of recurring account work over time, and to remain with the Company for a long time.
Account Acquisitions
In addition to building sales through organic channels, we intend
to actively and aggressively pursue business development through the acquisition of existing accounts from service contractors
that control them wherever opportunities present themselves to build value on the way in. Specifically, and although there can
be no assurance, this means discipline in buying any such accounts only at attractive purchase prices that will be accretive to
our per share value, whether paid in cash or shares of our stock.
Contracts
Wherever our negotiating leverage permits, and whether derived organically
through traditional sales initiatives or acquired from another service provider, we attempt to enter into long-term service agreements
with our clients that will provide us in each case with a value-generating source of recurring revenue.
Certain
Business Focal Points
Revenue
Sources
Although
there can be no assurance of either mix or volume, and based on our revised business plan, we expect to derive recurring revenue
from each of the following:
|
▪
|
The
performance of interior flooring and exterior hardscape applications services
|
|
▪
|
Sales
of our interior flooring and exterior hardscape product beyond that sold as part of our applications services
|
|
▪
|
Sales
of our other vertical market coatings to licensees, distributors, private-label resellers, remanufacturers and other users,
including those for HVAC and refrigeration units, power generators, automobiles and motorcycles, vessels and marine infrastructure,
heavy trucks and construction equipment/vehicles, oil, gas and mining infrastructure/equipment
|
Revenue
Drivers
Management
believes that our future revenues will be largely dependent upon the following key factors:
|
▪
|
The
growth rate in the number and size of client-customer accounts (as determined through a combination of sales headcount, quota
and productivity rates in relation to meeting quota)
|
|
▪
|
Our
client retention rate
|
|
▪
|
The
degree to which our product is superior in the market, our product mix and our product pricing
|
|
▪
|
Our
applications pricing
|
Gross
Profit Margin Drivers
Management
believes that our future gross profit margins will be largely dependent upon the following key factors:
|
▪
|
The
existence of product pricing power
|
|
▪
|
Our
lack of dependence on unaffiliated general contractors for crew labor on our applications
|
|
▪
|
Our
ability to benefit from economies of scale in materials purchasing
|
|
▪
|
The
frequency of our working capital turns
|
Cost
Drivers
Management
believes that our future costs structure will be largely dependent upon the following key factors:
|
▪
|
Our
cost of applications services crew labor, which will be materially affected by the extent to which we are reliant on unaffiliated
general contractors
|
|
▪
|
Our
ability to benefit from economies of scale in materials purchasing
|
|
▪
|
Our
applications services labor efficiency
|
|
▪
|
The
rates at which we experience application mishap incidents, and the severity of such mishap
|
Product Manufacturing and Fulfillment
We currently conduct all manufacturing and fulfillment operations
on our own at our facility in Lake Park, FL. Though production capacity is currently limited, we intend to expand in-house capacity
in the near future, subject to our having available to us the requisite capital investment. The manufacturing process is comprised
largely of combining and blending raw materials and chemicals, including additives, in each case consistent with our proprietary
formulations, and bottling of final product into labeled, quart, gallon and larger containers. In general, on-hand inventory is
kept to a minimum and built up based on forecasted immediate- to near-term sales.
Due to financial constraints, we are often unable to buy raw materials
in quantities that allow us to efficiently allocate our available capital. Specifically, we are often faced with having to purchase
such materials in bulk sizes that are larger than we have an immediate-term need for and which results in our having to tie up
more working capital in inventory than is maximally efficient from a capital allocation perspective. Although there can be no assurance
that we will free of ourselves of this inefficiency, we do believe that the steady availability of adequate working capital, which
has been absent for many years, would enable us to overcome this operational handicap.
Product Order Backlog
In general, we do not manufacture our products against a backlog
of orders and do not consider backlog to be a significant indicator of the level of future sales activity. Production and inventory
levels are based on the level of incoming orders as well as projections of future demand. Accordingly, we do not believe that backlog
information is material to an understanding of our overall business and should not be considered a reliable indicator of our ability
to achieve any particular level of revenue or other metric of financial performance.
Product Warranties and
Returns Policies
Our product returns policies and warranties differ materially based
on the type of surface to which we are informed our products are being applied, as well as the anticipated performance life of
the particular product.
In general, we maintain a consistent return policy relative to any
products in relation to which there is either no associated installation or, if there is an installation involved, it is one in
which we have no participation or for which we have any responsibility. The policy under such circumstances requires that the subject
products be returned unopened within no more than 30 days of purchase, and that all shipping charges associated with the return
be borne by the customer. For a period of up to five years from purchase, a warranty is extended in such cases to customers relative
to both the chemical integrity (as represented upon sale) and the performance integrity of the coatings based on the specific characteristics
of the subject product and application, and the corresponding representations made by us in relation thereto.
Our returns policies and product warranties are general policies
and warranties and are subject to change in relation to any particular sale. Further, the general policies and warranties themselves
are subject to change from time to time and are likely to evolve as our operations and revenues develop.
Applications Services Warranties
While still in the early stages of development, our services warranties
are likely to be offered in three or more tiers depending on the level of service purchased and the business type and level of
foot or vehicle traffic on the area of application. For example, a first tier application services warranty for a customer that
wants only the initial application and no maintenance follow up in a medium-to-heavy traffic office building might range from one
to three years and cover only product replacement costs but not labor, whereas a tier three application services warranty might
last five years or longer for a customer that subscribes to routine preventive maintenance calls and periodic heavy traffic area
reapplication services. An example of a heavy traffic area would be the checkout line areas of a grocery store.
Research and Development
Though a substantial and growing percentage of our operating expense,
our RexPro research and development (“R&D”) has been very modest in recent years, in real dollar terms, due to
a lack of allocable funds. The limited R&D activities that have been pursued over this period have been conducted exclusively
in-house.
Our RexPro R&D objective is to leverage our unique, integrated,
emerging science capabilities to drive revenue and margin growth. Our R&D initiatives are principally focused on our strategic
priority of achieving a leadership position across the relatively higher margin, science-driven segments of the specialized coatings
and surfaces markets in which it operates by developing and refining differentiated, advanced industrial and related coatings and
surface materials. We believe that our specialized scientific expertise, together with our developing R&D program, combine
to provide us with distinctive, competitive advantages that position us to establish broad global reach over time and deep market
penetration in our market verticals.
Our RexPro R&D team consists of one full-time employee and one
part-time personnel.
We continue to protect our R&D investments and assets through
pursuit of a comprehensive intellectual property strategy. See discussion under “Intellectual Property.”
Regulatory and Environmental
Compliance
Our coatings products business is subject to an extensive array
of stringent regulations arising under a broad range of U.S. federal, state, local and foreign environmental, health and safety
laws relating to the generation, storage, handling, discharge, disposition and stewardship of hazardous wastes and other harmful
materials. These regulations have potential implications for us in terms of our manufacturing operations, product handling and
use by customers and agents, as well as installation processes. In this regard, we will likely have to expend substantial amounts
to comply with such laws and regulations as well as establish and maintain an evolving set of policies to minimize and control
our environmental discharge and emissions. Nevertheless, legislative, regulatory and economic uncertainties (including existing
and potential laws and regulations pertaining to climate change) may make it difficult for us to project future spending for these
purposes and, if there is an acceleration in new regulatory requirements, we may be required to expend substantial additional funds
to remain in compliance.
Our applications services operations are
subject to various federal, state, and/or local laws regulating the discharge of materials into the environment or otherwise relating
to the protection of the environment, such as discharge into soil, water, and air, and the generation, handling, storage, transportation,
and disposal of waste and hazardous substances. We expect that, from time to time, we will be involved in environmental matters
at certain of our locations or in connection with our operations. Although there can be no assurance, we do not anticipate that
the cost of complying with environmental laws or resolving environmental issues relating to locations or operations in in North
America to have a material adverse effect on our financial position, results of operations, or cash flows.
Coatings Products Industry Competition
Product performance, technology, cost-effectiveness, quality and
technical and customer service are major competitive factors in the industrial and flooring coatings businesses. While, as discussed
elsewhere, we are aware of a variety of products that share some of the attributes as our own, including some in our interior flooring
and exterior hardscape categories, we are unaware of any one or more products possessing the identical combination of physical
properties, and that, on the whole, offers exactly the same array of benefits, as our proprietary line of specialty coatings. There
can be no assurance, however, that there’s not products under development or already in existence and in the early stages
of market introduction of which management is not yet aware. The market for industrial and product performance coatings is extremely
large, broad in scope, and consists of many different segments and sub-segments, each of which involves a range of product applications.
It is also increasingly characterized by rapidly evolving technology. Precisely because of the wide array of beneficial properties
they possess, the specialty coatings produced and distributed by us should be viewed as competing with other coatings products
across a wide variety of the various existing market segments and sub-segments. Hydrophobic, anti-corrosion and antimicrobial coatings,
for example, are each segments in which numerous companies are aggressively competing with one another worldwide, both in terms
of technology and market share, but that, combined, represent only a minor portion of the aggregate competition that we should
be viewed as meaningfully confronting.
The competition faced by us in relation to our proprietary line
of specialty coatings includes both public and private organizations and collaborations among academic institutions and large companies,
both domestic and foreign, most of which have significantly greater experience and financial resources than us. We expect that
our most significant competitors, at least in some verticals, will tend to be larger, more established companies, including many
major multinational corporations such as Akzo Nobel N.V., PPG Industries, Inc., Axalta Coating Systems, and Valspar Corporation.
In general, these companies are all developing products that, at some level or in one or more ways, compete with ours and, in addition
to many existing issued and pending patents, they have significantly greater capital and other resources available to them for
research and development, testing, seeking and obtaining any required regulatory approvals, marketing and distribution. In addition,
many smaller coatings have formed strategic alliances or collaborative arrangements, partnerships, and other types of joint ventures
with larger, well-established industry competitors that afford these companies’ potential research and development and commercialization
advantages, and may be aided in becoming significant competitors through rapid evolution of new technologies. Academic institutions,
governmental agencies, and other public and private dedicated research organizations are also financing and conducting research
and development activities that could result in the introduction of products directly competitive to our own.
Interior Flooring and Exterior Hardscape
Applications Services Competition
We believe that each aspect of our applications
services business will prove highly competitive and that such competition will be based primarily on price, quality of service,
efficiency enhancements, ability to adapt to changing workplace conditions, and ability to anticipate and respond to industry changes.
Although we believe that the quality and developing reputation of our proprietary products that we apply in connection with our
services will serve to facilitate meaningful and durable competitive advantages in establishing and maintaining client accounts,
we are proceeding on the basis of our conservatively arrived at assumption that a majority of our potential services revenue will
be driven by prospective accounts requiring competitive bids, and that invitations to bid will often be conditioned upon prior
experience, industry presence and demonstrated expertise, and financial strength, all factors in relation to which we should be
expected to be at a meaningful competitive disadvantage. The low cost of entry in the facility services business results in a very
competitive market. We expect to compete largely with regional and local owner-operated companies that may have more acute vision
into local markets and significantly lower labor and overhead costs, providing them with competitive advantages in those regards.
We also expect to compete indirectly with companies that can perform for themselves one or more services that we do not provide.
Intellectual Property
The competitive environment in which we operate is largely driven
by technology, proprietary or otherwise. In general, companies in this environment seek to develop competitive advantages –
both offensive and defensive – through the obtaining and maintaining of relevant patents and trade secrets (“intellectual
property” or “IP”) relating to their respective technological advancements. As a science and technology based
company, we believe that securing intellectual property is an important part of protecting our research and development.
Our IP strategy has been arrived at after extensive consideration
of the relevant factors associated with both trade secret and potential patent protection. Given the meaningful disadvantages occasioned
by the pursuit and/or issuance of potential patents on our technologies, coupled with the practical realities surrounding policing
concerns thereafter, the strategy settled upon is one which relies strictly, at least for the time being and foreseeable future,
on the protection and maintenance of trade secrets, and does not involve the pursuit of any patents, either in the United States
or elsewhere.
Our core advanced coatings products’ unique competitive advantages
are protected by closely-guarded trade secrets consisting of proprietary chemistry and formulations. In this regard, trade secrets
play an important part in our intellectual property strategy, and we vigilantly seek to protect them. To protect our proprietary
position in trade secrets, we require all employees, consultants, advisors and collaborators with access to our technology to enter
into confidentiality and invention ownership agreements with us. There can be no assurance, however, that these agreements will
provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized
use or disclosure. Further, in the absence of patent protection, competitors who independently develop substantially equivalent
technology, or otherwise acquire it, may adversely impact our business. If and when we discover that any trade secrets have been
misappropriated, it is expected that we will, unless we otherwise determine for strategic or similar reasons, report the matter
to governmental authorities for investigation and potential criminal action, as appropriate. In addition, and to the extent that
we have the available financial resources, we intend to take all reasonably required measures in an effort to mitigate any potential
adverse economic impact, which may include civil actions seeking redress, restitution and/or damages based on losses sustained
by us and/or unjust enrichment by a counter-party.
The fields in which we operate have been characterized by significant
efforts by competitors in recent years to establish dominant or blocking patent rights to gain a competitive advantage, and by
considerable differences of opinion as to the value and legal legitimacy of competitors’ purported patent rights and the
technologies they actually utilize in their businesses. There can be no assurance that we will not be victimized by such aggressive
initiatives and deliberate disputes.
It is possible that competitors in both the United States and foreign
countries, many of which have substantially greater resources and have made substantial investments in competing technologies,
may have applied for, or may in the future apply for and obtain, patents, which will have an adverse impact on our ability to make
and sell our products. There can also be no assurance that competitors will not reverse engineer any one or more of our formulations,
or will not claim that we are infringing on their patents. Defense and prosecution of patent infringement suits, even if successful,
are both costly and time consuming. An adverse outcome in the defense of a patent infringement suit could subject us to significant
liabilities to third parties, require disputed rights to be licensed from third parties or potentially even require us to cease
our operations.
ADVANCED CEMENT SCIENCES
Advanced Cement Sciences, LLC (“ACS”) is a Florida-based,
development-stage company that acquired and owns certain intellectual property aimed at the production of advanced concrete and
stucco admixtures and that consists principally of a combination of unique, proprietary formulations and production processes.
ACS is in the process of developing and commercializing an array of application-specific products that rely on this technology,
each of which are at a different stage of research and development, on the one hand, or very early commercialization, on the other.
ACS has not, to date, generated anything
beyond nominal revenues despite it being
a venture that our management had been very actively involved in developing since
2016 and into which we have invested significantly. Due to a lack of available company financial resources, coupled with its lack
of near-term prospects for generating material revenue, ACS has been the subject in recent months of considerably reduced allocations
of our available capital and human resources, a trend we expect to continue unless and until our financial condition substantially
improves.
Technology
The ACS core technology centers around what are believed by management
to be two meaningfully proprietary advances in concrete materials engineering:
|
▪
|
Industrial chemistry formulations that result in multi-functional, high-performance concrete and stucco end-products that possess physical, flexural, chemical, and structural properties believed by management to potentially be unparalleled in their respective U.S. domestic and global markets.
|
|
|
|
|
▪
|
Methodologies for the custom blending, bonding and assimilation of base catalytic chemistries with a variety of industrial nanofibers and nanoparticles such that the net results are concrete and stucco end-products carrying a broad array of application-specific, custom-enhanced properties and high-performance characteristics.
|
Taken as a whole, we believe that our ACS platform technology is
not merely a finite assortment of formulations from which certain useful products have been derived, but rather an evolving continuum
of custom-blended concrete and stucco admixture variations subtly adaptable to meet a broad array of specific industrial applications
and needs.
ACS is achieving results in the performance and other characteristics
of its nano-engineered catalytic chemistry that management believes may prove unparalleled in a variety of ways. It is doing this
by using internally developed, largely unconventional and proprietary combinations of materials and chemistry, including advanced
compound assimilation methodologies believed by us to be unique to ACS.
Beyond its unique and proprietary concrete and stucco admixture
formulations themselves, ACS has additionally developed an advanced product delivery system not otherwise known by us to be utilized
in the industry that dramatically simplifies the process associated with mixing and preparing end-product, the purpose of which
is to render the process much more mistake-proof than it might otherwise be. ACS’s “AdPacks,” named for their
novel combining of the concrete industry admixture concept with that of a pre-mixed, ready-to-go package, contain a dense, viscous
cake-mix style assortment of pre-measured and combined contents constituting a base product which, when combined on a production
line or job site with cement, water and most commonly used concrete or stucco aggregates in accordance with provided instructions
and supplemental videos, results in an end-product with notably superior characteristics for its particular purposes. It is management’s
goal to make the ACS AdPacks available in off-the-shelf SKUs as well as custom formulations, and can be delivered in bag-sizes,
totes or drums to meet quantity requirements at all industry levels.
Products and Markets
ACS is currently developing and, to varying degrees, commercializing,
three distinct AdMix product lines:
|
▪
|
Ultra-Lightweight Concrete Dry AdMix (AdPack)
|
|
▪
|
High-Performance Stucco Dry AdMix (AdPack)
|
|
▪
|
Ultra-Lightweight Concrete Block Dry AdMix (AdPack)
|
ACS has not, to date, generated anything beyond nominal revenues
from any developed product lines.
Our
Ultra-Lightweight Concrete
Dry AdMix and
High-Performance Stucco Dry AdMix are each believed by us to be ready at this time for
commercialization and market introduction, subject to a variety of questions that remain unresolved, particularly those associated
with continuing uncertainties surrounding the following, among others:
|
▪
|
the long-term performance characteristics and durability of the products,
|
|
▪
|
the lack to date of having completed comprehensive industry-standard testing of such products,
|
|
▪
|
market sizes,
|
|
▪
|
market receptivity,
|
|
▪
|
market penetration rates,
|
|
▪
|
the attainability and sustainability of targeted market price points for such products in order to achieve established benchmark minimum gross margin thresholds, and
|
|
▪
|
the degree to which stockpiling speculative inventory will be necessary during the early-going sales period to meet customer demand if and when it materializes and develops.
|
Despite these continuing uncertainties, sales of our proprietary
ACS Ultra-Lightweight Concrete Dry Admix have begun to a company with which ACS is affiliated (through common ownership with one
of the beneficial owners from whom we recently acquired the remaining interest in ACS that we had not previously owned), United
Stone, LLC, and that is currently selling precast decorative lightweight “manufactured stone” end-product that it is
producing with our product. Notably, the end-user customer on these orders is Lennar Corporation, a very large homebuilder operating
throughout the U.S.
Other applications for our Ultra-Lightweight Concrete Dry Admix
are currently subject to continuing research, development and testing, including fire-resistant hollow-core panels, and other pre-cast
construction panels and materials, for which the potentially definable construction markets are each global and massive by any
sales volume standard.
Our
Ultra-Lightweight Concrete
Block Dry AdMix remains for the time being
subject to continuing research, development and testing.
We are cautiously optimistic regarding the prospects for this product, however, given the enormity of the global market potential
within the construction sector and the uniquely valuable fire-resistant properties we believe that we can achieve and eventually
be able to claim coupled with the substantially reduced weight of these units relative to the standard, ubiquitous units being
sold worldwide in this category.
At the broadest industrial level, and at each of the U.S. domestic
and global levels, there are two basic customer categories within the concrete and stucco family of products, both of which ACS
intends to serve:
|
▪
|
Manufacturers who rely on concrete to make precast products they sell for use by property owners, developers, contractors, and builders; and
|
|
|
|
|
▪
|
Developers, contractors and builders who rely on ready-mix or mix-on-site concrete and stucco for pour-in-place and tilt-up construction projects they develop, manage, and build.
|
With end-product that tends to be very bulky, heavy and prone to
breakage in transport, and with only minor exception, those in the first group are believed by management to naturally covet a
concrete that is many times lighter in weight than standard concrete, and that features a flexural strength that preserves the
integrity of their product where it would otherwise fail (crack or break), but only if the cost of using it is meaningfully lower
on a net, all-in basis. Although there are others, some of which are very large, initially targeted markets by ACS within this
group include the following, in relation to which ACS believes it can most rapidly achieve meaningful revenue growth and market
penetration:
|
▪
|
Producers of concrete interior and exterior “manufactured stone” panels and veneers, architectural trim and decorative pieces (product: ACS Ultra-Lightweight [Design] Formula AdPack); and
|
|
|
|
|
▪
|
Subject to completion of ongoing product development, concrete block (product: ACS Ultra-Lightweight Block Formula AdPack).
|
With end-product that consumes vast amounts of concrete to achieve
required compressive and tensile strength levels, those in the second group are believed by management to covet concrete and stucco
materials that are substantially stronger than standard offerings, thus enabling the use of substantially less material to achieve
comparable strength, but, here too, only if the cost of using it is meaningfully lower on a net, all-in basis. Although the largest
markets within this group consist of those developers, contractors and builders using ready-mix or mix-on-site concrete for pour-in-place
and tilt-up construction projects, and ACS intends to pursue those markets in time with products currently under development and
testing, initially targeted markets by ACS within this group are limited solely to stucco, in relation to which ACS believes it
can most rapidly achieve meaningful revenue growth and market penetration. For this vertical, ACS offers its Ultra-High-Performance
Stucco Formula AdPack.
Sales initiatives for ACS product have been underway for over a
year as of the date of this Annual Report on Form 10-K, and such initiatives have been, intentionally due to production constraints,
slow to develop and limited to those aimed strictly at the “manufactured stone” market and, more recently, the stucco
market. Given the realities of new product introductions generally, and the need in the case of ACS products to not only evidence
product compliance with existing building codes and related industrial standards, but also demonstrate product workability and
efficacy through showcase projects, positive customer experiences, and industry expert references and endorsements, ACS is yet
to achieve any meaningful degree of sales traction for either of those product lines and, to date, sales have been very limited
and deliberately targeted towards customers that view their use of the product as part of a series of final-stage, semi-pilot projects.
In the meantime, steady efforts have been underway towards enabling ACS’s ability to systematically provide evidence of product
compliance with existing building codes and related industrial standards within identified markets, as well as to readily demonstrate
product workability and efficacy through showcase projects, positive customer experiences, and industry expert references and endorsements
within such markets.
Manufacturing and Marketing
To date, and beyond that associated with continuing product research
and development, manufacturing and packaging of ACS product has been low-rate, batch only (i.e. non-automated). Systems design
and planning for automated production and packaging are currently (and as they have been for some time now due to financing constraints)
in the early stages of development, though implementation will be dependent on the availability of required financing. In the meantime,
pursuit and acceptance of purchase orders has been and will necessarily continue to be constrained by very limited production capacity.
Subject to the availability of required financing and allocation
by management, for which there can be no assurance, ACS’s 2-year manufacturing and marketing development plan is highlighted
by the following key objectives:
|
▪
|
implementing strategic intellectual property initiatives aimed at minimizing vulnerabilities for all product lines;
|
|
|
|
|
▪
|
building out manufacturing capacity and operations for each of the Ultra-Lightweight Formula AdPack (including concrete block) as well as Ultra High-Performance Stucco Formula AdPack product lines;
|
|
|
|
|
▪
|
building out the marketing and sales operations organization for those same product lines; and
|
|
|
|
|
▪
|
continuing R&D initiatives in respect of all product lines.
|
Historically, the handling of nanofibers and nanoparticles has been
widely recognized as posing significant health and safety concerns and challenges stemming from the potentially hazardous particulates
emitted into the air during the production, transport, and use of these materials. These emissions occur because, in the absence
of industry-appropriate methods, processes and practices for the containment of otherwise loose, airborne particulates, such matter
can get drawn into the eyes, the throat and lungs, and onto the skin, of those individuals handling or otherwise being exposed
to these materials. Such exposure can lead to a variety of health and safety concerns. In relation to the production of those ACS
admixture products that rely on the incorporation of nanoparticle-enhanced nanofibers, therefore, and although there can be no
assurance that any safety precautions will prove reliable against any and all vulnerabilities in all instances, ACS has adopted
and utilizes what it has deemed to be reasonably suitable methods and practices for the containment of these hazardous substances.
Backlog
In general, ACS does not manufacture its products against a backlog
of orders and does not consider or expect backlog to be a significant indicator of the level of future sales activity. Production
and inventory levels are based on the level of incoming orders as well as projections of future demand. Accordingly, we do not
believe that ACS backlog information is material to an understanding of our overall business and should not be considered a reliable
indicator of ACS’s or our ability to achieve any particular level of revenue or other metric of financial performance.
Intellectual Property
The only material asset of ACS existing
as of the date hereof is the intellectual property
underlying the ACS technology
, the value of
which remains highly speculative as of the date hereof, but the prospects for which offer potentially desirable returns for each
of at least several applications in the event of successful product commercialization and market penetration/adoption at targeted
price points.
This intellectual property was acquired via irrevocable assignment by ACS in February of 2018 from the individual
responsible for its development, Matthew Piazza, who has been independently consulting for ACS and is expected to continue to do
so for the foreseeable future, though there is not currently an agreement in place relating to Mr. Piazza’s services going
forward. Pursuant to the terms of the agreement by which ACS acquired the subject technology from Mr. Piazza, ACS is obligated
to pay to Mr. Piazza a percentage of all annually distributable income of ACS based on the gross profit margins of products sold
by or for the account of ACS, and actually realized by ACS and not at any time recouped, in accordance with the following schedule:
Gross
Margin Actually Realized By ACS
|
Percentage
|
Up To 35%
|
-0-
|
35-45%
|
1%
|
45.01-55%
|
2%
|
55.10-65%
|
3%
|
65.01-75%
|
4%
|
75.01% or More
|
5%
|
Although there can be no assurances as to the discounted present
or future value of our ACS technology, and despite our having been unable as a practical matter - due to prohibitive cost considerations
given our current financial condition and unavailability of allocable cash - to obtain a professional, independent third-party
valuation and/or fairness opinion, we have concluded based on our unique (though necessarily incomplete) knowledge of the relevant
facts as a founding member since inception that ACS represents a uniquely worthy investment opportunity for us given the potential
revenue-generating value of its intellectual property.
Our Historical Involvement With ACS
The Company was one of three founding members in ACS in September
2016. Following an equity restructuring of ACS that occurred in May 2017 that arose out of the agreed-upon departure from the enterprise
of one of the founding technology firms and the addition of a new member that occurred in July 2017, until the series of transactions
consummated on December 24, 2018, the venture was owned and controlled approximately 93% by its remaining two founding members,
the Company and Nanotech Fibers, LLC, each of which have been actively involved in its development to date. Although ACS had been
in a purely pre-revenue stage of development, our management team had been devoting a very significant percentage of its time to
the business of this enterprise.
Since September 14, 2016, and for accounting purposes under FASB
guidelines, ACS had constituted a variable interest entity of which the Company until recently owned a minority 31.05% economic
interest and for which it had been considered the primary beneficiary among the equity participants based on qualitative and quantitative
criteria. For this reason, we have been auditing and consolidating the financial statements of ACS together with our own since
September 24, 2016.
Pursuant to an unwritten understanding
among the then-members of ACS, we, as a significant stakeholder in ACS, began making expenditures on behalf of ACS in late 2016
because, as a practical matter, we had available funds to allocate and ACS was without other sources of available financing. Although
it was never formally agreed to, the basic understanding among the members was that we would make expenditures on behalf of ACS
that would be treated as a loan (though no interest rate was at any time specified). The reason it was never reduced to a formal
written agreement was that working out the precise and definitive details of such agreement proved ultimately to be too challenging
to be meaningfully effective on a prospective basis given the variety of materials, personnel services, facilities and other resources
involved (shared and/or crossing over between the Company and ACS), coupled with the reality that the composition of such expenses
was evolving continuously and rapidly.
As of December 24, 2018, the date on which the series of transactions were consummated
causing ACS to have become our wholly-owned subsidiary, ACS owed us $242,579 for expenditures we had incurred on behalf of ACS
since September 14, 2016.
On December 24, 2018, and in a series of separate but related taxable
transactions, the Company acquired the 68.95% economic – and 68.42% voting – interests not previously owned by it in
ACS, resulting in the Company owning 100% of ACS as of the date hereof (and making it a wholly-owned and consolidated subsidiary).
Prior to the consummation of these transactions, effected separately with each of the other four holders of membership interests
in ACS, we had owned a 31.05% economic – and 31.58% minority voting – interest in ACS. In exchange for the acquisition
by the Company of such combined membership interests, the Company issued to the holders thereof a combined total of 175,000,000
shares of Company common stock, including
57,458,335
shares, indirectly and through beneficial
ownership, to our president and chief executive officer, Steven Malone, 57,458,333, also indirectly and through beneficial ownership,
to our corporate and securities legal counsel, Michael Membrado, and
28,729,166,
also indirectly
and through beneficial ownership, to Mr. Piazza, the developer of the ACS technology. The agreements pursuant to which this series
of transactions were consummated are included as Exhibits
10.50 – 10.53
to our Current
Report on Form 8-K filed December 31, 2018. In connection with the acquisition of this remaining percentage interest in ACS, each
of the three incumbent managers of ACS resigned, effective immediately, and the Company designated itself as the manager of that
entity, which now exists as our wholly-owned subsidiary.
COMBINED BUSINESSES
Significant Customers
and Vendors
During the years ended December 31, 2018 and 2017, we generated
a significant portion of our revenues from certain customers as follows:
|
|
% of Total Revenues
|
Customer
|
|
2018
|
|
2017
|
Caribbean Energy Solutions, LLC.
|
|
|
18.44
|
%
|
|
|
0.45
|
%
|
Springfield ReManufacturing Corp. (SRC)
|
|
|
13.64
|
%
|
|
|
7.50
|
%
|
Permatect Facility Solutions
|
|
|
9.03
|
%
|
|
|
3.05
|
%
|
During the years ended December 31, 2018 and 2017, our significant
product and chemical raw material purchases were as follows:
|
|
|
% to Total Products
|
|
|
|
2018
|
|
|
|
2017
|
|
Vendor A
|
|
|
22.36
|
%
|
|
|
—
|
|
Vendor B
|
|
|
16.46
|
%
|
|
|
18.41
|
%
|
Vendor C
|
|
|
10.45
|
%
|
|
|
7.15
|
%
|
We currently have no long-term written agreements with any of these
vendors. The payment terms are generally net 30 days, and we are not substantially dependent upon any one or more of them; all
are easily replaceable with any locally or nationally available supplier.
Corporate Formation, Legacy, History &
Subsidiaries
We were incorporated in the State of Nevada on November 7, 1997
as EJH Entertainment, Inc. On December 4, 1997, a predecessor corporation with the same name as our own but domiciled in Idaho
was merged with and into us. Although the predecessor Idaho corporation was without material assets or operations as of the time
of the merger, since being organized in 1968, it had historically been involved in mining and entertainment businesses unrelated
to our current business.
Beginning in 1997, and although we were not then a reporting company
under the Securities Exchange Act, our common stock was quoted on the OTC Bulletin Board (originally under the symbol “TIXX”,
which was later changed to “TIXXD”). On May 13, 1999, we changed our name to FINdex.com, Inc. On March 7, 2000, in
an effort to satisfy a then recently imposed NASD Rule eligibility requirement that companies quoted on the OTC Bulletin Board
be fully reporting under the Securities Exchange Act (thereby requiring recently audited financial statements) and current in their
filing obligations, we acquired, as part of a share exchange in which we issued 150,000 shares of our common stock, all of the
outstanding capital stock of Reagan Holdings, Inc., a Delaware corporation. At the time of this transaction, Reagan Holdings was
subject to the requirements of having to file reports pursuant to Section 13 of the Securities Exchange Act, had recently audited
financial statements and was current in its reporting obligations. Having no operations, employees, revenues or other business
plan at the time, however, it was a public shell company. As a result of this transaction, Reagan Holdings, Inc. became our wholly
owned subsidiary and we became the successor issuer to Reagan Holdings for reporting purposes pursuant to Rule 12g-3 of the Securities
Exchange Act. Shortly thereafter, we changed our stock symbol to “FIND.” Though it does not currently have any operations,
employees, or revenues, Reagan Holdings remains our wholly-owned subsidiary.
In addition to Reagan Holdings, we also have one other wholly owned
subsidiary, Findex.com, Inc. (i.e. the same name as our own), a Delaware corporation. Like Reagan Holdings, this entity, too, does
not currently have any operations, employees, or revenues. This subsidiary resulted from an acquisition on April 30, 1999 pursuant
to which we acquired all of the issued and outstanding capital stock of FINdex Acquisition Corp., a Delaware corporation, from
its then stockholders in exchange for 4,700,000 shares of our common stock, which, immediately following the transaction, represented
55% of our total outstanding common stock. Our purpose for this acquisition (under a previous management) was to broaden our then-existing
stockholder base, an important factor in our effort to develop a strong market for our common stock. On May 12, 1999, in exchange
for the issuance of 457,625 shares of FINdex Acquisition Corp. common stock, FINdex.com, Inc., another Delaware corporation (originally
incorporated in December 1995 as FinSource, Ltd.), was merged with and into FINdex Acquisition Corp., with FINdex Acquisition Corp.
remaining as the surviving entity. Our purpose for this merger (under a previous management) was to acquire a proprietary financial
information search engine for the Internet which was to serve as the cornerstone for a Web-based development-stage business, but
which has since been abandoned. As part of the certificate of merger relating to this transaction, FINdex Acquisition Corp. changed
its name to FINdex.com, Inc. We currently own 4,700,000 shares of FINdex.com, Inc. (the Delaware corporation), representing 100%
of its total outstanding common stock.
On July 23, 2014, we merged with EcoSmart Surface & Coating
Technologies, Inc., a Florida corporation (“EcoSmart Florida”). Because, for accounting purposes, this merger was treated
in accordance with ASC 805-40, Reverse Acquisitions, and Findex was recognized as the accounting acquiree in relation thereto with
EcoSmart Florida as the accounting acquirer, our consolidated financial statements for the reporting period from January 1, 2013
through July 23, 2014 were those of EcoSmart Florida, not the enterprise historically recognized as Findex. Accordingly, our consolidated
financial statements for the periods since July 24, 2014, the day after which the merger was consummated, recognize Findex and
EcoSmart Florida as a single operating enterprise and entity for accounting and reporting purposes, albeit with a carryover capital
structure inherited from Findex (attributable to the legal structure of the transaction). Readers of this annual report on Form
10-K should note that, in order to provide materially relevant disclosure regarding certain of Findex’s historical, operational
expenses not otherwise appropriately accounted for in our consolidated financial statements given the applied accounting treatment
described herein, certain disclosure is contained in the text of this report relating to such expenses, including e.g. executive
compensation, director compensation, and audit fees, that does not numerically align with the corresponding figures contained in
our consolidated financial statements.
Prior to the merger with EcoSmart Florida, and since 1999, our business
had been developing, publishing, marketing, distributing and direct-selling off-the-shelf consumer and organizational software
products for the Windows platform. Following divestitures of two software titles which had consistently accounted for the overwhelming
majority of our revenues while owned by us, including our Membership Plus product line, which we sold in late 2007, and our flagship
QuickVerse product line, which we sold during 2011, and title acquisitions during the same period that, in the aggregate, had been
relatively insignificant in offsetting the loss of revenues associated with those major divestitures, our continuing operations,
while not nominal, had been very limited and insubstantial in terms of revenue, both relative to what they had been prior thereto
and by any appropriate standalone measure. Specifically, our operations immediately prior to the merger with EcoSmart Florida consisted
exclusively of those relating to the FormTool line of products which we acquired in February 2008, as well as two language tutorial
products, which were retained after the sale of the QuickVerse product line. Due to a continuing lack of capital over a number
of years, we were unable to meaningfully grow the FormTool line and develop related products, and our business and financial prospects
became increasingly challenged. Since the merger with EcoSmart Florida, our primary focus has shifted away from the continued development
of our FormTool line and much more intently in the direction of our surfaces and coatings business, where we believe the opportunities
for our future growth are greater and have significantly more to offer economically.
In its most recent corporate form, EcoSmart Florida was organized
in 2012. The patents (since assigned by us) and other intellectual property forming the foundation of the EcoSmart business were
originally developed during a preceding period dating back to 2003 in which it was operated by the developers of the Company’s
technologies as Surface Modification Technologies, Inc. (“SMT”), a Florida corporation, and EcoSmart, LLC, a Florida
limited liability company, which were sold together to The Renewable Corporation, a Florida based company with its common stock
then traded in the over-the-counter market (“TRC”) in 2012. On January 20, 2012, EcoSmart Coating Technologies, Inc.,
a Florida corporation, was organized as a wholly-owned subsidiary of TRC. Simultaneously, EcoSmart Surface Technologies, Inc.,
also a Florida corporation, was formed as a wholly-owned subsidiary of TRC. With common ownership by TRC, the assets of each of
SMT and EcoSmart, LLC were thereafter transferred in part to EcoSmart Coating Technologies, Inc. with the remainder to EcoSmart
Surface Technologies, Inc. On September 18, 2012, EcoSmart Surface Technologies, Inc. changed its name to EcoSmart Surface &
Coating Technologies, Inc. On October 19, 2012, EcoSmart Coating Technologies, Inc. was merged with and into EcoSmart Surface &
Coating Technologies, Inc., leaving EcoSmart Surface & Coating Technologies, Inc. as the surviving corporation.
ACS, a Florida limited liability company, is an engineered cement
technology and products firm founded in mid-2016 and currently focused on developing and commercializing a line of proprietary
admixtures to be used in the production of ultra-lightweight, high-strength concrete and high-performance stucco. Since September
14, 2016, and for accounting purposes under FASB guidelines, ACS had constituted a variable interest entity of which the Company
until recently owned a minority 31.05% economic interest and for which it had been considered the primary beneficiary among the
equity participants based on qualitative and quantitative criteria. On December 24, 2018, and in a series of separate but related
taxable transactions, the Company acquired the 68.95% economic – and 68.42% voting – interests not previously owned
by it in ACS, resulting in the Company owning 100% of ACS as of the date hereof (and making it a wholly-owned and consolidated
subsidiary). Prior to the consummation of these transactions, effected separately with each of the other four holders of membership
interests in ACS, we had owned a 31.05% economic – and 31.58% minority voting – interest in ACS. In exchange for the
acquisition by the Company of such combined membership interests, the Company issued to the holders thereof a combined total of
175,000,000 shares of Company common stock.
Employees
As of April 16, 2019, we had six full-time and two part-time employees/contractors.
Two full-time employees/contractors are part of the senior-level executive team, one full-time employee/contractor and one part-time
employee/contractor are part of the product research and development and business development team, one part-time employee/contractor
and one part-time employee/contractor is part of the marketing, customer service and sales team, one full-time employee/contractor
is part of the manufacturing team, and one full-time employee/contractor is part of the financial management and administration
team.
We rely heavily on our current officers and directors in operating
the business. We are not subject to any collective bargaining agreements and believe that our relationships with our employees/contractors
are good.
Principal
Executive Offices and Contact Information
Our executive offices are located at 1313 South Killian Drive, Lake
Park, FL 33403, and our main telephone number at that address is 561-328-6488. The Internet address for our website is
http://www.ecosmartsurfaces.com
.
The contents of our website are not incorporated by reference into this Annual Report on Form 10-K and should not be relied on
by investors for the accuracy of the information set forth therein.
Certain matters discussed in this annual report on Form 10-K for
the fiscal year ended December 31, 2018 contain forward-looking statements that involve uncertain outcomes, outcomes that may or
may not materialize, risks associated with certain outcomes, and, in many cases, management judgments relative to such outcome
uncertainties and risks. Many of the factors associated with such forward-looking statements that could cause actual results to
differ from those projected or forecast are included in the contents of this annual report on Form 10-K. In addition to other information
contained herein, readers should carefully consider the following cautionary statements and risk factors.
An investment in our securities is speculative and involves a
high degree of risk.
Company Liquidity and Related Risks
If we are required to repay our outstanding
debt as and when required, we may not be able to without either depleting our working capital or raising additional funds, and
any failure on our part to repay such debt could result in legal action against us, which could require the sale of material assets.
As of December 31, 2018, and in addition to $633,792 in trade and
related accounts payables, we owed an aggregate of $2,607,708 in principal face amount of combined notes payable and notes payable,
related parties. In accordance with the respective terms of these notes, $300,000 is required to be serviced with quarterly interest
payments (calculated on the basis of a 10% annual percentage rate) and have been overdue and payable since August 1, 2015, and
$1,409,925 is payable by us upon demand by the holders of the notes (i.e. our creditors). The extent of this debt, when coupled
with our limited revenue production during recent reporting periods, presents a situation in which our ability to service that
debt is in serious question. The Company recognized revenue of $334,331 for the period ended December 31, 2018 and our ongoing
operating costs and capital investment requirements, has us under financial pressures that materially threaten our near-term viability
and sustainability. In the event that we are required to repay some or all of these notes and/or other payables in the near-term
(and potentially beyond), in whole or substantial part, the funds available to us for this purpose would have to come from either
working capital or funds on hand in excess of working capital at that time. No assurance can be provided, however, that any such
required funds would be available to us for this purpose, and, historically, we have never had any such surplus funds. If funds
are not available to us for this purpose, we would likely need to undertake a financing transaction of some kind. No assurance
can be provided, however, that we would be able to complete any such financing between the date hereof and the date by which we
would be required to satisfy our obligations, or that, if we are able, that it would be on the basis of terms that are not unfavorable
to us. Among other reasons, this is true because investors in early-stage technology companies such as ours generally look unfavorably
on the allocation of funds invested by them towards the repayment of debt to third parties as opposed to growing the business.
In the event that we are required to repay some or all of the outstanding principal or interest, in whole or in part, and we have
insufficient funds to meet and satisfy the obligation, legal action is likely to be taken against us, which could lead to our having
to sell some or all of our material assets, including our smart surface technology patent, or potentially even to our having to
liquidate the Company.
We are operating at a substantial
working capital deficit and our liquidity and capital resources are very limited.
For the year ended December 31, 2018, we generated $334,331 in total
revenue while incurring $1,147,025 in combined sales, marketing, general and administrative expenses. This represents a substantial
working capital deficit that is severely constraining our ability to operate, both near-term and long-term and our ability to meet
our obligations as they become due. Our ability to fund working capital, as well as anticipated capital expenditures, will depend
on both our ability to raise much-needed capital and our future performance, which is subject to general economic conditions, our
customers, actions of our competitors and other factors that are beyond our control. Our ability to fund operating activities is
also dependent upon (i) the extent and availability of bank and other credit facilities, (ii) our ability to access external sources
of financing, and (iii) our ability to effectively manage our expenses in relation to revenues.
The
Company’s cash on hand as of December 31, 2018, $1,821, was insufficient to support our operations for the next twelve months.
Therefore, it is likely to become necessary for us to raise additional capital to support growth and/or otherwise finance potential
acquisitions. Furthermore, there can be no assurance that our operations or access to external sources of financing will continue
to provide resources sufficient to satisfy our liabilities arising in the ordinary course of business, and while it may be possible
to borrow funds as required, any such additional capital is likely to require that we sell and issue additional equity and/or convertible
securities, including shares issuable upon exercise of currently outstanding warrants, any of which issuances would have a dilutive
effect on holdings of existing shareholders. See “Management’s Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources” included in this Annual Report on Form 10-K.
There is uncertainty as to our ability
to continue as a going concern.
Our audited financial statements for the period ending December
31, 2018, including the footnotes thereto, call into question our ability to continue as a going concern. This conclusion was drawn
from the fact that, as of the date of those financial statements, we had a negative current ratio and total liabilities in excess
of total assets. Those factors, combined with the Company’s operating deficits, have resulted in uncertainty regarding our
ability to continue as a going concern. See Note 2 in the Notes to the Consolidated Financial Statements for the year ended December
31, 2018 included in this Annual Report on Form 10-K.
We owe an aggregate amount of $66,851
to various third parties which, under state escheat laws, could subject us to substantial additional liabilities for penalties
and interest.
We are carrying certain liabilities on our balance sheet in the
aggregate amount of $62,523 for trade payables and royalties payable in connection with services and content licenses associated
with certain of our former software titles extending back up to fifteen years but in relation to which we have been unable to locate
the parties to whom we owe such trade payables and royalties and no effort to collect such obligations by such parties or any successors-in-interest
have been made. We are additionally carrying certain liabilities on our balance sheet in the aggregate amount of $4,328 for amounts
payable to customers for product return refunds extending back up to ten years many of whom we expect, without actually knowing
at this point one way or the other, to similarly be unable to locate and in connection with which no effort to date to collect
such obligations has been made. Under the escheat laws of the various states in which these creditors were last known to have an
address based on our records, we are or may be required to pay to such states the aggregate amounts owed for these obligations
– in both categories – even though we cannot locate the actual parties to whom they are owed. Moreover, we are likely
to be additionally liable for substantial penalties, both individually and in the aggregate, for not having previously reported
such obligations and paid such amounts to such various states, which reporting obligations and associated penalties for non-compliance
vary significantly among states, as well as interest for amounts deemed past due. It is likely that these additional liabilities,
neither the individual nor collective extent of which are known at this time and as such have not been accrued, will be material
in the aggregate and have a material adverse effect on our financial condition and our results of operations, including our liquidity.
No matter how quickly we can generate
sales, assuming that we can accomplish that, we will require additional funding in the near-term, potentially substantial, and
any failure to raise additional capital necessary to support organizational, sales and operational growth will jeopardize our viability
to remain in business.
At December 31, 2018, we had $1,821 in cash and cash equivalents.
At April 16, 2019, that amount was $5,145. Given ongoing cash constraints, we currently need to raise substantial additional capital,
through either equity, debt and/or hybrid (combination equity and debt) financing. Specifically, a near-term infusion of cash
is now critical for purposes of the following:
|
▪
|
building and sustaining our sales organization, including nationally, regionally, and locally throughout North America;
|
|
▪
|
direct, online and other marketing and promotion of our products and services throughout North America, including website development, and tradeshow attendance and exhibition;
|
|
▪
|
acquiring applications service accounts as opportunities arise, at least until doing so using our common stock as currency becomes financially sensible;
|
|
▪
|
establishing and maintaining suitable manufacturing and inventory-carrying capacity to meet anticipated and actual demand for our products, including as may be prudent capital investment in production automation systems;
|
|
▪
|
purchasing raw materials in bulk and maintaining inventories of those and other consumable supplies at levels that keep pace with projected near-term sales volume;
|
|
▪
|
building and sustaining our applications servicing network and operations throughout North America, including training, equipment (including vehicles wherever warranted), uniforms, supplies and support services (including online and video/technology based);
|
|
▪
|
building our customer service and support resources;
|
|
▪
|
continuing to develop our product research and development initiatives in order to maintain our proprietary competitive advantages;
|
|
▪
|
identifying, attracting and hiring qualified key executive c-level personnel and board members;
|
|
▪
|
maintaining our general and administrative expenses at required levels, including the hiring and training of personnel, the retaining of outside professionals, and the securing and maintaining of appropriate insurance coverage for all of our products, operations and executive and directorial errors and omissions;
|
|
▪
|
investor relations initiatives, including personnel, outside services and printing;
|
|
▪
|
qualifying for, obtaining and maintaining an appropriate and competitive-rate commercial line of credit for operating the business; and/or
|
|
▪
|
meeting increasing working capital requirements.
|
There can be no assurance that any such financing, be it through
strategic collaborations, public or private equity investment or other financing sources, will be available to us as and when required,
either on acceptable terms or at all. To the extent that financing is only available through the sale of equity or convertible
securities, or that a determination is made by management that the sale of equity or convertible securities is otherwise in our
best interests, any such financing could and likely would result in significant dilution to our existing stockholders, subject,
however, to availability of authorized but unissued shares of common stock, which availability is limited and cannot be assured.
To the extent that financing is only available through the divestiture of some or all of our assets, or that a determination is
made by management that any such divestiture of assets is otherwise in our best interests, any such sale would result in the loss
of otherwise existing potential revenue and/or earnings opportunities for us achievable through retained ownership of such assets.
Further, if funds are obtained through arrangements with collaborative partners or other third parties, these arrangements may
require us to relinquish rights to some of our technologies, product candidates or products that we would otherwise seek to develop
and commercialize on our own, thereby similarly resulting in a loss of otherwise existing potential revenue and/or earnings opportunities
for us achievable through the retention of such rights. If sufficient capital is not available, we may be required to delay, reduce
the scope of, or eliminate one or more of our development programs or product lines, or potentially cease to remain in business.
Our accumulated deficit makes it
harder for us to borrow funds.
As of December 31, 2018, and as a result of historical losses both
during the year ended December 31, 2018 and prior years, our accumulated deficit was $8,966,690. The fact that we maintain an accumulated
deficit, as well as the extent of our accumulated deficit, negatively affects our ability to borrow funds because lenders –
and particularly commercial and other market rate lenders – generally view an accumulated deficit as a negative factor in
evaluating creditworthiness. Any inability on our part to borrow funds if and when required or desired, or any reduction in the
favorability of the terms upon which we are able to borrow funds if and when required or desired, including amount, applicable
interest rate and collateralization, would likely have a material adverse effect on our business, our financial condition, including
liquidity and profitability, and our results of operations. See “Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources” included in this Annual Report on Form 10-K.
Risk Associated with Any Future After-Tax
Free Cash Flow and Reported Earnings
It is highly unlikely that we will be able to benefit from
our existing net operating losses.
Although we currently have a total of $18,460,000 in net operating
losses (“NOLs”) extending back to 1996, we believe that it is highly unlikely that we will be able to offset otherwise
future taxable income by carrying forward, or otherwise being able to benefit from, those NOLs. Section 382 of the U.S. Internal
Revenue Code contains the statutory rules governing the use of NOLs as a deferred tax asset to offset otherwise taxable income.
These laws and the required analysis for determining whether a given company is, or remains over time, eligible to benefit from
its NOLs by offsetting income are highly complex, require extensive and detailed review of the company’s historical share
issuances over time, and are not easily applied in a way that results in any meaningful degree of certainty surrounding the conclusion
reached, except when completed by expert professionals. Any such expert professionals, however, are generally very expensive to
engage, retain, and render a conclusory opinion on such matter, and, although we recognize the value and importance to investors
of doing so, we have not to date had the available financial resources to allocate to this purpose, and our lack of pre-tax profitability
in recent years has served as a disincentive to make it a higher priority for us in the allocation of our very limited capital.
There can be no assurance, as such, that our NOLs carry any continuing economic value to us. When coupled with our own suspicions
that such carryover benefits have been irretrievably lost through one or more corporate actions taken by us over time, in each
case motivated by other, higher priority considerations, investors are cautioned not to factor any potential value associated with
our historical NOLs as deferred tax assets into a determination as to our future prospects or financial results.
Risks Associated with Our Businesses and
Industries
Our vertical integration into the
coatings applications services business amounts to speculative entry by us into a new and very different business.
Although we have been selling our RexPro coatings products for a
number of years (up until recently under the EcoSmart brand), and gradually developing that business, our recent determination
to vertically integrate by expanding into the interior flooring and exterior hardscape applications services business, and making
that our primary focus, represents a material departure for us from our historical business operations. Accordingly, our primary
business should be viewed as speculative and one subject to some or all of the attendant risks and uncertainties associated with
start-up companies generally and those in the specialty maintenance service contracting industry, specifically, including without
limitation:
|
▪
|
potential business model non-feasibility;
|
|
▪
|
theorized product value propositions not materializing as projected in the market;
|
|
▪
|
sales developing more slowly than projected;
|
|
▪
|
higher than expected cost of entry into potential markets;
|
|
▪
|
inability to find and retain available contract crew labor (including crew leaders) as required;
|
|
▪
|
inability in our applications services operations to gradually reduce our dependence on unaffiliated general contractors and develop our own network of go-to crew members;
|
|
▪
|
inability to manufacture sufficient quantities of product to keep pace with applications demand;
|
|
▪
|
inability to attain and sustain projected gross margin levels as business grows;
|
|
▪
|
intense market competition from more established companies with greater resources;
|
|
▪
|
inability to adequately protect intellectual property;
|
|
▪
|
competition for managerial and other employee talent;
|
|
▪
|
potential product failures and/or unsatisfactory applications services leading to reputational decline in the market;
|
|
▪
|
performance mishaps occurring in the course of applications services more frequently than projected, thereby increasing insurance costs and eroding unit economics;
|
|
▪
|
unanticipated difficulties in collecting accounts receivable;
|
|
▪
|
acquisitions that prove unworthy over time of the purchase price paid;
|
|
▪
|
inability to effectively manage rapid growth; and
|
|
▪
|
lack of industry experience and expertise in what is effectively an entirely new business.
|
Although we believe that we are adequately prepared to experience
success if and when we complete a required, substantial and near-term financing, especially given our control over our proprietary
products, our decision to vertically integrate by entering the applications services aspect of the flooring and hardscape coatings
industry represents a major shift in our business, and one in relation to which we have no direct experience and only limited indirect
experience, and we must for this reason be viewed properly as a start-up venture in this aspect of our business, which we are depending
on becoming a major aspect.
Sales growth in our RexPro coatings products has been slow
to develop and our production volume remains small, which poses certain forward-looking operational challenges.
Developing sales volume for our coatings products since we took
over the business in 2014 has proven challenging and, as an objective, elusive. In addition to the fact that continuing product
R&D, internal testing, and commercialization has been ongoing in relation to some of our products, and gaining the attention
of customers and users through their own testing and continued use of our products has taken longer than we wanted, this has been
true, we believe, largely because of an ongoing lack of financial resources available or allocated to hiring sales personnel and
making other investments in marketing and sales, as well as indecision on our part to some extent as to where, precisely, to focus
any such investments given our broad array of options and the rapidly evolving apparent market promise of any one vertical market
product over another or over all others. Although we have been producing and selling our coatings for roughly five years now, and
consider ourselves operationally efficient in managing our manufacturing operations, and although management believes that our
coatings sales in our recently identified vertical-of-choice (flooring and hardscapes) can be significantly increased to the extent
that we complete a substantial financing that enables us to allocate adequate capital to building those sales, any substantial
increase in required production output, particularly if rapid, would necessitate corresponding increases in production capacity,
and any such necessity could potentially strain our resources and test our ability to efficiently scale. There can be no assurance
that any such substantial and rapid increase in demand for our products would not result in delays or other complications in meeting
orders, or required expenditures in automation, or that such results or requirements would not have a material adverse effect on
our business, prospects, financial condition or results of operations.
The markets for our RexPro coatings
products are highly competitive.
The applications markets that we are targeting for our RexPro coatings
are perceived by management to present substantial, attractive economic opportunities for us because of the unique array of benefits
the coatings are expected to be able to provide. With many different companies in the industrial coatings market all vying for
market share, ranging from small and specialized, on the one hand, to large and diversified, on the other, and each selling products
with coatings that offer many of the same benefits as our own, however, there can be no assurance that the coatings products marketed
by others will not become the preferred choice among manufacturers of end-products and/or customers over time with respect to any
one or more individual applications markets category. For many different reasons the particular combination of which is not consistent
in each case, category leaders are not always necessarily the most effective products in a given market segment. Although we are
aware, for example, of other products possessing a similar array of benefits to many of our own and that, more generally, offer
comparable value to our own in many of our vertical markets, and although we further believe that, in certain verticals, our RexPro
products are either easier to use for those applying them, more cost-effective, qualitatively superior in material respects to
all others in their category, or all of these, comparability to products selling well in the market, or even qualitative superiority
over them in terms of ease-of-use and performance, are not necessarily enough to assure market share. Well-established brand-name
recognition, strength of distribution channels, industry ‘marketing muscle,’ customer pull-through, and credibility,
for example, and especially when coupled with relative financial strength, are all major competitive factors in the industrial
coatings business and can often be more important than technological superiority in a head-to-head market competition. And while
we aim to build all of these desirable attributes over time, we are a relatively new entrant in the industry and each of them generally
requires a sustained presence in the market that can take many years to develop.
With respect to our RexPro interior flooring and exterior hardscape
coatings, which are expected by us to increasingly become the focal point of our revenues over time, there are certain products,
among the many available in the market, that we consider to be our most serious competition. For interior surface (flooring) products,
these include NeverStrip, Epic, Adsil MicroGuard, EcoProcote, ETS 180, and SaniGLAZE. For exterior surface (hardscape) products,
these include Black Diamond, Epic, Adsil MicroGuard, Endura, Valspar, Rock Solid and Glaze-‘n-Seal. Although there can be
no assurance, we believe, however, that our RexPro products are worthy of competing very effectively in both categories. While
in respect of some product attributes, we may be found to perform less favorably than some competitive products, we do not believe
that the degree to which that conclusion is true is material, and, in contrast, we do believe that, when taken as a whole, our
products offer the most complete variety of superior attributes.
As it relates to our RexPro coatings more broadly, the market for
industrial and product performance coatings is extremely large, broad in scope, and consists of many different segments and sub-segments,
each of which involves a range of product applications, and each of which is also increasingly characterized by rapidly evolving
technology. Precisely because of the wide array of beneficial properties they possess, the specialty coatings produced and distributed
by us should be viewed as competing with other coatings products across a wide variety of the various existing market segments
and sub-segments. Hydrophobic and antimicrobial coatings, for example, are each segments in which numerous companies are aggressively
competing with one another worldwide, both in terms of technology and market share, but that, combined, represent only a minor
portion of the aggregate competition that we should be viewed as meaningfully confronting in relation to our coatings business.
The competition faced by us in relation to our proprietary line
of RexPro specialty coatings includes both public and private organizations and collaborations among academic institutions and
large companies, both domestic and foreign, most of which have significantly greater experience and financial resources than us.
Management expects that our most significant competitors in our coatings business will tend to be larger, more established companies,
including many major multinational corporations such as Akzo Nobel N.V., PPG Industries, Inc., Axalta Coating Systems, BASF Corporation,
and Valspar Corporation. In general, these companies are all developing products that, at some level or in one or more ways, compete
with our own and, in addition to many existing issued and pending patents, they have significantly greater capital and other resources
available to them for research and development, testing, seeking and obtaining any required regulatory approvals, marketing and
distribution. In addition, many smaller coatings and related nanotechnology and materials companies have formed strategic alliances
or collaborative arrangements, partnerships, and other types of joint ventures with larger, well-established industry competitors
that afford these companies’ potential research and development and commercialization advantages, and may be aided in becoming
significant competitors through rapid evolution of new technologies. Academic institutions, governmental agencies, and other public
and private dedicated research organizations, moreover, are also financing and conducting research and development activities that
could result in the introduction of products directly competitive to those of ours.
If it turns out that one or more other companies are able to achieve
a dominant market position in any one or more applications markets potentially served by one or more of our RexPro coatings, including
our indoor flooring or outdoor hardscape coatings products, and whether on the basis of broad market strength or otherwise, it
will likely have an adverse effect on the pace with which we are able to grow revenues, as well as on our prospects more generally,
outcomes which, in turn, are likely to lead to a downward adjustment in our publicly quoted stock price.
The market for our RexPro coatings applications services is
highly competitive, and we are a new entrant.
We believe that each aspect of our RexPro
applications services business will prove highly competitive and that such competition will be based primarily on price, quality
of service, efficiency enhancements, ability to adapt to changing workplace conditions, and ability to anticipate and respond to
industry changes. Although we believe that the quality and developing reputation of our proprietary RexPro products that we apply
in connection with our services will serve to facilitate meaningful and durable competitive advantages in establishing and maintaining
client accounts, we are proceeding on the basis of our conservatively arrived at assumption that a majority of our potential services
revenue will be driven by prospective accounts requiring competitive bids, and that invitations to bid will often be conditioned
upon prior experience, industry presence and demonstrated expertise, and financial strength, all factors in relation to which we
should be expected to be at a meaningful competitive disadvantage. The low cost of entry in the facility services business results
in a very competitive market. We expect to compete largely with regional and local owner-operated companies that may have more
acute vision into local markets and significantly lower labor and overhead costs, providing them with competitive advantages in
those regards. We also expect to compete indirectly with companies that can perform for themselves one or more services that we
do not provide.
Our success going forward will depend
on our ability to establish and maintain client relationships defined by justifiably profitable, recurring business, and accomplishing
that despite the intensely competitive industry environment presents many significant challenges.
A primary determinant of success in our unfolding initiative to
vertically integrate our RexPro interior flooring and hardscape coatings products business with the services component of applying
those products will be our ability to convince property owners, managers and tenant/lessees to perform those applications services
for them at a price that meets our internal unit gross margin threshold, and thereafter provide such positive client experiences
and value that those decision-makers are lead to continue to rely on us for those services. Each aspect of this combined challenge
presents unique obstacles for us. First, and as it relates to securing opportunities for the applications servicing work, we are
competing without any existing track record of performance in a marketplace consisting of a vast array of contractors – ranging
from large, nationwide, corporate operators, to mom-’n-pop owner-operators, and everything in between – and all eager
to perform what amounts to relatively low-skilled labor at relatively attractive hourly rates as well as highly territorial in
protecting the account relationships that they have already established. Second, we need to secure such opportunities at rates
that meet our internally established gross margin benchmarks when many competing for the work will likely be able to provide service
cost estimates considerably below our own. Third, and here, again, without the benefit of experience, we need to consistently deliver
a highly professional, client experience, free of any material complications, mishaps or other notable hassles, and we need to
have consistently provided a combined service and product result that is notably worthy, if not flat-out impressive. Although we
believe that we have developed a business plan for our RexPro unit that facilitates our ability to effect all of these objectives,
and we believe further that we can execute that plan successfully, there can be no assurance that our actual results will be consistent
with those beliefs, and any failures in this regard are likely to have an adverse effect on our business, prospects, financial
condition, and results of operations.
Accidents or other unintended occurrences
could materially damage our business.
Adverse publicity stemming from an accident or other incident relating
to our RexPro applications services or involving our services personnel related to injury, illness, death, or alleged criminal
activity could harm our reputation, result in the loss of existing clients, the cancellation of long-term contracts with those
clients with whom we have been able to establish them, an inability to win future business opportunities, and expose us to significant
liability for damages. If we lose a significant number of clients and contracts after having secured them, our profitability could
be negatively impacted, even if we are somehow able to secure comparable revenues thereafter from new clients.
Our business success depends on our ability
to attract and retain qualified personnel and senior management.
Despite a lack of current available funds, our future performance
depends on the continuing services and contributions of our senior management and on our continued ability to attract and retain
both additional senior management personnel as well as other qualified personnel. Any unplanned turnover in senior management or
inability to attract and retain qualified personnel could have a negative effect on our results of operations. Although we currently
employ only 6 persons full-time, in order to fulfill our business plan, we will need to hire many more people in a variety of capacities
and departments, and build a diverse workforce upon which our operations will inevitably depend. We must therefore raise required
working capital as well as attract, train, and retain a large and growing number of qualified employees, all while simultaneously
controlling related labor costs. Our ability to control labor and benefit costs is subject to numerous internal and external factors,
including changes in the unemployment rate, changes in immigration policy, regulatory changes, prevailing wage rates, and competition
we face from other companies for qualified employees. There is no assurance that we will be able to attract or retain an adequate
number of qualified employees in the future, and any inability in this regard will have a material adverse effect on our business,
financial condition, and results of operations.
Our use of subcontractors or joint venture
partners to perform work under client contracts exposes us to liability and financial risk.
As we progress in our planned vertical integration for RexPro, we
will inevitably depend on subcontractors or other parties, such as joint venture partners, to perform work in situations in which
we are not able to self-perform the work involved. Such arrangements may involve subcontracts or joint venture relationships where
we do not have direct control over the performing party. A failure, for whatever reason, by one or more of our subcontractors or
joint venture partners to perform, or the alleged negligent performance of, the agreed-upon services may expose us to liability.
Although we intend to have in place controls and programs to monitor the work of our subcontractors and our joint venture partners,
there can be no assurance that these controls or programs will have the intended effect, and we may incur significant liability
as a result of the actions or inactions of one or more of our subcontractors or joint venture partners.
Our risk management and safety programs
may not have the intended effect of reducing our liability for personal injury or property loss.
We attempt to mitigate risks relating to personal injury or
property loss through the implementation of company-wide safety and loss control efforts designed to decrease the incidence of
accidents or events that might increase our liability. It is expected that any such decrease would also have the effect of reducing
our insurance costs for our casualty programs. However, incidents involving personal injury or property loss often are caused by
multiple factors, a significant number of which are beyond our control. Therefore, there can be no assurance that our risk management
and safety programs will have the desired effect of controlling costs and liability exposure.
Our RexPro coatings products and
applications services business may be negatively impacted by adverse weather conditions.
Weather conditions such as snow storms, heavy flooding, hurricanes,
and fluctuations in temperatures can negatively impact portions of our RexPro business. Cooler than normal temperatures in the
summer could reduce the need for servicing of air conditioning units, resulting in reduced revenues and profitability. On the other
hand, the absence of rain and snow can cause us to experience reduced revenues, as demand for our services is heightened by the
wet messiness that is brought indoors by heavy foot traffic.
ACS is an early-stage business with
highly speculative prospects, and one that is at least temporarily constrained from further development due to a lack of financial
resources.
Although, to date, ACS has had certain operations and revenues,
and we believe that it holds certain very substantial potential as either an operating unit or technology licensing unit to the
extent that technological and cost objectives are achieved, its business has been slow to develop and, taken as a whole, very much
remains an early-stage enterprise insofar (i) none of our several most focused-upon products under development (inclusive of both
our concrete- and stucco- enhancing admixtures) have yet proven through testing or other use to be dependably solid performers
in the field for their respective purposes, (ii) none of such products have demonstrated meaningful commercial viability given
existing market price points and our own internal, threshold gross margin requirements, and (iii) we have not, despite considerable
investment, been able to either design, engineer or otherwise establish reliable and scalable production processes for any of such
products. These factors, coupled with ACS’s necessarily required continued research and development, capital and operating
expense requirements, lack of near-term prospects for generating material revenue, and our recent and current lack of available
company financial resources, have all combined to lead to a determination on the part of our corporate management to dramatically
restrict allocable capital and human resources to this venture until such time, if at all, that our financial condition substantially
improves and cash becomes available to justifiably and sensibly resume investment. And meanwhile, many other very large, established
industry players, some of which represent potential licensees for our products, are actively developing their own advanced products
aimed at serving the markets for which our own ACS products have been under development, and we are unable as a practical matter
to meaningfully monitor or evaluate the progress being made by them, either individually or collectively. For all of these reasons,
there can be no assurance that ACS will be the subject of any continuing investment by us for an indeterminate period, and investors
are cautioned not to factor the continued development of this business unit into any investment decision, at least for the time
being and until we announce otherwise.
The markets for our developing ACS
products are highly competitive.
The market for cement-enhancement additives and admixtures is extremely
large, broad in scope, and consists of many different segments and sub-segments, each of which involves a range of product applications,
and each of which is also increasingly characterized by rapidly evolving technology. Precisely because of the wide array of beneficial
properties they possess, the products to be potentially manufactured and distributed by ACS should be viewed as competing with
other concrete- and stucco-enhancement and admixture products across a wide variety of the various existing market segments and
sub-segments. Concrete admixtures promising increased strength and compressed curing times, for example, are each segments in which
numerous companies are aggressively competing with one another worldwide, both in terms of technology and market share, but that,
combined, represent only a minor portion of the aggregate competition that ACS should be viewed as meaningfully confronting in
relation to its concrete and stucco-enhancing products.
The competition potentially to be faced by our ACS unit in relation
to its proprietary line of specialty concrete and stucco admixture products includes many large companies, both public and private
and both domestic and foreign, most of which have significantly greater experience and financial resources than us. Management
expects that ACS’s most significant competitors will tend to be larger, more established companies, including many major
multinational corporations such as Sika, BASF, Cemex, Old Castle, Cementaid Group, GCP Applied Technologies, Oscrete, Krete Industries,
and CarpenterCrete. In general, these companies are all developing products that, at some level or in one or more ways, compete
with those of ACS and, in addition to many existing issued and pending patents, they have significantly greater capital and other
resources available to them for research and development, testing, seeking and obtaining any required regulatory approvals, marketing
and distribution.
Our RexPro and ACS products, and
ultimately our business as a whole, are based on technologies with only limited testing, independent verification, and commercial
history.
Although certain limited testing conducted (i) by us internally
on our RexPro coatings products and ACS internally on our concrete- and stucco-enhancing products, (ii) by independent laboratories,
and (iii) by actual and prospective customers have provided positive indications of their reliably yielding performance results
consistent with internal management expectations, to date, such technologies have not been extensively tested or independently
evaluated and assessed in a comprehensive way, and have only recently developed any meaningful commercial history. Although we
have no basis upon which to conclude that either our RexPro coatings or ACS concrete- and stucco-enhancing technologies will not
ultimately meet reliability, efficiency, or other performance targets, and that their efficacy will exceed minimally acceptable
qualitative standards given benchmark economic objectives, there can be no assurance of this result. If any of these technologies
fail to consistently perform at levels that enable cost-effective solutions for customers, or fail to do so without undesirable
environmental consequences, or we are unable to effectively manage the implementation of the technologies despite their otherwise
satisfactory performance capabilities, it would likely have a material adverse effect on our financial condition and prospects.
There can be no assurances that either
our RexPro coatings products or ACS admixture products will be accepted in the marketplace.
The degree of market acceptance of our RexPro coatings products,
and our ACS concrete- and stucco-enhancing admixture products if and when they prove market-ready, will depend on many factors.
We cannot predict or guarantee the degree to which targeted customers will accept or utilize some or even any of these products.
Failure to achieve market acceptance would limit our ability to generate revenue and would have a material adverse effect on our
business. In addition, even if any one or more of these products do achieve a degree of market acceptance, that market acceptance
may not be able to be sustained over time if competing products or technologies are introduced that are superior in efficiently
achieving targeted results, received more favorably by customers, or more cost-effective.
New products markets take time to
develop and many of the applications markets for our RexPro coatings and ACS admixture products should be viewed as separate, new
market opportunities that will only ever be cultivated over time.
Commercialization of new technology products often has a very long
lead-time and a multiplicity of risks. The confluence of materials engineering and nanotechnology is in its very early stages and
acceptance and demand for products in this developing area can often be a long, evolutionary process. In general, new products
markets – even those surrounding innovative, revolutionary, and so-called ‘break-through’ or ‘game-changing’
technologies – develop gradually over time; despite advancements offering meaningful benefits, they tend to be resistant
to change and slow to adapt, evolve, and keep pace with the rate of those advancements. Many of the applications markets potentially
served by our RexPro coatings, and many of the markets potentially served by ACS’s concrete- and stucco-enhancing admixture
products, are new – either brand new or recently emerging – and should thus be viewed as likely to take significant
time to develop and cultivate. Moreover, each should be viewed individually, separate and distinct from all others in terms of
development-life. If one or more of these applications markets takes longer to develop and cultivate than we expect, it will likely
have an adverse effect on the pace with which we are able to grow revenues, as well as on our prospects more generally, outcomes
which, in turn, are likely to lead to a downward adjustment in our publicly quoted stock price.
We may make strategic determinations
to allocate capital towards the pursuit of particular markets that turn out to be less receptive to either our or their products,
or more difficult to penetrate, than expected.
We perceive our RexPro coatings technologies as having a wide array
of potential product applications, spanning across numerous industrial, consumer, and household segments. Similarly, we perceive
our ACS concrete- and stucco-enhancing technologies as having a wide array of applications as well. As we grow our RexPro coatings
business, and investment in our ACS business resumes, we will thus be faced with the challenges – as we are currently –
of having to select certain of these potential product applications markets over others for purposes of focusing our human and
financial resources because those resources are necessarily limited and would be less apt to bring about meaningfully positive
results if allocated across too many separate market initiatives concurrently. The considerations involved in making these determinations
are complex and involve many factors, including the following:
|
▪
|
the relative size, age and projected growth trend of the subject market;
|
|
▪
|
experience, observational/anecdotal intelligence, and lab and field testing results previously obtained in relation to the application;
|
|
▪
|
the relative strength of the value proposition to prospective customers;
|
|
▪
|
the comparative time-to-market;
|
|
▪
|
the comparative cost-to-market coupled with existing, internal, industry relationships and available resources;
|
|
▪
|
the relative geographic accessibility of the market;
|
|
▪
|
the seasonality of the market, if any;
|
|
▪
|
the relative barriers-to-entry within the market;
|
|
▪
|
the relative, projected length of the particular sales cycle;
|
|
▪
|
the projected gross profit margins;
|
|
▪
|
both the presence within the subject market, together with the relative quality, of competitive products; and
|
|
▪
|
the relative size and strength of the individual competitors.
|
While management will exercise its best judgment in making these
determinations, there can be no assurance that the determinations it makes in this regard will turn out to have been the most productive
or otherwise best ones for either business unit all things considered. Some of the potential applications markets will inevitably
be more receptive to our RexPro and ACS products than others due to the inherent vagaries of product markets generally, and it
may turn out that strategic determinations we make along the way to forego the pursuit of certain applications markets in the immediate-
and near-term – in favor of pursuing others that our management expects to be comparatively more promising or susceptible
to penetration by us in that timeframe – are proven incorrect. If this should occur, it would be an indication that, despite
our intentions and prudence in assessing future demand, we had not allocated our capital as effectively as we might have otherwise,
and this could have a material adverse effect on our returns on capital and/or be reflected in a downward adjustment in our publicly
quoted stock price.
For strategic reasons, we may pursue
more markets for our RexPro or ACS products in the near-term than we can most effectively penetrate given our available resources.
As noted in the risk factor immediately above, given the notably
wide array of industrial and consumer products that we perceive our technology as potentially benefitting, we are and will continue
to be faced with important decisions as to which of these applications markets to pursue in each of the immediate-, near- and long-term.
As also noted in the risk factor immediately above, the considerations involved in making these determinations are complex and
involve many factors. While management seeks to exercise sound judgment in making these determinations, there can be no assurance
that, in hindsight, the determinations made in this regard will turn out to have been the most productive or otherwise best ones
for us. For purposes of achieving a degree of so-called ‘first-mover advantage,’ for example, we may pursue some markets
in the immediate- or near-term that we might otherwise wait to pursue until sometime in the future when we are better equipped
to do so effectively. Further, some applications markets may be targeted by management to be pursued in the immediate- or near-term
because of their perceived likelihood, whether accurate or inaccurate, to generate revenues sooner than others, even though such
others are expected to be larger in the aggregate and/or to offer higher gross margin opportunities. If the strategic determinations
that management makes in this regard prove in hindsight not to have been the most productive or otherwise best ones for the Company,
it will likely have an adverse effect on the pace with which we are able to grow revenues, as well as on our prospects more generally,
outcomes which, in turn, are likely to lead to a downward adjustment in our publicly quoted stock price.
Our RexPro coatings technologies
may turn out to be less effective for one or more applications than we expect.
Our current view of the potential applications markets for our RexPro
coatings is intentionally broad and far-reaching, spanning numerous potential industrial, consumer, and household segments in relation
to which we believe our technology may provide a range of meaningful benefits. To date, however, we have not commissioned or otherwise
undertaken or obtained any comprehensive market study in respect of any one or more of these applications markets. Whether before
or after we undertake any such market study, it may turn out to be the case that our coatings are not as effective for any one
or more of these applications as we have preliminarily concluded and pursued accordingly, and we may make a subsequent determination
at some point to abandon any continued pursuit of the corresponding market or markets for this reason. If this should occur, it
will likely have an adverse effect on the pace with which we are able to grow revenues, as well as on our prospects more generally,
outcomes which, in turn, are likely to lead to a downward adjustment in our publicly quoted stock price.
Either individually or collectively,
and without infringing on our trade secrets, one or more technologies owned by others may be able to effect the same or similar
results as our own.
We believe that our proprietary RexPro coatings technology affords
us a competitive advantage in a wide variety of product applications markets that we are either currently pursuing or intend to
fully evaluate as potential targets in the future. There can be no assurance, however, that other technologies, whether existing
or developed in the future, and whether individually or combined with others, will not be able to effect the same or similar results
as our own, thereby potentially neutralizing whatever unique market advantage we had theretofore believed we possessed. This could
potentially occur, moreover, without any infringement on the part of others as it relates to our proprietary intellectual property
rights. It is not at all uncommon for meaningfully different technologies – each protectable in their own right – to
produce the same or a very similar result, albeit through an alternate means. If any such other technologies are determined to
exist, or are developed in the future, that effect the same or a similar result as our own, and particularly if they can do so
at a reduced cost, it will likely have an adverse effect on the pace with which we are able to grow revenues, as well as on our
prospects more generally, outcomes which, in turn, are likely to lead to a downward adjustment in our publicly quoted stock price.
Our RexPro coatings technology are,
and our ACS concrete- and stucco-enhancing technologies may eventually become, components within various end-products marketed
and sold by others, and the success of our products is and will be, accordingly, dependent on the success of such end-products.
The need for effective solutions-based coatings such as those featuring
our RexPro coatings technology will depend to some degree upon industrial and commercial needs going forward and the related demand
for such products as components. Similarly, the need for concrete or stucco that is substantially lighter and/or stronger than
non-premium-priced products available in the market will depend to some degree upon precast and other building needs going forward
and the related demand for such products as components. The success of our RexPro coatings products, and our ACS admixture products
if and when they are commercialized, will thus depend largely upon the continuing need for the end-user products into which they
become incorporated, and the market demand this engenders. If a significant percentage of the products into which these products
are incorporated are not embraced by end-users, it will likely have an adverse effect on the pace with which we are able to grow
revenues, as well as on our prospects more generally, outcomes which, in turn, are likely to lead to a downward adjustment in our
publicly quoted stock price.
We depend on strategic relationships
with commercial and industrial collaborators to help develop and test products, and our ability to develop and commercialize products
may be impaired or delayed if collaborations are unsuccessful.
Our strategy for the development, testing and commercialization
of products in each of our RexPro and ACS business units requires in many cases that we enter into collaborations with actual and
potential corporate partners, licensors, licensees and others. Wherever possible, and in order to benefit from their resources
and abilities, we seek collaborators in this regard with established lines of business and more substantial financial resources.
We are dependent upon the subsequent success of these other parties in performing their respective responsibilities as well as
the continued cooperation and interest of these parties. Under agreements with collaborators, we may rely significantly on such
collaborators to, among other things, (i) fund research, development and testing activities either with or for us or them, and
(ii) market with us any commercial products that result from our or their collaborations. There can be no assurance, however, that
collaborators will cooperate with us or them or perform their obligations under agreements reached with them, even where such matters
are provided for within such agreements. Moreover, we cannot control the amount and timing of our collaborators’ resources
that will be devoted to research, development and testing activities related to our collaborative agreements with them. Such collaborators
may not place the same degree of relative importance that we do on product lines that rely on our products to meet benchmark performance
standards because the success or failure of such product lines is unlikely to be as material to their business, taken as a whole,
as it is to ours. If our collaborators fail to cooperate with us as desired, devote the requisite resources to agreed-upon joint
initiatives, or meet their obligations under agreements that are established, or if they choose for any reason to pursue existing
or alternative technologies in preference to those being developed in collaboration with us, it will likely have an adverse effect
on the pace with which we are able to grow revenues, as well as on our prospects more generally, outcomes which, in turn, are likely
to lead to a downward adjustment in our publicly quoted stock price.
Our reliance on the activities of
non-employee consultants, research institutions, and scientific contractors, whose activities are not wholly within our control,
may lead to delays in development of proposed products.
We rely extensively upon and have relationships with outside consultants
and contract research organizations having specialized skills to conduct research and to help develop and test our respective products,
and each expect to have to continue to rely on these types of relationships for the indefinite future. The consultants and contract
research organizations we engage, or that we may engage, provide us, or may provide us as the case may be, critical skills and
resources otherwise unavailable. These consultants are not, or may not be, our employees and may have commitments to, or consulting
or advisory contracts with, other entities that may limit their availability. We have, or would have, limited control over the
activities or operations of these consultants and, except as otherwise required by our collaboration and consulting agreements
to the extent they exist, can expect only limited amounts of their time to be dedicated to our activities and our research and
development goals. These research facilities may have commitments to other commercial and non-commercial entities.
We have limited resources with which
to pursue and manage development activities, and because of the numerous risks and uncertainties associated with our respective
product development and commercialization efforts, we are unable to predict the extent of our future reporting losses or when or
if we will become profitable.
Our extremely limited, current resources with which to conduct and
manage development activities might prevent us from successfully developing or exploiting potential markets for our existing products.
If we do not succeed in conducting and managing our development activities, we may not be able to commercialize our products, or
may encounter significant delays in doing so, either of which is likely to materially harm our business. Our ability to generate
revenues from any of our products, moreover, will depend on a number of factors, including our ability to successfully complete
and implement our commercialization strategies. Our failure to successfully commercialize our products or to become and remain
profitable would likely depress the market price of our common stock and impair our ability to raise capital, expand our business,
diversify our product offerings and continue our operations.
Our ability to commercially develop our technologies will be dictated
in large part by forces outside our control which cannot be predicted, including, but not limited to, general economic conditions.
Other such forces include the success of our research and field-testing, the availability of collaborative partners to finance
our work in pursuing applications markets for our technologies or other developments in the field which, due to efficiencies or
technological breakthroughs, may render one or more areas of commercialization more attractive, obsolete or competitively unattractive.
It is possible that one or more areas of commercialization will not be pursued at all if a collaborative partner or entity willing
to fund research and development cannot be located. Our decisions regarding the ultimate products we pursue could have a material
adverse effect on our ability to generate revenue if we misinterpret trends, underestimate development costs and/or pursue technologies,
products, or applications markets that turn out to have lesser market appeal and demand than expected. Any of these factors, either
alone or in concert, could materially harm our ability to earn revenues or could result in a loss of any investment in the Company.
If we are unable to keep up with
rapid technological changes in the industrial coatings products field, and the cement-enhancing products field to the extent we
resume investment in ACS, we will be unable to effectively compete.
Both the coatings and cement-enhancing admixtures and other products
industries are engaged in activities in the organic and inorganic chemistry, materials engineering, and nanotechnology fields,
which are generally characterized by extensive research efforts and rapid technological progress. Materials engineering and the
manipulation of materials of nanometer sizes and dimensions is a relatively new science and the creation of new products is dependent
upon new and different properties of such materials created that will result in many uncertain applications and rapid change. The
evolution of nanotechnology as a relatively new science adds greater uncertainty to new applications and new and improved product
introductions are unpredictable. If we fail to anticipate or respond adequately to scientific or technological advancements, our
ability to attain and/or sustain profitability could suffer. Moreover, there is no assurance that research and discoveries by other
companies will not render our technologies, products, services, or potential products or services, uneconomical or result in products
superior to those we have or develop or that any technologies, applications, or products we have or develop will be preferred to
any existing or newly-developed technologies, applications, or products.
Our RexPro coatings business has
historically depended on a disproportionate percentage of its revenues being attributable to only a few customers.
Although our marketing and sales focus has been evolving rapidly,
and aggregate revenues have been modest, during the year ended December 31, 2018, and the year ended December 31, 2017, and as
reflected in the table below, our coatings business generated a significant portion of its revenues from a select few customers.
|
|
% of Total Revenues
|
Customer
|
|
2018
|
|
2017
|
Caribbean Energy Solutions, LLC.
|
|
|
18.44
|
%
|
|
|
0.45
|
%
|
Springfield ReManufacturing Corp. (SRC)
|
|
|
13.64
|
%
|
|
|
7.50
|
%
|
Permatect Facility Solutions
|
|
|
9.03
|
%
|
|
|
3.05
|
%
|
In general, any concentration of customer base for a business creates
a risk that the continuity of the business is more dependent on such customer or customers than is desirable and that the loss
of that customer or customers for any reason would have a material adverse effect on the business. Although management believes
that the planned direction of our coatings business going forward will result in an expanded and more diverse customer base over
time, and a discontinuance of this trend in reliance on only a few customers, there can be no assurance that we will be successful
in achieving this targeted objective and any failure in this regard would likely have a material adverse effect on our financial
condition and prospects.
The business model to be applied
to monetizing our ACS technologies may be highly capital intensive.
To the extent we resume investment in ACS, which has been at least
temporarily curtailed due to financial constraints, the definitive business model going forward for our product lines in that business
unit would be subject to further research, development and change. As a result, there can be no assurance as to what such business
model would ultimately be. While there is a possibility that we would ultimately determine to focus our strategies exclusively
on the exploitation of our technologies through a model that contemplates our involvement and risk solely to the extent of our
exploitation of licensing opportunities to third parties, in the meantime, and quite possibly as a long-term plan either in whole
or in part, we may manufacture and market our own products to customers either directly and/or through distribution channels. Some
contemplated business models in this regard, including those that involve any manufacturing and stocking of product, are considerably
more capital intensive than others. Accordingly, there can be no assurance as to the degree of capital intensity of our ACS business
model if and when investment in that business unit resumes. Although it may be possible to rely to a significant extent on debt
financing over time, substantial debt financing is unlikely to be a realistic option in the near-term given our lack of financial
strength (both balance sheet and net income based) and a high degree of capital intensity could lead to the need to raise even
more equity financing than we already require, thereby resulting in dilution to the interests of existing stockholders.
We may not be able to protect our
proprietary technology, which could harm our ability to become profitable.
We believe that our intellectual property with respect to our RexPro
coatings technologies and ACS cement-enhancing technologies are critical to our future success. Trade secret protection is critical,
more generally, for our technologies, as well as the products and processes derived through them. The fields in which we operate
have been characterized by significant efforts by competitors to establish dominant or blocking patent rights to gain a competitive
advantage, and by considerable differences of opinion as to the value and legal legitimacy of competitors’ purported patent
rights and the technologies they actually utilize in their businesses. Our success will depend to a substantial degree on our ability
to preserve our trade secrets, and operate without infringing the proprietary rights of others. We can provide no assurance, however,
that the use of our technology will not be determined by a jurisdictional authority to have infringed on the proprietary rights
of others, or that patents will not be issued to other parties which are thereafter determined to have been infringed by our products
or technologies. If either of these results were to occur, it would likely have a materially adverse effect on our business, prospects,
and financial condition.
Our business technologies are protected
strictly by trade secrets.
Our chemistry formulations, know-how and related technology are
either not patentable, or, for strategic reasons, best protected in the determination of management by leaving them unpatented.
In this regard, trade secrets play an important part in our intellectual property strategy, and we vigilantly seek to protect them.
To protect our proprietary positions in trade secrets, we require all employees, consultants, advisors and collaborators with access
to our technologies to enter into confidentiality, and, wherever possible, invention ownership, agreements with us. There can be
no assurance, however, that these agreements will provide meaningful protection for these trade secrets, know-how or other proprietary
information in the event of any unauthorized use or disclosure. Further, in the absence of patent protection, competitors who independently
develop substantially equivalent technology, or otherwise acquire it, may adversely impact our business without being accountable
in any way to us.
Intellectual property litigation
presents an ongoing threat to our businesses in terms of both outcome and cost.
It is possible that litigation over patent or other intellectual
property matters with one or more competitors could arise in relation to which we are named as a party defendant. We could incur
substantial litigation or interference costs in defending ourselves against any such lawsuits, or, additionally, in pursuing lawsuits
in which we assert our intellectual property rights offensively against others. If the outcome of any such litigation is unfavorable,
our business could be materially adversely affected. Moreover, there can be no assurance that we will have available the requisite
financial resources to aggressively, or even adequately, defend, initiate, or pursue this type of litigation.
Patents obtained by other persons
may result in infringement claims against us that are costly to defend and which may limit our ability to use the disputed technologies
and prevent us from pursuing research and development or commercialization of potential products and/or applications markets.
If third party patents or patent applications contain claims infringed
by our technology or other technology required to make and use our potential products, and such claims are ultimately determined
to be valid, there can be no assurance that we would be able to obtain licenses to these patents at a reasonable cost, if at all,
or be able to develop or obtain alternative technology. If, under such circumstances, we are unable to obtain any such licenses
at a reasonable cost, we may not be able to develop some products commercially, and, further, we may be required to defend ourselves
in court against allegations of infringement of third-party patents. Patent litigation is generally very expensive and can consume
substantial resources and create significant uncertainties. Any adverse outcome in such a suit could subject us to significant
liabilities to third parties, require disputed rights to be licensed from third parties, or require us to cease using such technology.
We may not be able to adequately
defend against piracy of intellectual property in foreign jurisdictions.
Considerable research in the areas of organic and inorganic chemistry,
materials engineering, and nanotechnology is being performed in countries outside of the United States, and a number of potential
competitors of the Company are located in these countries. The laws protecting intellectual property in some of those countries
may not provide adequate protection to prevent such competitors from misappropriating our intellectual property within those jurisdictions
and elsewhere. Several of these potential competitors may be further along in the process of product development and also operate
large, company-funded research and development programs. As a result, our international competitors may develop more competitive
or affordable products, or achieve earlier patent or other intellectual property protection or product commercialization than we
are able to achieve. Any such competitive products may render any products or product candidates that we develop obsolete.
We will likely be required to spend
large amounts of money for environmental compliance in connection with our manufacturing operations.
As a manufacturer of our RexPro applied specialty coating and surfacing
materials, and potentially one of our ACS concrete- and stucco-enhancing admixture products, we are subject to a variety of stringent
regulations under numerous U.S. federal, state, local and foreign environmental, health and safety laws and regulations relating
to the generation, storage, handling, discharge, disposition and stewardship of hazardous wastes and other materials. In this regard,
we will likely have to expend substantial amounts to comply with such laws and regulations as well as establish a policy to minimize
our environmental emissions, and we are currently unable to allocate cash to this purpose. Moreover, legislative, regulatory and
economic uncertainties (including existing and potential laws and regulations pertaining to climate change) may make it difficult
for us to project future spending for these purposes and, if there is an acceleration in new regulatory requirements, we may be
required to expend substantial additional funds to remain in compliance.
Our production operations involve
our having to work with dangerous materials that can potentially injure our employees, damage our facilities, and disrupt our work
flow.
Some of our operations, including those of ACS, involve the handling
of hazardous materials that may pose the risk of fire, explosion, or the release of hazardous substances into the surrounding environment.
Such events could result from operational failures, natural disasters, or terrorist attacks, and might cause injury or loss of
life to our employees and others, environmental contamination, and property damage. Any such events might cause a temporary shutdown
of an affected plant, or portion thereof, or a customer’s premises, or a portion thereof, and we could be subject to penalties,
civil claims, or both, as a result. A disruption of our operations caused by any of these or other events could have a material
adverse effect on our financial condition and results of operations.
Historically, the handling of nanofibers and nanoparticles has been
widely recognized as posing significant health and safety concerns and challenges stemming from the potentially hazardous particulates
emitted into the air during the production, transport, and use of these materials. These emissions occur because, in the absence
of industry-appropriate methods, processes and practices for the containment of otherwise loose, airborne particulates, such matter
can get drawn into the eyes, the throat and lungs, and onto the skin, of those individuals handling or otherwise being exposed
to these materials. Such exposure can lead to a variety of health and safety concerns. In relation to the production of those ACS
admixture products that rely on the incorporation of nanoparticle-enhanced nanofibers, therefore, and although there can be no
assurance that any safety precautions will prove effective and reliable against any and all vulnerabilities in all instances, we
have adopted and utilize what we have deemed to be reasonably suitable methods and practices for the containment of these hazardous
substances.
Our product sales could expose us
and them to product liability claims, which, in turn, could diminish our assets and adversely affect our operations.
We may be held liable or incur expenses to settle product liability
claims if our products cause injury, directly or indirectly, or are found unsuitable during product testing, manufacturing, marketing,
sale or use. These risks exist even with respect to any products that have received, or may in the future receive, regulatory approval,
registration or clearance for commercial use. There can be no assurance that we will be able to avoid product liability exposure.
Although we currently maintain product liability insurance, we will
likely need to obtain additional insurance coverage in the very near future at levels determined to be sufficient and consistent
with industry standards for companies such as ours. It is possible that such additional insurance coverage may not be available
to us on commercially reasonable terms or at all, and a product liability claim could potentially result in liability to us greater
than our assets and insurance coverage, if any, at such time. Whether or not a product liability insurance policy is maintained
in the future, any product liability claim could harm our business and financial condition. Moreover, even if we have adequate
insurance coverage, product liability claims or recalls could result in negative publicity or force us to devote significant time
and attention to matters other than those that arise in the normal course of business.
Our insurance policies may be inadequate
and potentially expose us and them to unrecoverable risks.
We do not currently maintain director and officer insurance for
errors and omissions, though we do maintain a limited general liability insurance coverage. Any significant insurance claims against
us would have a material adverse effect on our business, financial condition and results of operations. Insurance availability,
coverage terms and pricing continue to vary with market conditions. We endeavor to obtain appropriate insurance coverage as soon
as practicable given available financial resources for insurable risks that we identify, however, we may fail to correctly anticipate
or quantify insurable risks, or be unable to obtain appropriate insurance coverage, and insurers may be unwilling to cover insurable
events for which we seek coverage. We have observed rapidly changing conditions in the insurance markets relating to nearly all
areas of traditional corporate insurance. Such conditions have resulted in higher premium costs, higher policy deductibles, and
lower coverage limits. For some risks, we may not have or maintain insurance coverage because of cost or availability.
Conditions in the global economy
and global capital markets may adversely affect our results of operations, financial condition, and cash flows.
Our business and operating results may in the future be adversely
affected by global economic conditions, including instability in credit markets, declining consumer and business confidence, fluctuating
commodity prices and interest rates, volatile exchange rates, and other challenges such as the changing financial regulatory environment
that could affect the global economy. Our customers and clients may experience deterioration of their businesses, cash flow shortages,
and difficulty obtaining financing. As a result, existing or potential customers or clients may delay or cancel plans to purchase
products and may not be able to fulfill their obligations in a timely fashion. Further, suppliers could experience similar conditions,
which could impact their ability to fulfill their obligations to us. Because we intend to have significant international operations,
or at least sales, there are expected to be a large number of currency transactions that result from international sales, purchases,
investments and borrowings. And although we also intend to actively manage currency exposures that are associated with net monetary
asset positions, committed currency purchases and sales, foreign currency-denominated revenues and other assets and liabilities
created in the normal course of business, there can be no assurances that such initiatives will be effective. Future weakness in
the global economy and failure to manage these risks could adversely affect our results of operations, financial condition and
cash flows in future periods.
Changes in government policies and
laws could adversely affect our financial results.
Although there can be no assurance, our product sales to customers
outside the U.S. are expected over time to account for a material percentage of gross revenues. As a result, our financial results
could be affected by changes in trade, monetary and fiscal policies, laws and regulations, or other activities of U.S. and non-U.S.
governments, agencies and similar organizations. These conditions include, but are not limited to, changes in a country’s
or region’s economic or political conditions, trade regulations affecting production, pricing and marketing of products,
local labor conditions and regulations, reduced protection of intellectual property rights in some countries, changes in the regulatory
or legal environment, restrictions on currency exchange activities, burdensome taxes and tariffs and other trade barriers. International
risks and uncertainties, including changing social and economic conditions as well as terrorism, political hostilities and war,
could lead to reduced sales and profitability.
Increases in prices and declines
in the availability of raw materials could negatively impact our financial results.
Our financial results are significantly affected by the cost of
raw materials. Product raw materials, both organic and inorganic, generally comprise a significant percentage of our cost of goods
sold in most formulations and represent our single largest production cost component.
Most of the raw materials used in production are purchased from
outside sources, and we intend in the near future to begin making supply arrangements from time to time to meet our planned operating
requirements for the future. Supply of critical raw materials is managed by qualifying multiple and local sources of supply, sometimes
including suppliers from outside the U.S., establishing contracts, procuring from multiple sources, and identifying alternative
materials or technology whenever possible. We are continuing our aggressive sourcing initiatives to support our continuous efforts
to find the lowest raw material costs.
Increases in the cost of raw materials may have an adverse effect
on our earnings or cash flow in the event we are unable to offset these higher costs in a timely manner. Any inability to obtain
critical raw materials would adversely impact our ability to produce our products.
Non Unit-Specific Business Risks
The loss of key personnel could adversely
affect our business.
We are presently dependent to a great extent upon the experience,
abilities and continued services of our president and chief executive officer, Steven Malone. An employment agreement is currently
in place between the company and Mr. Malone. In accordance with its terms, this agreement expires on July 22, 2020. Beyond the
obligations expressly set forth in Mr. Malone’s employment agreement (a copy of which is included as Exhibit 10.1 to our
Current Report on Form 8-K filed July 29, 2014), no assurances can be given that either he or any other executive will remain with
us for any particular duration or that any of such other executives will enter into employment agreements with us. The loss of
services of any of the management personnel could have a material adverse effect on our business, financial condition or results
of operation.
Failure to effectively manage acquisitions,
divestitures, strategic ventures, alliances and other portfolio actions could adversely impact our future results.
From time to time, we expect to be evaluating and pursuing acquisition
or strategic venture candidates that may strategically fit our business and/or growth objectives. If we are unable to successfully
integrate and develop acquired businesses, we could fail to achieve anticipated synergies and cost savings, including any expected
increases in revenues and operating results, which could materially and adversely affect our financial results. We intend to continually
review our portfolio of operational assets to assess their respective contributions to our larger objectives and alignment with
our broader growth strategy. However, we may not be successful in separating underperforming or non-strategic assets and gains
or losses on the divestiture of, or lost operating income from, such assets may affect our results of operations. Moreover, we
may incur asset impairment charges related to acquisitions or divestitures that reduce any otherwise reportable earnings.
Our results of operations and financial
condition could be seriously impacted by business disruptions and security breaches, including cybersecurity incidents.
Business and/or supply chain disruptions, plant and/or power outages
and information technology system and/or network disruptions, regardless of cause including acts of sabotage, employee error or
other actions, geo-political activity, weather events and natural disasters could seriously harm our operations as well as the
operations of our customers and suppliers. Failure to effectively prevent, detect and recover from security breaches, including
attacks on information technology and infrastructure by hackers, viruses, breaches due to employee error or actions, or other disruptions
could result in misuse of our assets, business disruptions, loss of property including trade secrets and confidential business
information, legal claims or proceedings, reporting errors, processing inefficiencies, negative media attention, loss of sales
and interference with regulatory compliance. Though our resources are meaningfully limited, we intend to actively manage the risks
within our reasonable control that could lead to any such business disruptions and security breaches. As these threats continue
to evolve, particularly around cybersecurity, and particularly as our business grows, however, we may be required to expend significant
resources to enhance our control environment, processes, practices and other protective measures. Despite these efforts, such events
could materially adversely affect our business, financial condition or results of operations.
Our business, including our results
of operations and reputation, could be adversely affected by process safety and product stewardship issues.
Failure to appropriately manage safety, human health, product liability
and environmental risks associated with our products, product life cycles and production processes could adversely impact employees,
communities, stakeholders, the environment, as well as our reputation and results of operations. Public perception of the risks
associated with our products and production processes could impact product acceptance and influence the regulatory environment
in which we operate. While we have in place procedures and controls to manage process safety risks, issues could be created by
events outside of our control including natural disasters, severe weather events, acts of sabotage and substandard performance
by our external partners.
Our results of operations could be
adversely affected by litigation and other commitments and contingencies.
We face risks arising from various asserted and unasserted litigation
matters, including, but not limited to, product liability, patent infringement, and claims for third party property damage or personal
injury stemming from alleged environmental torts. We have observed and noted a nationwide trend in purported class actions against
manufacturers of chemical and materials-based products generally seeking relief such as medical monitoring, property damages, off-site
remediation and punitive damages arising from alleged environmental torts without claiming present personal injuries. We have further
observed and noted a trend in public and private nuisance suits being filed on behalf of states, counties, cities and utilities
alleging harm to the general public. Various factors or developments can lead to changes in current estimates of liabilities such
as a final adverse judgment, significant settlement or changes in applicable law. A future adverse ruling or unfavorable development
could result in future charges that could have a material adverse effect on us. An adverse outcome in any one or more of these
matters would likely have a material adverse effect on our business, financial condition or results of operations.
In the ordinary course of business, we may make certain commitments,
including representations, warranties and indemnities relating to current and past operations, including those related to products
we sell, divested businesses, and issue guarantees of third-party obligations. If we were required to make payments as a result,
they could exceed the amounts accrued, thereby adversely affecting our results of operations.
Risk Associated with the Prospective Dilution
of Our Common Stock
We expect to pursue whatever steps are necessary in the near-term,
including the obtaining of shareholder approval, to effect a reverse stock-split that will result in the total number of outstanding
shares of our common stock being substantially reduced by a specified factor and the holdings of all shareholders being divided
by the same factor, but the market trading price of our shares may not adjust such that the market values of holders’ shares
remain the same after the reverse-split as they were before it.
We are currently authorized under our corporate charter, as amended,
to issue up to 900,000,000 shares of common stock. We currently have 714,945,811 shares of common stock issued and outstanding,
and 173,120,917 shares of common stock reserved for issuance pursuant to convertible notes.
Whether justified or not, one of the practical realities of the
stock market is that a capitalization involving so many authorized, and so many issued and outstanding, shares, on the one hand,
and a very low quoted share price ($0.004), as of the date of this Annual Report), on the other, are factors that are, and will
likely continue to be, perceived by a large percentage of the institutional investment community, the relatively sophisticated
retail investment community, as well as most reputable securities research firms that provide analyst coverage, as a decidedly
negative indicator of the future prospects of the Company and the quality of our corporate management more generally as it relates
to building shareholder value. Further, we believe that our current capitalization structure will prohibit us as a practical matter
from being able to increase our share trading price in the foreseeable future to a level that qualifies for eligibility on one
of the recognized stock exchanges, and that allows investors to trade in our stock without being burdened with prohibitive transaction
costs. Because we believe that the Company and our shareholders could eventually benefit from being able to realistically attract
the interest of institutional investors, relatively sophisticated retail investors, and reputable securities analysts in our stock,
and at some point qualify for listing on a recognized stock exchange and maintain a share price that allows for manageable transaction
costs, we believe that pursuing and effecting a reverse stock-split in the relatively near-term should be made a priority.
A forward stock-split is the exchange of one share of stock for
multiple shares. For example, in a 2-for-1 stock-split, each stockholder receives two shares for each share held, and in a 3-for-1
stock-split, each stockholder receives three shares for each share. When a firm splits its stock, the intrinsic value of the firm
is not affected because nothing has occurred to positively or negatively impact the underlying business, which is what provides
the basis for determining intrinsic value. Therefore, in a publicly-traded securities market like OTC Markets, in which our stock
is quoted, a holder of a share having a market price of $5 that splits 2-for-1 is left with two shares, which should logically
and reasonably be expected to settle in after the event at a trading price of $2.50. Similarly, the market capitalization (or “market
cap”) of the subject company following a forward stock-split should rationally be expected to remain unchanged.
In a reverse stock-split, the opposite occurs. Unlike in a forward
stock-split, which leaves a shareholder with more shares, in a reverse stock-split, a shareholder is left with fewer shares. For
example, a 1-for-2 reverse stock-split results in a shareholder who had been holding two shares to end up holding only one, and
a 10-for-1 reverse stock-split results in a shareholder who had been holding ten shares to end up holding only one. And here, too,
when a firm reverse splits its stock, the intrinsic value of the firm is not affected because, just as in a forward split, nothing
has occurred to positively or negatively impact the underlying business, which is what provides the basis for determining intrinsic
value. Therefore, in a publicly-traded securities market like OTC Markets, in which our stock is quoted, a holder of ten shares,
each having a market value of $1.00 (and a combined market value of $10) that splits 1-for-10 is left with one share, which should
logically and reasonably be expected to settle in after the event at a trading price of $10.00. And here, too, the market capitalization
(or “market cap”) of the subject company following a reverse stock-split should rationally be expected to remain unchanged.
Mostly because of the rational relationship that tends to exist
between market prices, on the one hand, and intrinsic value, on the other, the prices of relatively large, established company’s
stocks can be expected to maintain a rational correlation between price and value no matter how many shares into which the stock
may be divided or combined. This is because the fundamental metric-based components of establishing a reasonable intrinsic valuation
range for such companies (typically including projectable revenues, cash flows, earnings, growth rates, and shareholders’
equity) are generally available, and so the factors comprising the speculative remainder of the valuation inputs become relatively
minor in the valuation process and the result is broader consensus in the market as to estimated value for these issues, and, ultimately,
price stability.
What is rational, however, is not always what occurs when it comes
to reverse stock-splits. Because companies that effect reverse stock-splits are commonly very small companies that lack reasonably
projectable business fundamentals, as we are, and “penny stocks” that carry certain stigma in some trading circles
as being unworthy of investment, as ours is, gauging intrinsic value is subject to a much greater degree of speculation and so
the market trading price is not necessarily correlated with anything more than pure speculation, which is by definition not tied
to anything tangibly quantifiable. In terms of after-effect on stock market trading price, the result of a reverse stock-split
in such cases is thus much less predictable, and there can be no assurance that the market trading price of our shares if and when
we effect any contemplated reverse stock-split, as we expect to, will necessarily adjust such that the market values of holders’
shares remain the same after the reverse-split as they were before it.
Future issuances of our common stock
or preferred stock are likely and may dilute your economic interest.
We are likely to issue additional shares of our common stock in
the future in connection with various financings, which will likely have to do repeatedly until such time, if at all, that our
revenues attain a consistent level at which they can support both our operating and capital investment requirements. While any
such financings may involve registered or unregistered sales of securities, in the case of unregistered sales, the subject securities
may, and likely will – given our relatively early stage of development – be either preferred stock or debt, convertible
into common stock on the basis of a given ratio. We may also issue shares of our common stock or preferred stock in connection
with acquisitions and/or business combinations, and here, too, in either registered or unregistered, exempted transactions. Although
we intend to limit any financings or acquisitions in relation to which we issue shares to those for which the implied value of
our shares are equal to or greater than our most reasoned estimate of our intrinsic value, thereby avoiding dilution to our existing
stockholders in terms of economic value, there can be no assurance in this regard because (i) intrinsic value is, to at least some
degree, an inherently subjective benchmark range in relation to which reasonable minds can differ, and (ii) financings may be critical
at a time when we are unable to attract the interest of potential investors willing to invest on the basis of a valuation considered
by us to be within our intrinsic value range.
Other Risks Associated with an Investment
in our Common Stock
A holder of certain of our debt has
veto power over the filling of vacant board seats, which we have agreed to limit to five until that debt is retired.
Our corporate bylaws currently provide for a classified board of
directors consisting of up to 15 members, as determined from time to time within the discretion of our board of directors through
the due execution of appropriate resolutions and procedures. As of the date of this annual report on Form 10-K, we have a 5-person
classified board of directors with three sitting members and two vacancies. Of the three sitting members, one, John Kuehne, is
a Class I member, whose current term expired on July 22, 2018, one, Donald Schoenfeld, is a Class II member, whose current term
expires on July 22, 2019, and one, Steven Malone, is a Class III member, whose current term expires on July 22, 2020. In accordance
with a debt restructuring effected concurrently with the consummation of the Merger, however, and since amended, we have agreed
to limit the size of our board of directors to no more than five sitting members until such time as that debt is satisfied and
to obtain the consent of the holder of such debt to any directorship appointments effectively filling the two existing vacancies
in the meantime. As a result of this agreement, and though still possessing all of the same voting rights relative to the constitution
of our board of directors, holders of our common stock, individually and collectively, are deprived for the time being of the same
right to influence and effect such constitution as otherwise entitled under Nevada corporate law and our articles of incorporation
and bylaws, and there can be no assurance that the constitution of our board of directors will be consistent with what it would
be in the absence of this agreement and/or that any actions taken or not taken by our board of directors during the effectiveness
of this agreement will be consistent with those that would have occurred were it not in place.
Future issuances of our common stock
or preferred stock are likely and may depress our stock price.
We may issue additional shares of our common stock in the future
in connection with financings, which we expect to do in the very near-term and will likely have to do repeatedly until such time,
if at all, that our revenues attain a consistent level at which they can support both our operating and capital investment requirements.
While any such financings may involve registered or unregistered sales of securities, in the case of unregistered sales, the subject
securities may, and likely will – given our relatively early stage of development – be either preferred stock or debt,
convertible into common stock on the basis of a given ratio. We may also issue shares of our common stock or preferred stock in
connection with acquisitions and/or business combinations, and here, too, in either registered or unregistered, exempted transactions.
Although we intend to limit any financings or acquisitions in relation to which we issue shares to those for which the implied
value of our shares are equal to or greater than our most reasoned estimate of our intrinsic value, thereby avoiding dilution to
our existing stockholders in terms of economic value, there can be no assurance in this regard because (i) intrinsic value is,
to at least some degree, an inherently subjective benchmark range in relation to which reasonable minds can differ, and (ii) financings
may be critical at a time when we are unable to attract the interest of potential investors willing to invest on the basis of a
valuation considered by us to be within our intrinsic value range. In any event, future issuances of shares may have the effect
of depressing our stock price for any one or more of the following reasons, among others:
|
▪
|
the market perceives our shares as having been issued below intrinsic value, thereby diluting the economic interests of our shareholders, who, thereafter sell for that reason, thereby putting downward pressure on the stock price;
|
|
|
|
|
▪
|
the market will perceive an “overhang” in shares soon to be entering the float via resale registration or exemption, and discount the current value accordingly, thereby putting downward pressure on the stock price;
|
|
|
|
|
▪
|
investors that acquire substantial blocks of common stock in connection with a private financing subsequently determine to sell out their position rapidly once the shares become eligible for resale, particularly if they are professional investors that acquired their shares at a price below current market, but in any event putting downward pressure on the stock price;
|
|
|
|
|
▪
|
recipients of shares in a business combination subsequently determine to sell out their position rapidly once the shares become eligible for resale, particularly if they are individual investors that had held the shares throughout an extended period of illiquidity, but in any event putting downward pressure on the stock price.
|
Future sales of our common stock
by our officers or directors may depress our stock price.
Our officers and directors are not contractually obligated to refrain
from selling any of their shares; therefore, our officers and directors may sell any shares owned by them which are registered
under the Securities Act, or which otherwise may be sold without registration to the extent permitted by Rule 144 or other exemptions.
Because of the perception by the investing public that a sale by such insiders may be reflective of their own lack of confidence
in our prospects, the market price of our common stock could decline as a result of a sell-off following sales of substantial amounts
of common stock by our officers and directors into the public market, or even the mere perception that these sales could occur.
Though our common stock is quoted
on the OTC Markets, there is no liquidity and no established public market for our common stock, which means that it will likely
be difficult to sell shares.
Our common stock is quoted over the counter on the OTC Markets under
the symbol “FIND.” The OTC Markets is not an exchange and the over-the-counter market is a significantly more limited
market than established trading markets and national exchanges such as the New York Stock Exchange and Nasdaq, including the Nasdaq
Global Select Market. Broker dealers may not be willing to make a market in shares quoted solely over the counter such as ours.
In addition, many of the issues traded on the OTC Markets, including our own, are often characterized by low trading volumes and
price volatility, which may make it difficult for an investor holding shares to sell them on acceptable terms.
Although we are an Exchange Act reporting company, there is no active
trading market for our common stock. There can be no assurance that an active trading market will ever develop for our common stock
or, if it does develop, that it will be maintained. Failure to develop or maintain an active trading market will generally result
in relatively low-priced shares, which may, in turn, cause an investor to be unable to sell its shares or to attempt to sell its
shares with the effect of lowering the market price, all of which could lead to a complete or partial loss of investment. Unless
an active trading market develops for our common stock, for which there can be no assurance, investors may not be able to sell
their shares.
We cannot assure you that our common
stock will ever be listed on one of the national securities exchanges.
Although it is our intention to seek the listing of our common stock
on Nasdaq (Global or Capital Markets) or another stock exchange as soon as we are able, there can be no assurance that we will
be able to meet the initial listing standards of either of those or any other stock exchange in the foreseeable future, or ever,
or that, if we do, and we become listed, that we will be able to maintain such listing for any given period through continuing
eligibility. Until our common stock is listed on one of the national stock exchanges, for which there can be no assurance, we expect
that our common stock would continue to trade in the OTC Markets.
Since our common stock is thinly
traded, it is more susceptible to extreme rises or declines in price, and you may not be able to sell your shares at or above the
price you paid.
Investors in our common shares may have difficulty reselling them,
either at or above the price paid, or even at a fair market value. The stock markets often experience significant price and volume
changes that are not related to the operating performance of individual companies, and because our common stock is thinly traded,
it is particularly susceptible to such changes. These broad market changes may cause the market price of our common stock to decline
regardless of how well we perform as a company, and, depending on when you determine to sell, you may not be able to obtain a price
at or above the price you paid.
We were once a shell company, which,
coupled with other factors, makes resale of our restricted shares unusually challenging.
For stockholders of ours that hold restricted shares (typically
because they were acquired in private offerings), the most common means for reselling their shares requires reliance by them on
Rule 144 under the Securities Act, which provides an exemption from the otherwise applicable requirements of SEC registration.
Given the current securities brokerage environment, however, selling restricted shares of microcap penny stocks pursuant to Rule
144 is proving increasingly difficult because fewer and fewer brokerage firms are dealing in these securities and those that continue
to do so are charging transaction fees that are exorbitant to the point of making them prohibitive as a practical matter. This
reality renders the prospect of selling restricted shares of our stock through anything other than an effective registration statement
daunting at best. Complicating matters even further for our shareholders, however, is the fact that, as a former shell company,
we are subject to certain heightened regulations under Rule 144 that, as a practical matter, make the process of selling restricted
shares of our stock all the more administratively challenging. For this reason, and unless their resale is registered through an
effective registration statement, holders of restricted shares of our stock (shares purchased in an offering directly from us,
or, in any event, not purchased in the open market) are likely to encounter major challenges in selling their shares, even if and
when they otherwise qualify for resale under Rule 144.
If you require dividend income, you
should not rely on an investment in our common stock.
Because we have very limited cash resources, significant cash needs,
and a substantial accumulated deficit, we have not declared or paid any dividends on our common stock since our inception and we
do not anticipate declaring or paying any dividends on our common stock in the foreseeable future. Rather, we intend to retain
earnings, if any, for the continued operation and expansion of our business. It is unlikely, therefore, that holders of our common
stock will have an opportunity to profit from anything other than potential appreciation in the value of our common stock held
by them. If you require dividend income, you should not rely on an investment in our common stock.
If we are unable to establish appropriate
internal controls over financial reporting, it could cause us to fail to meet our reporting obligations, result in the restatement
of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose
confidence in our reported financial information and have a negative effect on the market price for shares of our common stock.
Effective internal controls are necessary for us to provide reliable
financial reports and to effectively prevent fraud. We maintain a system of internal control over financial reporting, which is
defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer,
or persons performing similar functions, and effected by our board of directors, management and other personnel, 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.
As a public company that files reports under the Exchange Act, we
have significant additional requirements for enhanced financial reporting and internal controls. We are required to document and
test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which
requires annual management assessments of the effectiveness of our internal controls over financial reporting. Our disclosure controls
and procedures are not effective as a result of the material weakness in internal control over financial reporting because of inadequate
segregation of duties over authorization, review and recording of transactions as well as the financial reporting of such transactions.
Management is attempting to develop a plan to mitigate the above material weaknesses. The process of designing and implementing
effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the
economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate
to satisfy our reporting obligations as a public company under the Exchange Act.
We cannot assure you that we will not, in the future, identify areas
requiring improvement in our internal control over financial reporting. We cannot assure you that the measures we will take to
address any areas in need of improvement will be successful or that we will implement and maintain adequate controls over our financial
processes and reporting in the future as we continue our growth. If we are unable to establish appropriate internal financial reporting
controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial
statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our
reported financial information and have a negative effect on the market price for shares of our common stock.
Unless and until we garner analyst
research coverage, we are unlikely to create long-term market value in our common stock.
Although we are an Exchange Act reporting company and our common
stock is quoted on the OTC Markets, we are unaware of any investment banking firms, large or small, that currently provide analyst
research coverage on the Company and, given our relatively small size within the public securities markets, it is unlikely that
any investment banks will begin doing so in the near future. Without continuing research coverage by reputable investment banks
or similar firms, it is considerably more difficult to attract the interest of most institutional investors, which are generally
considered to be very important in achieving a desirable balance in shareholder composition and long-term market value (as distinct
from intrinsic value) in a stock. While we intend to continue to aggressively pursue investor relations initiatives designed to
create visibility for the Company and common stock, and hope to garner analyst coverage in the future, there can be no assurance
that we will succeed in this regard and any inability on our part to develop such coverage is likely to materially impede the realization
of long-term market value in our common stock.
Our common stock is subject to the
“penny stock” regulations, which is likely to make it more difficult to sell.
Our common stock is considered a “penny stock,” which
generally is a stock trading under $5.00 and not registered on any national securities exchanges under applicable securities laws.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. This regulation
generally has the result of reducing trading in such stocks, restricting the pool of potential investors for such stocks, and making
it more difficult for investors to sell their shares. Prior to a transaction in a penny stock, a broker-dealer is required to:
|
▪
|
deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market;
|
|
▪
|
provide the customer with current bid and offer quotations for the penny stock;
|
|
▪
|
explain the compensation of the broker-dealer and its salesperson in the transaction;
|
|
▪
|
provide monthly account statements showing the market value of each penny stock held in the customer’s account; and
|
|
▪
|
make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction.
|
These requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that is subject to the penny stock rules. For this reason, investors in our
common stock may find it more difficult to sell their shares.
As an issuer of “penny stock,”
we do not currently benefit from the protection provided by the federal securities laws relating to forward-looking statements.
Although, generally, federal securities laws provide a safe harbor
for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor
is not available to issuers of penny stocks. As a result, and since our common stock has consistently traded in recent years at
a level at which it is considered to constitute a “penny stock,” we do not have the benefit of this safe harbor protection
in the event of any legal action based upon a claim that any forward-looking statements contained in any one or more of our public
filings proved to be inaccurate. Any such legal action could hurt our business, financial condition and results of operations.
Our stock price could be volatile,
and your investment could suffer a decline in value.
The trading price of our common stock is likely to be highly volatile
and could be subject to extreme fluctuations in price in response to various factors, many of which are beyond our control, including:
|
▪
|
the trading volume of our shares;
|
|
▪
|
the number of securities analysts, market-makers and brokers following our common stock;
|
|
▪
|
changes in, or failure to achieve, financial estimates by securities analysts;
|
|
▪
|
new products introduced or announced by us or our competitors;
|
|
▪
|
announcements of technological innovations by us or our competitors;
|
|
▪
|
actual or anticipated variations in quarterly operating results;
|
|
▪
|
announcements by us of significant acquisitions, strategic partnerships, joint ventures, or capital commitments;
|
|
▪
|
additions or departures of key personnel;
|
|
▪
|
sales of our common stock; and
|
|
▪
|
stock market price and volume fluctuations of publicly-traded, particularly microcap, companies generally.
|
The volatility of our common stock is illustrated by reference to
the fact that, during the twelve months ended December 31, 2018, the market trading price of our common stock has fluctuated from
a low of $0.002 to a high of $0.03 per share.
The stock market has recently experienced significant price and
volume fluctuations. Volatility in the market price for particular companies has often been unrelated or disproportionate to the
operating performance of those companies. These broad market and industry factors may seriously harm the market price of our common
stock, regardless of our operating performance. In addition, securities class action litigation has often been initiated following
periods of volatility in the market price of a company’s securities. A securities class action suit against us could result
in substantial costs, potential liabilities and the diversion of management’s attention and resources from our business.
Moreover, and as noted above, our common stock is currently quoted on the OTC Market and, further, sales of our shares are subject
to the penny stock regulation. Price fluctuations in such shares are particularly volatile and subject to manipulation by market
makers, short-sellers and option traders.
Actions of activist investors could
disrupt our business.
Public companies have increasingly become the target of activist
investors in recent years. In the event that a third party, such as an activist investor, proposes to change our governance policies,
board of directors, or other aspects of our operations, our review and consideration of such proposals may create a significant
distraction for our management and employees. This could negatively impact our ability to execute our business plan and may require
management to expend significant time and resources responding to such proposals. Such proposals may also create uncertainties
with respect to our financial position and operations and may adversely affect our ability to attract and retain key employees.