U.S. Lighting Group, Inc. - Annual Report: 2020 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark one) 

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Year Ended December 31, 2020

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission File Number: 000-55689

US LIGHTING GROUP, INC.

(Exact name of registrant as specified in its charter)

(216) 896-7000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.0001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes ☐  No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐  No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The aggregate market value of the voting common equity held by non-affiliates as of June 30, 2020, based on the closing sales price of the common stock as quoted on the OTC Marketplace was $17,387,000. For purposes of this computation, all officers, directors, and 5 percent beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such directors, officers, or 5 percent beneficial owners are, in fact, affiliates of the registrant.

As of March 19, 2021, there were 96,945,735 shares of registrant’s common stock outstanding.

TABLE OF CONTENTS

FORWARD LOOKING STATEMENTS

This Annual Report contains forward-looking statements, including, without limitation, in the sections captioned “Description of Business,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere. Any and all statements contained in this Report that are not statements of historical fact may be deemed forward-looking statements. Terms such as “may,” “might,” “would,” “should,” “could,” “project,” “estimate,” “pro forma,” “predict,” “potential,” “strategy,” “anticipate,” “attempt,” “develop,” “plan,” “help,” “believe,” “continue,” “intend,” “expect,” “future,” and terms of similar import (including the negative of any of the foregoing) may be intended to identify forward-looking statements. However, not all forward-looking statements may contain one or more of these identifying terms. Forward-looking statements in this Report may include, without limitation, statements regarding (i) the plans and objectives of management for future operations, including plans or objectives relating to exploration programs, (ii) a projection of income (including income/loss), earnings (including earnings/loss) per share, capital expenditures, dividends, capital structure or other financial items, (iii) our future financial performance, including any such statement contained in a discussion and analysis of financial condition by management or in the results of operations included pursuant to the rules and regulations of the SEC, and (iv) the assumptions underlying or relating to any statement described in points (i), (ii) or (iii) above.

The forward-looking statements are not meant to predict or guarantee actual results, performance, events or circumstances and may not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates and assumptions and are subject to a number of risks and uncertainties and other influences, many of which we have no control over. Actual results and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements as a result of these risks and uncertainties. Factors that may influence or contribute to the inaccuracy of the forward-looking statements or cause actual results to differ materially from expected or desired results may include, without limitation, our inability to obtain adequate financing, insufficient cash flows and resulting illiquidity, our inability to expand our business, the COVID-19 pandemic and measures intended to reduce its spread, government regulations, lack of diversification, volatility in the price of gold, increased competition, results of arbitration and litigation, stock volatility and illiquidity, and our failure to implement our business plans or strategies.

Readers are cautioned not to place undue reliance on forward-looking statements because of the risks and uncertainties related to them. We disclaim any obligation to update the forward-looking statements contained in this Report to reflect any new information or future events or circumstances or otherwise.

ITEM 1. DESCRIPTION OF BUSINESS.

Overview

The Company designs and manufactures commercial LED lighting. Intellitronix Corporation (“Intellitronix”), our wholly owned subsidiary, is a manufacturer of automotive aftermarket and original equipment manufacturer (OEM) electronics.

The Company was incorporated in the State of Florida on October 17, 2003, under the corporate name Luxurious Travel Corp., in order to develop, market and distribute a hotel booking engine software that interfaces and captures various rate channels and inventory controls for hotel reservations. The system allowed users to market, manage and sell hotel reservations, and to produce invoices, track follow up and manage customer relationships.

The Company acquired all of the issued and outstanding capital stock of US Lighting Group, Inc. (founded in 2013 in accordance with the laws of the State of Wyoming) on July 13, 2016, and the corporate name was changed on August 9, 2016 to the US Lighting Group, Inc.

Intellitronix Corp. was acquired by the Company on December 1, 2016. The Company agreed to pay $4.0 million in exchange for all the shares of Intellitronix Corp. Intellitronix Corp. is a designer and a US-based manufacturer of automotive electronic products such as digital and analog gauges, energy management systems and ignition boxes. The products are sold through aftermarket distributors, as well consumer direct and through some OEM channels. At the time of acquisition Intellitronix Corp. already had access to the automotive electronics market and had an established distributor and consumer base.

As a consolidated entity, the Company has demonstrated revenue growth; however, the Company has historically reported operating losses primarily from expenses associated with public company costs, corporate marketing, and product development activities. However, in the year ending December 31, 2020, the Company was able to report net income due to a significant increase in sales by Intellitronix and an increase in its manufacturing productivity due to automation. We intend to raise capital to operate and expand our business to meet the growing demand for our products. We plan to grow revenue through the increase in sale of our existing products and our new products via our existing distribution networks, as well as, completing more OEM projects for the recreational vehicle (RV) and marine industries.

US Lighting Group

In recent years, we have seen a more energy-efficient, environmentally safe, and flexible lighting for businesses and residential homes. Light emitting diodes (LEDs) offer numerous advantages over traditional light bulbs. LEDs are more durable resembling a hard plastic versus a thin glass. Since mercury is not required in the manufacturing process, LEDs are more environmentally friendly. Benefits of using our LED lights include an immediate and significant reduction in lighting bills with no yearly bulb or ballast replacements. LED lights are durable and rugged, resistant to external impacts, and emit virtually no heat and ultraviolet emissions. Furthermore, unlike the previous fluorescent bulb, LED lights are ecologically friendly as they do not include mercury or hazardous chemical and are recyclable.

Applications for our LED lights include commercial spaces such as board rooms, offices, factories, stores, gymnasiums, schools, hospitals, warehouses, and greenhouses, as well as some residential applications such as garages.

LEDs are a cost-effective, energy-savings alternative to incandescent lights, touting a 2000% efficiency rate over conventional light bulbs and a 500% efficiency rate over compact fluorescent bulbs. Over a 10-year period, the lighting industry could save $1 trillion in energy costs, eliminate the need for nearly 1 billion barrels of petroleum leading to a substantial reduction in carbon dioxide emissions. With technology advancements, the true potential of LED lighting lies in their ability to transform lighting technology. The light spectrum could be custom-tailored for all wavelengths, accurately matching the sun’s light qualities that could revolutionize indoor agriculture and help night-shift workers. The use of polarized light from LEDs could also improve computer displays and lower the glare from car headlights.¹

References:

Transformerless Circuit Controls Speed of Energy

Most LED lighting companies use a transformer to appropriately drive an LED. Transformers, however, emit heat; that heat reduces a light bulb’s energy efficiency. US Lighting Group has created a proprietary “transformerless” circuit that controls the speed of energy powered to the LED. Eliminating the expense of an additional circuit board and timely assembly that goes along with it allows us to put money into the part that matters most, the actual LED. Our driverless and transformerless technology allows our LED lights to offer maximum efficiency.

Ballast or no-ballast fluorescent lighting retrofits

Most businesses use fluorescent lighting for work areas, conference rooms, and hallways. These fixtures have a “ballast” which regulates the amount of electricity going through the fluorescent tube providing enough electricity to “start up.” Our BH4 and GFY LED lighting product lines do not require a ballast in its fixture, allowing for maximum energy efficiency. Our FEB Ballast Compatible line of bulbs eliminates the guesswork and retrofitting associated with these fixtures. These LED bulbs are “plug-and-play” so customers do not have to worry about the type of ballast, and they can literally begin saving money on their electricity by removing the old fluorescent bulb and replacing it with our Ballast Compatible LED Bulbs.

LED Technology

According to the U.S. Department of Energy, commercial and residential LED usage has shown that LED lights use at least 75% less energy and last 25 times longer than incandescent bulbs. The actual LED component determines a light’s efficiency. To ensure our LED is the most efficient, we use one of the most powerful LEDs available, such as Samsung LM561C, that emits the most lumens per watt. All LEDs are rated to last at least 100,000 hours. However, this lifespan is only possible should an LED not exceed clearly defined power and temperature limits, which is the main consideration behind our “transformerless” design.

Principal Products

US Lighting Group designs, manufactures, and distributes 4’ LED tube lights that are superior in power usage, lifespan, warranty, and cost savings, because of the exclusive minimalistic design and proprietary manufacturing processes. Channels to market include The Home Depot drop ship program, and earlier in the company history, a chain of regional distributors. US Lighting Group, Inc. has research and development, testing, and production facilities based in Euclid, Ohio, USA where all products are engineered and manufactured from domestic and imported components.

The US Lighting Group currently produces a series of bulbs, each with their own unique specifications and applications:

Distribution and Current Market

LED lighting is a commodity product, which has become very competitive due to overseas imports with low pricing, making it a difficult climate for US Lighting Group, Inc. to operate in. We are looking into other LED lighting product lines that would leverage our electronics innovativeness to provide more specialty-type LED lighting. US Lighting Group has a supplier contractual relationship with The Home Depot. Customers can order product online at HomeDepot.com and it ships to the customer directly from our warehouse, however the sales have been minimal in the last two years.

US Lighting Group is looking at other industries such as robotics and fiberglass, but they are still in the early development stage.

Patents

The following patents have been issued to our majority shareholder, CEO, Paul Spivak:

Patent No. 10308330 for the company’s new motion stabilized spotlight product for the marine industry, Issued - 06/04/2019.

Patent No. 6353781 GPS Controlled Marine Speedometer Unit with Multiple Operational Modes, Issued - 03/05/2002.

Currently, there is no formal patent license agreement between the CEO and the Company.

Intellitronix Corporation

In recent years, the Company’s primary activity has been centered around Intellitronix. Intellitronix is engaged in automotive electronics manufacturing, serving a niche market of aftermarket electronics for customer installations as well as several emerging OEM applications.

Products

Our capabilities include a broad range of design and manufacturing services, such as various microprocessor-controlled products for the automotive, electronic, marine, and recreational vehicle markets and the Company has been leveraging its competitive advantage as an efficient low-cost manufacturing partner to other OEM providers. We are focusing on growing the OEM and private label segments that provide high-volume and low-overhead manufacturing opportunities.

The vast majority of our products are manufactured at our facility in Euclid, Ohio.

Distribution

We currently have three sales channels, including Intellitronix branded automotive product lines sold through business-to-consumer (B2C) and retail channels, business-to-business (B2B) and private labeled product lines, and original equipment manufacturers (OEM). For OEM customers, we provide design and manufacturing services to meet original equipment manufacturer’s specifications and these products are incorporated in the new vehicles. The most recent projects have been completed in the growing RV industry, meeting all applicable safety standards.

Our customers include O’Reilly Auto Parts, Summit Racing Equipment, JEGS, Kawasaki Motors, Coachman RV, US Auto Parts, CJ Pony Parts, Corvette Central, Mid America Motorworks, Eckler’s, and others. We also sell our products through eBay, Amazon, and other e-commerce platforms.

Employees

As of December 31, 2020, we had 47 employees, of which 12 employees are part-time. Our engineering staff designs products from conception through prototype, testing, and production. Our staff consists of both electrical and mechanical engineers, and we periodically utilize contractors on an as-needed basis. Our other departments include sales, marketing, administration, production, quality assurance, and technical support.

Equipment

We have a line of automated electronic assembly equipment and other machinery required to assemble and test printed circuit boards. We are expanding our capabilities by regularly purchasing in-house equipment in order to produce more intricate or customized products. Our current equipment line includes Stencil printers, SMT (Surface Mount Technology) pick-and-place machines, reflow oven, wave soldering machine, wire stripping, and laser cutting.

Markets

The global Automotive Electronics market was valued at $285 billion in 2018 and is estimated to be worth more than $645 billion by 2030 based on the compound annual growth rate (CAGR*) of 7% between 2019 and 2030. The Automotive Electronics global market includes automotive software, electrical/electronic component, ECUs/EDUs, power electronics, sensors, software, integration, verification and validation, and other electronic components.²

The COVID-19 pandemic has made a significant impact on the automotive industry. The automotive industry may see a shift in its global supply chain due to the level of dependence on Chinese production and tooling. The industry could potentially reduce its reliance on China, because of the supply chain disruptions. In this scenario, a larger percentage of production could feasibly move back to the U.S. It is expected that the Chinese tooling and production industries will be extremely aggressive with pricing and will have the full backing of local Chinese authorities and governments. Our strategic business plan for Intellitronix includes plans to reduce our dependency on Chinese imports.³ In 2020, we made significant investments in our manufacturing equipment thereby reducing our future dependency on Chinese imports.

 
References:

Suppliers – International and Domestic

US Lighting Group and Intellitronix both source components from preferred vendors and alternative sources:

US Lighting Group

Intellitronix Corporation

Competition

US Lighting Group

We compete with numerous companies in the LED Lighting marketplace including Lithonia Lighting, Toggled, Feit Electric and countless Chinese companies.

Intellitronix Corporation

We compete primarily with four companies in the Automotive Aftermarkets industry for automotive electronics, including Dakota Digital, Autometer, Classic Instruments, and Holley Ignition Boxes (MSD).

Product Safety

 
We use Intertek Testing Services NA, Inc. for product safety testing. We comply with environmental regulations regarding product safety.

ITEM 1A. RISK FACTORS.

Not required for smaller reporting companies.

ITEM 2. DESCRIPTION OF PROPERTY.

Our principal corporate office and production facility, which we purchased on April 27, 2020, is located at 1148 East 222^nd Street, Euclid, Ohio 44117. The commercial building has 26,000 sq. ft. of manufacturing, warehouse and office space and sits on 2.0 acres of land. Previously, the Company rented space at 34099 Melinz Parkway, Unit E, Eastlake, Ohio. We believe our facilities are adequate to meet our current and near-term needs.

ITEM 3. LEGAL PROCEEDINGS.

Intellitronix Corporation is a defendant in a lawsuit filed by Michael A. Kunzman & Associates, Inc. for alleged nonpayment of manufacturer’s representation commissions. The lawsuit was filed on August 24, 2020 and is currently pending in the Circuit Court for Oakland County, Michigan. Intellitronix Corporation denies the allegations and intends to assert, upon leave of Court, a counterclaim to recover its damages.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.

US Lighting Group is a publicly traded company on the OTC Markets Group Inc. quotation venue under the trading symbol “USLG.”

The following quotations reflect the high and low bids for our common stock based on inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

Fiscal Year 2020

Fiscal Year 2019

Holders of Record

As of March 19, 2021, an aggregate of 96,945,735 shares of our common stock were issued and outstanding and were owned by approximately 504 stockholders of record. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders. The holders of the Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. Holders of the Common Stock have no preemptive rights and no right to convert their Common Stock into any other securities. There are no redemption or sinking fund provisions applicable to the Common Stock.

Dividend Policy

We have never paid any cash dividends on our capital stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We intend to retain future earnings to fund ongoing operations and future capital requirements of our business. Any future determination to pay cash dividends will be at the discretion of the Board and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board deems relevant.

Securities Authorized for Issuance Under Equity Compensation Plans

The Company does not currently maintain any Equity Compensation Plans.

Recent Sales of Unregistered Securities

Common shares issued for cash

During the year ended December 31, 2020, the Company received proceeds of $683,000 on the sale of 4,275,665 shares of common stock, at an average price of $0.16, as part of its Regulation D offerings.

Common shares issued for services

The Company entered into various consulting agreements with third parties (“Consultants”) pursuant to which these Consultants provided business development, sales promotion, introduction to new business opportunities, strategic analysis, and sales and marketing activities. In addition, the Company issues its employees common shares to reward performance. During the year ended December 31, 2020, the Company issued 125,000 shares of common stock to these consultants and employees, with a fair value of $31,000 at the date of grant.

Common shares issued on conversion of convertible notes

During the year ended December 31, 2020, the Company issued 1,222,544 shares of the Company common stock on the conversion of principal and accrued interest of $275,000 on its convertible notes payable.

Repurchases of Equity Securities by the Issuer and Affiliated Purchasers

We did not purchase any of our registered securities during the period covered by this Annual Report.

ITEM 6 – SELECTED FINANCIAL DATA

Not required under Regulation S-K for “smaller reporting companies.” 

ITEM 7. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. See “Note Regarding Forward-Looking Statements.” Our actual results could differ materially from those anticipated in the forward-looking statements.

The following discussion and analysis of the Company’s financial condition and results of operations is based on the preparation of our financial statements in accordance with U.S. generally accepted accounting principles. You should read this discussion and analysis together with such financial statements and the related notes thereto.

General Overview

We are engaged in the business of manufacturing and distributing LED digital gauges, automotive electronics, and accessories for commercial and industrial customers, as well as LED lighting tubes and bulbs.

Principal Products

US Lighting Group designs, manufactures, and distributes 4’ LED tube lights that are superior in power usage, lifespan, warranty, and cost savings, because of the exclusive minimalistic design and proprietary manufacturing processes. Channels to market include The Home Depot drop ship program, and earlier in the company history, a chain of reginal distributors. US Lighting Group, Inc. has research and development, testing, and production facilities based in Euclid, Ohio, USA where all products are engineered and manufactured from domestic and imported components.

The US Lighting Group currently produces a series of bulbs, each with their own unique specifications and applications:

Distribution and Current Market

LED lighting is a commodity product, which has become very competitive due to overseas imports with low pricing, making it a difficult climate for US Lighting Group, Inc. to operate in. We are looking into other LED lighting product lines that would leverage our electronics innovativeness to provide more specialty-type LED lighting. US Lighting Group has a supplier contractual relationship with The Home Depot. Customers can order product online at HomeDepot.com and it ships to the customer directly from our warehouse, however the sales have been minimal in the last two years.

US Lighting Group is looking at other industries such as robotics and fiberglass, but they are still in the early development stage. 

Intellitronix Corporation

In recent years, the Company’s primary activity has been centered around Intellitronix. Intellitronix is engaged in automotive electronics manufacturing, serving a niche market of aftermarket electronics for customer installations as well as several emerging OEM applications.

Products

Our capabilities include a broad range of design and manufacturing services, such as various microprocessor-controlled products for the automotive, electronic, marine, and recreational vehicle markets and the Company has been leveraging its competitive advantage as an efficient low-cost manufacturing partner to other OEM providers. We are focusing on growing the OEM and private label segments that provide high-volume and low-overhead manufacturing opportunities.

The vast majority of our products are manufactured at our facility in Euclid, Ohio.

Distribution

We currently have three sales channels, including Intellitronix branded automotive product lines sold through business-to-consumer (B2C) and retail channels, business-to-business (B2B) and private labeled product lines, and original equipment manufacturers (OEM). For OEM customers, we provide design and manufacturing services to meet original equipment manufacturer’s specifications, and these products are incorporated in the new vehicles. The most recent projects have been completed in the growing RV industry, meeting all applicable safety standards. Our customers include O’Reilly Auto Parts, Summit Racing Equipment, JEGS, Kawasaki Motors, Coachman RV, US Auto Parts, CJ Pony Parts, Corvette Central, Mid America Motorworks, Eckler’s, and others. We also sell our products through eBay, Amazon, and other e-commerce platforms.

COVID-19 Considerations

Through the date these financial statements were issued, the COVID-19 pandemic did not have a net material impact on our operating results. In the future, the pandemic may cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment, which negatively effects the consumers who purchase our products.

Our ability to operate without significant negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees and our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities to protect our employees. Through the date that these financial statements were issued, we maintained the consistency of our operations during the onset of the COVID-19 pandemic. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example, an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations.

Through the date that these financial statements were issued, the COVID-19 pandemic has not negatively impacted the Company’s liquidity position as of such date, and the Company continues to generate cash flows to meet its short-term liquidity needs, and it expects to maintain access to the capital markets. The Company has not observed any material impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic.

Results of Operations for the Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019

Our revenue, operating expenses, and net loss from operations for the year ended December 31, 2020 as compared to the year ended December 31, 2019, were as follows:

Sales

Sales increased by $1.4 million (52%) to $4.0 million for the year ended December 31, 2020, compared to $2.6 million for the year ended December 31, 2019. The increase in revenue is attributed to the successful completion of several R&D projects that resulted in increased purchasing activity by OEM and private label customers as well as organic growth of the market share of Intellitronix branded products.

Cost of Goods Sold

Cost of goods sold increased by $279,000 (27%) to $1.3 million for the year ended December 31, 2020, compared to $1.0 million for the year ended December 31, 2019. The increase in costs of goods sold was primarily attributable to increased sales. Gross profit as a percentage of sales increased to 67% for the year ended December 31, 2020 from 61% for the year ended December 31, 2019, or 6%, an increase of 11%. The improved gross margin is attributed to increased automation implemented during the year ended December 31, 2020, leading to reduced labor costs and improved supply chain management.

Operating Expenses

Operating expenses include selling, general and administrative expenses, product development costs, and non-cash stock-based compensation expense, and loss on disposal of property and equipment. 

Selling, general and administrative expenses remained steady at $1.9 million for both of the years December 31, 2020 and 2019.

Product development costs remained steady at $236,000 during the year ended December 31, 2020, compared to $230,000 during the year ended December 31, 2019.

Non-cash stock-based compensation expense decreased approximately $7.9 million to $31,000 during the year ended December 31, 2020 compared to $8.0 million during the year ended December 31, 2019. We issued stock in lieu of cash payment for services received from employees and contractors. During the year ended December 31, 2019, we issued 27,091,000 shares of the Company’s common stock to our CEO valued at $6.8 million.

Income (Loss) from Operations

Income from operations increased to approximately $495,000 during the year ended December 31, 2020, compared to a loss from operations of $8.5 million during the year ended December 31, 2019. The increase in income from operations was due to increased gross profit and decreased operating expenses, as discussed above. 

Other Expense

Other expense for the year ended December 31, 2020 was $10,000, as compared to other expense of $200,000 for the year ended December 31, 2019. During the year ended December 31, 2020, we recorded a gain on SBA PPP loan forgiveness of $195,000 and sublease income of $30,000, both of which did not exist during the prior year period. Interest expense for the year ended December 31, 2020 was $235,000, as compared to $200,000 in the prior year period.

Net Income (Loss)

Net income was $485,000 during the year ended December 31, 2020, compared to a net loss of $8.7 million for the year ended December 31, 2019. The increase in net income was due to increased gross profit, decreased operating expenses, decreased non-cash stock based compensation expense, and decreased other expenses, as discussed above.

Liquidity and Capital Resources

Our working capital deficiency as of December 30, 2020 and 2019 was as follows:

The following summarizes our cash flow activity for the years ended December 30, 2020 and 2019:

At December 31, 2020, we had a working capital deficit of approximately $2.9 million compared to a working capital deficit of $2.2 million at December 31, 2019. The increase in working capital deficit was primarily related to the increase in short-term debt.

Net cash provided by operating activities for the year ended December 31, 2020 totaled $531,000, compared to net cash used in operating activities for the year ended December 31, 2019 of $315,000. The improvement in net cash provided by operating activities for the year ended December 31, 2020 was primarily due to our improved net income of $485,000 during the year ended December 31, 2020, and changes in our working capital accounts of $422,000 due primarily to the increase in our accounts receivable balance of $477,000.

Net cash used in investing activities was approximately $1,303,000 for the year ended December 31, 2020, compared to $101,000 for the year ended December 31, 2019. During the year ended December 31, 2020, the Company purchased land, building, and improvements, and production equipment for $1,130,000, and moved its operations to Euclid, Ohio. Net cash used in investing activities was approximately $101,000 for year ended December 31, 2019, and relates to the purchase of vehicles, machinery and equipment.

Net cash provided by financing activities for the year ended December 31, 2020 was $773,000, and included proceeds of $683,000 received in the private placement of common stock, $196,000 from the issuance of secured convertible promissory notes, $765,000 from proceeds from the issuance of notes payable, $60,000 from proceeds from a line of credit, and $408,000 in proceeds from the issuance of a note payable to a related party. These proceeds were offset by the payment of $2,000 on a finance lease, repayment of $494,000 of notes payable, repayment of $11,000 on the line of credit, and repayment of $832,000 of notes payable to a related party. Net cash provided by financing activities for the year ended December 31, 2019 was $299,000, and included $622,000 of proceeds from the private placement of common stock, $113,000 from the issuance of secured convertible promissory notes, and $280,000 in proceeds from loans payable. These proceeds were offset by the payment of $8,000 on a finance lease, repayment of $174,000 of notes payable, and repayment of $534,000 of notes payable to a related party.

Since inception, our principal sources of liquidity have been cash provided by financing, including through the private placement of convertible notes and equity securities, loans, and gross profit from the sales of our products. Our principal uses of cash have been primarily for labor and outside services, expansion of our operations, development of new products and improvement of existing products, expansion of marketing efforts to promote our products and brand, and capital expenditures. We anticipate that additional expenditures will be necessary to develop and expand our assets before sufficient and consistent positive operating cash flows will be achieved, including sufficient cash flows to service existing liabilities and related interest. Additional funds may be needed in order to continue production and operations, maintain profitability and to achieve our objectives. As such, our cash resources may not be sufficient to meet our current operating expense and production requirements, and planned business objectives beyond the date of this Form 10-K filing without additional financing.

Loans Payable to Related Parties

On December 1, 2016, the Company acquired Intellitronix Corporation from the Company’s President and shareholder. The Company agreed to pay $4,000,000 in exchange for all the shares of Intellitronix Corporation. The sixty-month loan matures in December 2021, requires monthly payments of $74,000, carries an interest rate of 6.25%, and is secured by the assets of Intellitronix Corporation. The loan balance on December 31, 2020 and 2019, including accrued interest, was $2,130,000 and $2,738,000.

During the year ended December 31, 2017, the Company’s President and shareholder, contributed $125,000 of working capital to the Company. The contributed working capital balance were converted into a loan with no interest rate, and due on demand. The loan balance was $125,000 on both December 31, 2020 and 2019.

In July 2016, the Company assumed an obligation of Solei Systems, Inc, an entity owned by the Company’s President and shareholder. The Company agreed to enter into a note agreement with Huntington National Bank for $60,000. The loan has an interest rate of 6.00% and requires a monthly payment of $1,000. The loan balance on December 31, 2020 and 2019, including accrued interest, was $34,000 and $32,000, respectively. In February 2021, the loan was repaid in full.

On April 24, 2020, the Company entered into a loan agreement (the “Loan Agreement”) with the Company’s President and shareholder, Paul Spivak (the “Lender”), pursuant to which the Company borrowed $408,000 from the Lender. The Loan has a term of twelve months and carries an interest rate of 6.00%. The Company used the net proceeds from the Loan to acquire the facility described in Note 3 of the accompany consolidated financial statements. A total of $330,000 was due on the loan as of December 31, 2020.

Loans Payable

On August 12, 2019, the Company entered into a PayPal Working Capital loan. The principal amount of the loan was for $216,000. The Company received net proceeds of $200,000, net of loan fees of $16,000. The loan has a 20-month term and requires monthly payments equal to 20% of monthly PayPal sales proceeds, but no less than $11,000 every 90-day period. The loan balance on December 31, 2020 and 2019, was $38,000 and $152,000, respectively.

On November 25, 2019, the Company entered into a PayPal Working Capital loan. The principal amount of the loan was for $66,000. The Company received net proceeds of $50,000, net of loan fees of $16,000. The loan has a 20-month term and requires monthly payments equal to 20% of monthly PayPal sales proceeds, but no less than $3,300 every 90-day period. The loan balance on December 31, 2020 and 2019, was $14,000 and $59,000, respectively.

On March 12, 2020, the Company entered into a loan agreement with Celtic Bank in the principal amount of $150,000 with interest at 32.09% per annum and due on September 12, 2021. The loan requires minimum monthly principal and interest payments of $11,000 and is secured by the Company’s assets and future sales and is personally guaranteed by the Company’s CEO. The loan balance on December 31, 2020 was $86,000.

On August 26, 2020, the Company entered into a loan agreement with Apex Commercial Capital Corp. in the principal amount of $266,000 with interest at 9.49% per annum and due on September 10, 2030. The loan requires one hundred nineteen (119) monthly payments of $2,322, with a final balloon payment on the one hundred twentieth (120) month, or September 10, 2030, of $224,835. The loan is guaranteed by the Company and the Company’s Chief Executive Officer and secured by the Company’s real estate. The loan balance on December 31, 2020 was $265,000.

The Company purchases vehicles for its Chief Executive Officer and for research and development activities. Generally, vehicles are sold or traded in at the end of the vehicle loan period. The aggregate vehicle loan balance was $74,000 at December 31, 2018. During the year ended December 31, 2019, the Company purchased an automobile for $30,000, with loan terms of 72 months and an interest rate of 10.99% per annum, and made aggregate payments of $19,000, leaving an aggregate loan balance on three vehicles of $85,000 at December 31, 2019. During the year ended December 31, 2020, the Company purchased two vehicles for $50,000 and $69,000, respectively, and entered loans ranging from 60 to 144 months, with interest rates per annum of 0% to 5.24%, and made total payments of $73,000, leaving an aggregate loan balance on three vehicles of $131,000 at December 31, 2020.

On August 3, 2020, the Company entered into a $18,000 term loan with Leaf Capital related to the purchase of production equipment. The loan requires monthly payments over the term of 36 months, has an interest rate of 8.48% per annum, and is secured by the production equipment. The loan balance was $16,000 at December 31, 2020.

On November 29, 2020, the Company entered into a $17,000 term loan with CIT Bank related to the purchase of software for its production equipment. The loan requires monthly payments over the term of 36 months, has an interest rate of 13.18% per annum, and is personally guaranteed by the Company’s CEO. The loan balance was $17,000 at December 31, 2020.

Convertible Secured Notes Payable

The Company issued convertible secured debentures (“Convertible Notes”) to accredited investors with interest at 10% per annum, a term of eighteen months, and secured by all of the assets of the Company and its subsidiaries. The Convertible Notes provide a conversion right, in which the principal amount of the Convertible Notes, together with any accrued but unpaid interest, could be converted into the Company’s common stock at a conversion price at $0.25 per share. During the year ended December 31, 2019, the Company received proceeds of $113,000 on the issuance of Convertible Notes, leaving an aggregate balance owed of $113,000 at December 31, 2019. During the year ended December 31, 2020, the Company received proceeds of $196,000 on the issuance of Convertible Notes, accrued additional interest of $21,000, and converted $275,000 of principal and interest into shares of the Company’s common stock, leaving a total of $55,000 owed at December 31, 2020.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to impairment of long-lived assets, including finite lived intangible assets, accrued liabilities, fair value of warrant derivatives and certain expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.

Our significant accounting policies are more fully described in Note 1 to our financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosures of contingent assets and liabilities. Actual results could differ from those estimates under different assumptions or conditions. We believe that the following critical accounting policies are subject to estimates and judgments used in the preparation of our consolidated financial statements:

Revenue recognition

We recognize revenue in accordance with Accounting Standard Update (“ASU”) No. 2014-09. This standard provides authoritative guidance clarifying the principles for recognizing revenue and developing a common revenue standard for U.S. generally accepted accounting principles. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in the exchange for those goods or services.

Under this guidance, revenue is recognized when control of promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company reviews its sales transactions to identify contractual rights, performance obligations, and transaction prices, including the allocation of prices to separate performance obligations, if applicable. Revenue and costs of sales are recognized once products are delivered to the customer’s control and performance obligations are satisfied.

Products sold by the Company are distinct individual products. The products are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them. Most of the Company’s sales are received through several eBay web-commerce websites, which requires customer payment at time of order placement.

The Company does offer a 30-day return policy from the date of shipment. The Company also provides a limited lifetime warranty on its products. Due to a limited history of returns, the Company does not maintain a warranty reserve. 

Recent Accounting Pronouncements

See Note 2 of the financial statements for a discussion of recent accounting pronouncements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Commitments

Lease Obligations

We currently have no lease obligations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required under Regulation S-K for “smaller reporting companies.”

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

Report of Independent Registered Public Accounting Firm

To the shareholders and the board of directors of US Lighting Group, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of US Lighting Group, Inc. (the “Company”) as of December 31, 2020, the related statement of operations, stockholders’ equity (deficit), and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue recognition — identification of contractual terms in certain customer arrangements

As described in Note 2 to the consolidated financial statements, management assesses relevant contractual terms in its customer arrangements to determine the transaction price and recognizes revenue upon transfer of control of the promised goods or services in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Management applies judgment in determining the transaction price which is dependent on the contractual terms. In order to determine the transaction price, management may be required to estimate variable consideration when determining the amount and timing of revenue recognition.

The principal considerations for our determination that performing procedures relating to the identification of contractual terms in customer arrangements to determine the transaction price is a critical audit matter are there was significant judgment by management in identifying contractual terms due to the volume and customized nature of the Company’s customer arrangements. This in turn led to significant effort in performing our audit procedures which were designed to evaluate whether the contractual terms used in the determination of the transaction price and the timing of revenue recognition were appropriately identified and determined by management and to evaluate the reasonableness of management’s estimates.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including those related to the identification of contractual terms in customer arrangements that impact the determination of the transaction price and revenue recognition. These procedures also included, among others, (i) testing the completeness and accuracy of management’s identification of the contractual terms by examining customer arrangements on a test basis, and (ii) testing management’s process for determining the appropriate amount and timing of revenue recognition based on the contractual terms identified in the customer arrangements.

/s BF Borgers CPA PC

BF Borgers CPA PC

We have served as the Company’s auditor since 2020

Lakewood, CO

March 24, 2021

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

US Lighting Group, Inc.

Euclid, Ohio

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of US Lighting Group, Inc. (the “Company”) as of December 31, 2019, the related consolidated statements of operations, shareholders’ deficit, and cash flows for the year then ended and the related notes (collectively referred to as the “financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company experienced a net loss and utilized cash from operations during the year ended December 31, 2019, and had a shareholders’ deficit as of that date. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the financial statements. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement, whether due to error, fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

We became the Company’s auditor in 2019. In 2020, we became the predecessor auditor.

/s/ Weinberg & Company, P.A.

Los Angeles, California

August 14, 2020

US LIGHTING GROUP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

US LIGHTING GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated financial statements.

US LIGHTING GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

The accompanying notes are an integral part of these consolidated financial statements. 

US LIGHTING GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are integral part of these consolidated financial statements.

US LIGHTING GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

NOTE 1 – BASIS OF PRESENTATION

History and Organization

US Lighting Group, Inc. (the Company) was founded in 2013 in accordance with the laws of Wyoming and is located in Euclid, Ohio. On July 13, 2016 (“Closing”), the Luxurious Travel Corp. acquired all of the issued and outstanding capital stock of the Company and changed its name to US Lighting Group, Inc.

Overview of Business

The Company designs and manufactures commercial LED lighting. Intellitronix Corporation (“Intellitronix”), our wholly owned subsidiary, is a manufacturer of automotive aftermarket and original equipment manufacturer (OEM) electronics.

COVID-19 Considerations

Through the date these financial statements were issued, the COVID-19 pandemic did not have a net material impact on our operating results. In the future, the pandemic may cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment, which negatively effects the consumers who purchase our products.

Our ability to operate without significant negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees and our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities to protect our employees. Through the date that these financial statements were issued, we maintained the consistency of our operations during the onset of the COVID-19 pandemic. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations.

Through the date that these financial statements were issued, the COVID-19 pandemic has not negatively impacted the Company’s liquidity position as of such date, and the Company continues to generate cash flows to meet its short-term liquidity needs, and it expects to maintain access to the capital markets. The Company has not observed any material impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic.

Liquidity

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. During the year ended December 31, 2020, the Company realized a net income of $485,000, and cash provided by operating activities was $531,000, compared to cash used in operating activities of $315,000 in the prior year period. At December 31, 2020, current assets improved by $594,000, and current non-related party liabilities decreased by $224,000, as compared to the prior year period. Based on current projections, we believe our available cash on-hand, our current efforts to market and sell our products, and our ability to significantly reduce expenses, will provide sufficient cash resources to satisfy our operational needs, for at least one year from the date these financial statements are issued.

At December 31, 2020, the Company had cash on hand in the amount of $108,000. Management estimates that the current funds on hand will be sufficient to continue operations through March 31, 2021. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company can obtain additional financing, it may contain undue restrictions on our operations in the case of debt financing, or cause substantial dilution for our stockholders, in the case or equity financing.

In conjunction with the Company’s capital raising efforts, management is working to improve its cash flows by increasing its private label manufacturing opportunities for high volume and low overhead production orders, and managing its operating expenses to support planned revenue growth. However, no assurance can be given that these efforts will be successful.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary Intellitronix Corp. Intercompany transactions and balances have been eliminated in consolidation.

Loss per Share Calculations

Basic earnings per share are computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed by dividing the net income applicable to common shareholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued using the treasury stock method. Potential common shares are excluded from the computation when their effect is antidilutive. The dilutive effect of potentially dilutive securities is reflected in diluted net income per share if the exercise prices were lower than the average fair market value of common shares during the reporting period.

Warrants to acquire 20,000 shares of common stock have been excluded from the calculation of weighted average common shares outstanding at December 31, 2020, as their effect would have been anti-dilutive. Warrants to acquire 5,814,000 shares of common stock, and 473,808 shares of common stock issuable under convertible note agreements, have been excluded from the calculation of weighted average common shares outstanding at December 31, 2019, as their effect would have been anti-dilutive.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our allowances for doubtful accounts, reserves for inventory obsolescence, valuing derivative liabilities, valuing equity instruments issued for services, and valuation allowance for deferred tax assets, among others. Actual results could differ from these estimates.

Segment Reporting

The Company operates in one segment for the manufacture and distribution of our products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying consolidated financial statements.

Revenue Recognition

The Company recognizes revenue in accordance with Accounting Standard Update (“ASU”) No. 2014-09. This standard provides authoritative guidance clarifying the principles for recognizing revenue and developing a common revenue standard for U.S. generally accepted accounting principles. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in the exchange for those goods or services.

Under this guidance, revenue is recognized when control of promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company reviews its sales transactions to identify contractual rights, performance obligations, and transaction prices, including the allocation of prices to separate performance obligations, if applicable. Revenue and costs of sales are recognized once products are delivered to the customer’s control and performance obligations are satisfied.

In the following table, revenue is disaggregated by major product line for the year ended 2020:

In the following table, revenue is disaggregated by major product line for the year ended 2019:

Products sold by the Company are distinct individual products. The products are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them. A significant amount of the Company’s sales are received through several eBay web-commerce websites, which requires customer payment at time of order placement. Customer advanced payments were $29,000 and $15,000 at December 31, 2020 and 2019, respectively, and are recorded as a liability on the consolidated balance sheets.

The Company does offer a 30-day return policy from the date of shipment. The Company also provides a limited lifetime warranty on its products. Due to a limited history of returns, the Company does not maintain a warranty reserve. 

Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid investments with remaining maturities of three months or less at the date of purchase. Cash equivalents include funds held in PayPal accounts.

Accounts Receivable

The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding.

The allowance for doubtful accounts and returns is established through a provision reducing the carrying value of receivables. At December 31, 2020, and December 31, 2019, the Company determined that no allowance for doubtful accounts was necessary.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is computed on a first-in, first-out basis. The Company’s inventories consist almost entirely of finished goods as of December 31, 2020 and 2019.

The Company provides inventory reserves based on excess and obsolete inventories determined primarily by future demand forecasts. The write down amount is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. At December 31, 2020 and December 31, 2019, the reserve for excess and obsolete inventory was $0 and $12,000, respectively.

Property and Equipment

Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The Company has determined the estimated useful lives of its property and equipment, as follows:

Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the related accounts and the resulting gain or loss is reflected in the statements of operations.

Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is an indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. The Company did not record an impairment loss for the years ended December 31, 2020 and 2019.

Product Development Costs

Product development costs are expensed in the period incurred. The costs primarily consist of prototype and testing costs. Product development costs were $236,000 and $230,000 for the year ended December 31, 2020 and 2019, respectively.

Shipping and Handling Costs

The Company’s shipping and handling costs relating to inbound freight are reported as cost of goods sold in the consolidated Statements of Operations, while shipping and handling costs relating to outbound freight are reported as selling, general and administrative expenses in the consolidated statements of operations. The Company classifies amounts billed to customers for shipping fees as revenues. 

Income Taxes

Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized. The Company has recorded a valuation allowance against its deferred tax assets as of December 31, 2020 and 2019.

The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.

Advertising Costs

Advertising costs are expensed as incurred and are included in selling, general and administrative expenses. Advertising costs were $24,000 and $29,000 for the year ended December 31, 2020 and 2019, respectively.

Concentration Risks

The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits. During the years ended December 31, 2020 and 2019, the Company had cash deposits that exceeded the federally insured limit of $250,000. The Company believes that no significant concentration of credit risk exists with respect to these cash balances because of its assessment of the creditworthiness and financial viability of the financial institution. 

Sales. During the year ended December 31, 2020, the Company’s two largest customers accounted for 15% and 14% of sales, respectively. During the year ended December 31, 2019, the Company’s largest customer accounted for 15% of sales. No other customers exceeded 10% of sales in either period.

Accounts receivable. As of December 31, 2020, the Company had accounts receivable from two customers which comprised 30%, and 26% of its gross accounts receivable, respectively. As of December 31, 2019, the Company had accounts receivable from four customers which comprised 25%, 22%, 14%, and 11% of its gross accounts receivable, respectively.

Purchases from vendors. During the year ended December 31, 2020, the Company’s two largest material vendors accounted for approximately 18% and 14% of all purchases, respectively. The Company sourced 55% of its raw materials from its vendors in China. During the year ended December 31, 2019, the Company’s largest materials vendor accounted for approximately 19% of all purchases. The Company sourced 47% of its raw materials from its vendors in China. No other vendor exceeded 10% of all purchases in either periods.

Fair Value Measurements

The Company determines the fair value of its assets and liabilities based on the exchange price in U.S. dollars that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:

The carrying amounts of financial instruments such as cash, accounts receivable, inventories, accounts payable and accrued liabilities, accrued payroll liabilities, and advanced customer deposits, approximate the related fair values due to the short-term maturities of these instruments. The carrying values of notes payable approximate their fair values due to the fact that the interest rates on these obligations are based on prevailing market interest rates. 

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.

Other recent accounting pronouncements issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements. 

NOTE 3 – PROPERTY AND EQUIPMENT

Property and equipment consist of the following at December 31, 2020 and 2019:

On April 24, 2020, the Company purchased land, building, and improvements for $741,000, and moved its operations to Euclid, Ohio, in June 2020 (see Note 7). During the year ended December 31, 2020, the Company disposed of $57,000 of fully depreciated property and equipment. Depreciation expense for the years ended December 31, 2020 and 2019 was $100,000 and $57,000, respectively.

NOTE 4 – ACCRUED PAYROLL TO OFFICER

Beginning in January 2018, the Company’s President voluntarily elected to defer payment of his employment compensation. The balance of the compensation owed to the Company’s President was $442,000 and $312,000 as of December 31, 2020 and 2019, respectively.

NOTE 5 – LINE OF CREDIT

On April 28, 2020, the Company obtained a $50,000 unsecured line of credit from Keybank. The line of credit carries an interest rate of 3.25% per annum. The balance outstanding on the line of credit was $49,000 at December 31, 2020.

NOTE 6 – LEASE PAYABLE

The Company adopted ASU 2016-02, Leases, effective January 1, 2019. The standard requires a lessee to record a Right of Use (ROU) asset and a corresponding lease liability at the inception of the lease, initially measured at the present value of the lease payments. As a result, we recorded ROU assets aggregating $79,000 as of January 1, 2019. That amount consists of a lease on the Company’s former Eastlake, Ohio office, and existing capitalized leases reclassified to ROU assets of $14,000. 

ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. During the year ended December 31, 2019, the Company reflected amortization of ROU asset of $54,000 related to these leases, resulting in a net asset balance of $25,000 as of December 31, 2019. During the year ended December 31, 2020, the leases terminated, and the Company reflected the remaining amortization of ROU asset of $25,000, leaving no remaining balance at December 31, 2020.

On January 1, 2019, liabilities recorded under finance leases and operating leases were $10,000 and $78,000, respectively. During the year ended December 31, 2019, the Company made payments of $8,000 towards finance lease liability and $52,000 towards its operating lease liability. As of December 31, 2019, liability under finance lease amounted to $2,000 and liability under operating lease amounted to $27,000, which were reflected as current due, under finance leases and operating leases. During the year ended December 31, 2020, the Company made its remaining payments of $2,000 towards its finance lease liability and $27,000 towards its operating lease liability.

The weighted average discount rate for the operating lease was 4.0% and 10.10% for the finance lease.

NOTE 7 – LOANS PAYABLE TO RELATED PARTIES

Loans payable to related parties consists of the following at December 31, 2020 and 2019:

NOTE 8 – LOANS PAYABLE

Loan payable consisted of the following as of December 31, 2020 and 2019: