Znergy, Inc. - Quarter Report: 2018 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549    

FORM 10-Q

For the quarterly period ended June 30, 2018

For the transition period from _______ to _______

000-55152

(Commission file number)

ZNERGY, INC.

(Exact name of registrant as specified in its charter)

None

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that 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, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 provide 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 ☒

Securities registered pursuant to Section 12(b) of the Act:

On July 1, 2019 there were 251,924,960 shares of the registrant’s common stock outstanding.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1.           Financial Statements

ZNERGY, INC.

INDEX

ZNERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS 

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

ZNERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED

(Unaudited)

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

ZNERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (unaudited)

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

ZNERGY, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PERIODS ENDED JUNE 30, 2018 AND 2017

NOTE 1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION

Znergy, Inc., (formerly Mazzal Holding Corp., formerly Boston Investment and Development Corp.) is a Nevada corporation (the “Company”), incorporated on January 23, 2013. The original business plan of the Company was the construction and management of multi-family home developments and the subsequent sale thereof.

On October 26, 2015 the Company acquired Global ITS, Inc. and its wholly owned subsidiary, Znergy, Inc. in order to expand into the Energy Efficiency (EE) marketplace, focusing on commercial lighting and green project financing. On February 9, 2016, the Company agreed to sell to the Mazzal Trust the real property which the Trust had previously sold to the Company and the Trust returned to the Company 149,950,000 of the 150,000,000 shares of the Company’s common stock owned by the Trust.  This transaction caused a change of control with Global being the accounting acquirer. The Company is now focused solely on the EE marketplace with an emphasis on LED retrofitting and installing new lamps.

The Company determined that Global ITS, Inc. served no purpose for the Company.  It held no assets or operations, had been dormant for over a year, except for the operations of its wholly owned Subsidiary.  On October 1, 2017, the Company sold 100% of its shares in Global to Peter Peterson, a shareholder of the Company and a creditor of Global for a nominal amount. The sale did not include Global’s investment in its subsidiary.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

Basis of Presentation

The unaudited condensed consolidated financial statements of the Company for the three and six months ended June 30, 2018 and 2017 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. However, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary for the fair presentation of the Company’s financial position and the results of operations. Results shown for interim periods are not necessarily indicative of the results to be obtained for a full fiscal year. The balance sheet information as of December 31, 2017 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC on June 6, 2018. These financial statements should be read in conjunction with that report.

Revenue Recognition

The Company accounts for revenue in accordance with ASC 606-10. The Company generally has two revenue sources – installation contracts and sales of lighting products. The installation contracts are short term in duration, typically within a week. The disaggregation of revenue for the three months ended June 30, 2018 was $228,974 and $30,608 for installation contracts and sale of lighting products, respectively. For the six months ended June 30, 2018, the amounts were $687,852 and $54,702 for installation contracts and sale of lighting products, respectively

When Znergy receives an order from a customer, either verbally or through a written purchase order for products such as individual lights or fixtures, but is not part of an installation contract, the Company recognizes the revenue when the goods are shipped, and title has passed to the customer.  In these arrangements, we have determined that there is one performance obligation and that revenue should be recognized at the point in time that title passes to the customer. 

Installation contract revenue is recognized when the contract is considered complete by the customer, through a written customer acceptance form.  Each contract for installation of lighting and fixtures, consists of labor and materials, and is given a unique number in the system.  Each contract is accounted for individually. The Company identifies the performance obligations, which include labor and materials and are accounted for as one contract. The transaction price is identified in advance with an agreed proposal between the Company and the customer and the price can be adjusted if, during the installation process, changes are made during the process. Under this method, contract costs are accumulated as deferred assets and billings and/or cash receipts are recorded to a deferred revenue liability account during the contract period, but no revenues, costs, or profits are recognized in operations until the completion of the contract. Costs include direct material, direct labor, subcontract labor, and allocable indirect costs. All unallocated indirect costs and corporate general and administrative costs are charged in the periods as incurred. However, in the event a loss on a contract is foreseen, the Company will recognize the loss when such loss is determined.  A contract is considered complete when accepted by the customer that the Company has satisfied its performance obligations. In the second quarter there were no contracts which were not complete by the end of the second quarter.

Adoption of recent accounting standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). The guidance in this ASU requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company has adopted Topic 606 as of January 1, 2018 utilizing the full retrospective method of adoption. The adoption of Topic 606 did not have any impact on its results of operations and financial condition.

In May 2017, the FASB issued ASU No. 2017-09, Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting, clarifying when a change to the terms or conditions of a share-based payment award must be accounted for as a modification. The new guidance requires modification accounting if the fair value, vesting condition or the classification of the award is not the same immediately before and after a change to the terms and conditions of the award. The new guidance is effective for the Company on a prospective basis beginning on January 1, 2018, with early adoption permitted. The adoption of this update did not have a material impact on its financial position, results of operations or financial statement disclosure.

Recent accounting standards

In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The guidance in this ASU expands the scope of ASC Topic 718 to include all share-based payment arrangements related to the acquisition of goods and services from both nonemployees and employees. This amendment will be effective for annual and interim periods beginning after December 31, 2018. The Company is currently evaluating the impact ASU No. 2018-07 will have on its financial position, results of operations or financial statement disclosure.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). This ASU will require lessees to recognize a right of use asset and lease liability on the balance sheet for leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The amendment will be effective for annual and interim periods beginning after December 15, 2018, including interim periods within those fiscal years. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases and ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. ASU No. 2018-10 provides certain amendments that affect narrow aspects of the guidance issued in ASU No. 2016-02. ASU No. 2018-11 allows entities the option to prospectively apply the new lease standard at the adoption date instead of recording the cumulative impact of all comparative reporting periods presented within retained earnings. The Company is currently evaluating the impact ASU No. 2016-02, ASU No. 2018-10 and ASU No. 2018-11 will have on its financial position, results of operations or financial statement disclosure.

NOTE 2 – GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As of June 30, 2018, the Company had a working capital deficit of $835,601, insufficient cash resources to meet its planned business objectives, and accumulated losses of $14,140,299 The Company intends to fund operations through equity and debt financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements through a year from the date these financial statements are available to be issued. As a result, the Company is seeking additional funding through debt and equity financing arrangements, or other funding opportunities.

The Company’s success is dependent upon, among other things, obtaining the additional financing to continue operations and to execute its business plan. No assurances can be made that management will be successful in pursuing its business plan.

These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

NOTE 3 – BUILDING, EQUIPMENT AND FURNITURE, NET

On July 22, 2017, the Company entered into a purchase agreement for a property located at 808A South Huntington Street, Syracuse, Indiana.  The purchase price was $255,000 of which $30,000 was paid on July 22, 2017 with the balance of $225,000 due 180 days after closing.  There was no interest accruing on the debt.  The Company closed on the property on September 1, 2017.

On March 9, 2018, the Company settled the outstanding mortgage through a sale of the building to the Company’s chairman, Rick Mikles who purchased the building for the balance of the mortgage of $225,000, as the Company was unable to make the scheduled $225,000 payment.  On March 16^th, a quitclaim was recorded to Rick Mikles as the new owner of the building.  The Company recorded a loss on the sale of $43,488, representing the difference between the carrying value and the mortgage balance assumed by the Company’s chairman.

NOTE 4– ADVANCES

During the six months ended Jun 30, 2018, the Company received an aggregate of $90,190 of short-term advance from its Chairman, Rick Mikles. These advances were offset by $2,755 which were repaid. The amounts are non-interest bearing and payable on demand.

On April 20, 2018, the Company received $125,000 as a short-term advance from an investor, B2 Opportunity Fund, via a payment to a vendor on the Company’s behalf. On June 5, 2018 the Company received an additional $30,000 in cash as an additional short-term advance. These advances were offset by $212 of repayments to the investor. Currently the advances are non-interest bearing and payable on demand.

On June 20, 2018, the Company received $75,000 as a short-term advance from an investor, Gary Cook. Currently the advance is non-interest bearing and payable on demand and does not accrue interest. Subsequent to June 30, 2018, the advance was converted to 1,000,000 shares of common stock and 1,000,000 warrants. The advance was converted at fair value on the date of conversion. The fair value of the warrants was not material.

Since June 30, 2018, through the filing date of this report the Company has received $296,000 in additional advances to fund operations.

NOTE 5 – LOANS FROM RELATED PARTIES

On January 8, 2018, the Company executed an unsecured promissory note in the amount of $150,000 payable to Mr. Wayne Miller, a shareholder of the Company.  The note was due and payable on April 8, 2018, with interest of $6,000. Pursuant to the terms of the note, there was a 15-day grace period, which ended on April 23, 2018 at which time a 15% penalty of the unpaid balance became due and payable together with the unpaid principal and accrued interest. Prior to the end of the grace period the Company paid $3,000 in interest and $10,000 in principle. The balance at June 30, 2018 was $164,450, which includes unpaid principal, interest, and penalties. As of the date of this Report, no further payments had been made. Under the note agreement, the Company issued warrants to purchase 1,000,000 shares at an exercise price of $0.15 per share.  The warrants expire on the first anniversary date of the initial exercise date of the warrants.

On February 15, 2018, the Company executed a promissory note in the amount of $25,000 payable to Rick Mikles, the Company’s Chairman and secured by the Company’s inventory.  The note was due and payable on June 1, 2018 together with interest at 4% per annum. Pursuant to the terms of the note, if the note and accrued interest is not paid by the due date, interest at 12% per annum shall be accrued on the outstanding balance until paid in full. The balance at June 30, 2018 was $25,625 which includes unpaid interest.  As of the date of this Report, the note and accrued interest remain unpaid.

On March 2, 2018, the Company executed an unsecured promissory note in the amount of $200,000 payable to Rick Mikles, the Company’s Chairman.  The note was due on June 1, 2018 together with interest of $2,500. Pursuant to the terms of the note, there was a 15-day grace period, which ended on June 16, 2018 at which time a 15% penalty of the unpaid balance became due and payable together with the unpaid principal and accrued interest. The balance at June 30, 2018 was $232,875 which includes unpaid interest and penalties. As of the date of this Report, the note, accrued interest, and penalties remain unpaid.

On March 22, 2018, the Company executed an unsecured promissory note in the amount of $50,000 payable to Paul Ladd, a shareholder.  The note was due and payable on May 21, 2018 together with interest of $1,000.  Pursuant to the terms of the note, there was a 15-day grace period, which ended on June 4, 2018 at which time a 15% penalty of the unpaid balance became due and payable together with the unpaid principal and accrued interest. The balance at June 30, 2018 was $58,650 which includes the unpaid principal, interest, and penalties. As of the date of this Report, the note, accrued interest, and penalties remain unpaid. Under the note agreement, the Company issued warrants to purchase 50,000 shares at an exercise price of $0.15 per share.  The warrants expire on the first anniversary date of the initial exercise date of the warrants.

On March 22, 2018, the Company also borrowed $20,000 in a non-interest bearing short-term payable to Wayne Miller.  There is no formal promissory note and payment is due on demand.

Since June 30, 2018, through the filing date of this report the company has received $450,000 in additional loans from related parties. The notes bear interest at 10%.

NOTE 6 – STOCKHOLDERS’ EQUITY

Common Stock

On February 12, 2018, the Company entered into an employment agreement with Rick Mikles, the Company’s Chairman, to become Chief Marketing Officer.  The agreement has a three-year term, an annual base salary of $26,000 and a quarterly payment based on 3% of the quarterly revenue recognized by the Company.  Mr. Mikles was granted 5,000,000 shares of the Company’s common stock, valued at its trading price of $0.10 per share, which vested immediately.  He was granted 5,000,000 options to purchase common stock of the Company at $0.10 per share.  These options have a three-year expiration and vest one option per every 2 dollars of revenue recognized by the Company.

Stock Based Compensation

The Company has issued and outstanding two types of options, time vesting and performance vesting.

Options - Time Vesting

The following table shows the stock option activity during the period ended June 30, 2018:

Options issued for the period ended June 30, 2018 were valued using the Black-Sholes model assuming zero dividends, a $0.10 strike price, 3-year expiration, 2.73% average risk-free rate and 201% average volatility. Options issued for the period ended June 30, 2017 were valued using the Black-Sholes model assuming zero dividends, a $0.10 strike price, 3-year expiration, 1.44% average risk-free rate and 225% average volatility.

Costs incurred in respect of stock-based compensation for employees, advisors and consultants for the three and six month periods ended June 30, 2018 were $119,554 and $249,116, respectively. Costs incurred in respect of stock-based compensation for employees, advisors and consultants for the three and six month periods ended June 30, 2017 were $102,725 and $168,908, respectively. The expense is included in selling, general and administrative expenses in the statement of operations

Unrecognized compensation costs related to options as of June 30, 2018 was $429,675, which is expected to be recognized ratably over a weighted average period of approximately 18 months. The intrinsic value is zero

Options - Performance Vesting

The options vest based on Company performance with one option vesting for every two dollars of revenue, vesting quarterly. The following table shows the stock option activity during the period ended June 30, 2018:

Options issued for the period ended June 30, 2018 were valued using the Black-Sholes model assuming zero dividends, a $0.10 strike price, 3-year expiration, 2.52% average risk-free rate and 196% average volatility. Options issued for the period ended June 30, 2017 were valued using the Black-Sholes model assuming zero dividends, a $0.10 strike price, 3-year expiration, 1.47% average risk-free rate and 244% average volatility.

These options were issued to individuals for their business development efforts. The costs incurred in respect of stock based compensation for employees, advisors and consultants for the three and six month periods ended June 30, 2018 were ($12,082) and $118,646, respectively. Costs incurred in respect of stock based compensation for employees, advisors and consultants for the three and six month periods ended June 30, 2017 were $61,627 and $79,227 respectively. The expense is included in selling, general and administrative expenses in the statement of operations

Unrecognized compensation costs related to options as of June 30, 2018 was $1,929,442 which is expected to be recognized ratably over a weighted average period of approximately 33 months. The intrinsic value is zero.

Warrants

The following table shows the warrant activity during the period ended June 30, 2018:

Warrants issued were valued using the Black-Scholes model assuming zero dividends, a $0.15 strike price, 1-year expiration, 2.09% risk-free rate and volatility of 286%. The relative fair value of warrants issued to related parties with debt was recorded as interest expense and was zero and 50,741 for the three and six months ended June 30, 2018.

Costs incurred in respect of warrants issued to investors for the three and six months ended June 30, 2017 were zero and $367,662.

NOTE 7 – BASIC AND DILUTED LOSS PER SHARE

Basic net loss per share is calculated by dividing the loss by the weighted-average number of shares outstanding for the period. Diluted net loss per share is computed by dividing the net attributable to common stockholders by the sum of the weighted average number of shares of common stock outstanding and the dilutive common stock equivalent shares outstanding during the period. The Company’s dilutive common stock equivalent shares, which include incremental common shares issuable upon i) the exercise of outstanding stock options and warrants and (ii) vesting of restricted stock units and restricted stock awards, are only included in the calculation of diluted net loss per share when their effect is dilutive. Since the company had net losses for all periods presented, all potentially dilutive securities are anti-dilutive. Accordingly, basic and dilutive net loss per share are equal.

The following potential common stock equivalents were not included in the calculation of diluted net loss per common share because the inclusion thereof would be anti-dilutive.

NOTE 8 – LITIGATION

On September 26, 2016, Znergy (“Registrant”) filed in the United States District Court for the Middle District of Florida a Complaint against defendants The Mazzal Trust, Nissim S. Trabelsi and Shawn Telsi (collectively the “Defendants”), seeking the disgorgement of profits obtained by Defendants and certain of their shareholder affiliates defined under Rule 16a-1(a)(1) under the Exchange Act defined below (collectively, the “Group”) through “short swing profits” in violation of Section 16(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Specifically, Registrant alleged that the Group acted under the guidance and control of the Defendants, whose individual defendants had filed forms 3 and 4 with the Securities and Exchange Commission (the “SEC”, declaring themselves to be “insiders” for the purpose of Section 16(b). The Group owned 100% of the shares of Registrant at the time that members of the group were engaged in the sale and purchase of such shares. The sales and purchases referenced all occurred with six months of other sales and purchases, subjecting Defendants to disgorge to Registrant all profits made by the Group in such sales and purchases. As detailed in paragraphs 16-22 of the Complaint, the total profits received by the Group is $1,695,689. Accordingly, Registrant has demanded the return of all such profits to Registrant plus the statutory payment of attorneys’ fees.

On August 24, 2017, the Plaintiff received a Clerk’s Entry of Default against Nissim Trabelsi.  The Plaintiff filed a Motion for Default Judgment for damages against Trabelsi on September 13, 2017, which to date has not been addressed by the Court.  On March 5, 2018, Nissim Trabelsi filed a notice of bankruptcy.  The Plaintiff is still pursuing its options in the Case and the Court has yet to address the service issues with the Mazzal Trust.

On January 26, 2017, the Company received an email from its transfer agent, VStock Transfer, LLC, (“VStock”) informing the Company that it had been served with a Summons and Complaint (B2 Opportunity Fund (“B2”) v. Trabelsi et al. - Index No.:17-CV-10043, the “Claim”) and further stating that the Company was obligated to indemnify VStock for fees and expenses incurred in defending the Claim.  The Company responded on February 24, 2017 stating that (1) we reviewed the Transfer Agent and Registrar Agreement between Mazzal and VStock dated May 20, 2014 and that in Article VI(c) of that agreement it states that indemnification will not be offered if the acts of VStock constitute bad faith or gross negligence, (2) we reviewed the lawsuit filed by B2 against VStock and others and find that VStock’s actions constitute gross negligence and perhaps bad faith, and we therefore deny indemnification of VStock relating to the Claim, and (3) should VStock take any action to seek indemnification by Znergy in any manner, Znergy will either join B2 in its lawsuit or will file an action on its own.  The Company terminated its agreement with VStock.  The issue in its entirety was settled with no impact to the Company on April 25, 2018.

NOTE 9 – CUSTOMER CONCENTRATION

For the three months ended June 30, 2018 one customer represented 36% of net revenue. For the three months ended June 30, 2017, one customer represented 56%, one customer represented 24% and one customer represented 16% of net revenue.

For the six months ended June 30, 2018, had one customer that represented 24% and one customer that represented 12% of net revenue. For the six months ended June 30, 2017, one customer represented 38%, one customer represented 17%, one customer represented 11% and one customer represented 10% of net revenue.

At June 30, 2018, one customer represented 55% of the net accounts receivable. At December 31, 2017, three different customers represented 22%, 21% and 12% respectively of net accounts receivable.

NOTE 10 – SUBSEQUENT EVENTS

Since June 30 2018, through the filing date of this report the company has received $296,000 in additional advances and $450,000 of additional loans from related parties.

Subsequent to June 30, 2018 through the filing date, the Company has issued 16,200,000 shares of common stock. 11,200,000 shares were issued to the Chairman of the Board in exchange for the cancellation of 19,000,000 stock options and 2,000,000 warrants outstanding. In addition, 4,000,000 shares were issued in exchange for business development efforts. Also, 1,000,000 shares were issued upon a conversion of a $75,000 advance. Additionally, 1,00,0000 warrants were issued as additional consideration for the conversion of the advance to the company.

CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  We have based these forward-looking statements on our current expectations and projections about future events, and they are applicable on as of the dates of such statement.  These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.  In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “forecast,” “expect,” “plan,” anticipate,” believe,” estimate,” continue,” or the negative of such terms or other similar expressions.  Factors that might cause or contribute to such a discrepancy include, but are not limited to, those listed under the heading “Risk Factors” and those listed in our other SEC filings. You should not put undue reliance on any forward-looking statements.  These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available on our website or otherwise, and we undertake no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.  The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report. Throughout this Quarterly Report on Form 10-Q we will refer to Znergy, Inc., together with its subsidiaries, as the “Company,” “we,” “us,” and “our”

The following discussion and analysis of our financial condition should be read together with our unaudited Consolidated Financial Statements and related notes included in this Form 10-Q as well as our audited Financial Statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 filed with the SEC on June 6, 2018.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company was formed in January 2013 as a Nevada corporation.  The original business plan of the Company was to build and sell multi-family housing projects. The Company acquired a parcel of land in Taunton, Massachusetts, from The Mazzal Trust, a trust of which the founder of the Company, Nissim Trabelsi, was the Trustee, in exchange for shares of the Company’s common stock, and began development of the project and construction of multi-family units.

Subsequently, on October 26, 2015, the Company acquired Global ITS, Inc., a Wyoming corporation (“Global”), and its wholly owned subsidiary, Znergy, Inc., a Florida corporation (“Znergy”), in order to expand into the Energy Efficiency (EE) marketplace, focusing on commercial lighting and green project financing.

On February 9, 2016, the Company agreed to sell to The Mazzal Trust the real property which the Trust had previously sold to the Company, and the Trust returned to the Company 149,950,000 of the 150,000,000 shares of the Company’s common stock owned by the Trust, which shares were cancelled. The Company is now focused solely on the EE marketplace.

The Company is a provider of energy-efficient lighting products, lighting controls and energy management solutions. The Company offers a full turn-key lighting solution which includes economic assessments, energy efficient analysis, installation and rebate support for the Company’s customers.  The Company’s business primarily involves retrofitting existing lighting solutions from traditional high intensity fluorescent lighting to energy efficient LED (Light Emitting Diode) technology.

Managing energy consumption and the associate costs is increasingly important to building owners.  Technological advancements in LED, together with significant private and public incentives for sustainability initiatives have made lighting infrastructure changes an effective way for building owners to cut energy costs. LED lighting provides energy efficiency, long life, low running temperatures and increasing technology such as dimmable lights.

The Company does not have long term contracts with its customers and the Company’s revenue comes from the sales of lighting systems involving the replacement of existing lighting fixtures with new energy efficient LED fixtures. In addition, the Company generates revenue from available utility incentives and rebate programs.

The Company provides its turn-key service though a detailed evaluation of the customer’s needs and performing an audit of the customer’s current energy consumptions and costs, together with an analysis of the benefits of retrofitting their lights.  Typically, the customer experiences an average payback on their investment between 12 and 24 months.

The Company intends to grow organically by selling energy efficiency (EE) and commercial security (CS) products to industrial and commercial businesses as well as municipal and state governments, universities and colleges, K-12 schools, and hospitals (the “MUSH” market). Strained government budgets have convinced state and local governments across the United States to embrace a new form of performance-based investments in energy efficiency offered by Energy Services Companies, or ESCOs. An ESCO provides energy-efficiency-related and other value-added services and for which performance contracting is a core part of its energy-efficiency services business. In a performance contract, the ESCO guarantees energy or financial savings for the project, which means ESCOs only make money if the project performs as promised. A study prepared by Allied Market Research indicated that the market is expected to grow at a Compound Annual Growth Rate of 13.76% during the forecast period 2014-2020 and reach $44.4 billion by 2020.

The Company plans to increase its competitive position by providing financing to customers for installation projects through a strategic partnership the Company has developed with a well-established funding group focused on energy efficiency projects.

Results of Operations

The Company had revenues of $742,554 and $428,241 for the six-month periods ended June 30, 2018, and June 30, 2017, respectively. The Company had revenues of $259,582 and $284,562 for the three-month periods ended June 30, 2018, and June 30, 2017, respectively. Revenues in 2018 and 2017 comprise LED installation projects and associated rebates from utilities.  The increase in revenues for the six month is due to the increase in sales personnel, the implementation of formalized training programs, and an increase in marketing efforts.  For the three-month period revenue was down due to timing of installations. The Company expects to continue to see increased revenue in future periods but can make no assumptions as to size of any increases or certainty thereof.

The Company incurred costs of revenue of $405,996 and $173,327 for the six-month periods ended June 30, 2018, and June 30, 2017, respectively. The Company incurred costs of revenue of $176,368 and $115,281 for the three-month periods ended June 30, 2018, and June 30, 2017, respectively. Costs of revenue in 2018 and 2017 comprise primarily LED product and installation costs, including labor and rental equipment. Cost of revenue as a percentage of revenue can be impacted by the type of jobs and if the job requires customized lighting.

The Company had selling, general and administrative expenses of $1,818,001 and $2,413,615 for the six-month periods ended June 30, 2018, and June 30, 2017, respectively. The Company had general and administrative expenses of $583,649 and $1,549,969 for the three-month periods ended June 30, 2018, and June 30, 2017, respectively. The decrease for the six-month period is primarily due to a reduction in stock-based compensation costs. The decrease for the three-month period is also primarily due to reduced equity based compensation costs.

The Company incurred interest expense of $64,591 and $176,150 for the three and six-month periods ended June 30, 2018. This is compared to zero for the same periods in 2017. This is the result of the additional Notes Payable and Advances the company has entered into to finance the operations of the Company.

The Company had net losses of $1,701,081 and $2,158,701 for the six-month periods ended June 30, 2018 and June 30, 2017, respectively. The Company had net losses of $608,514 and $1,380,688 for the three-month periods ended June 30, 2018 and June 30, 2017, respectively.

Liquidity and Going Concern Discussion

The 10-Q has been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. As of June 30, 2018, the company had a working capital deficit of $835,602, insufficient cash resources to meet its planned business objectives, and accumulated losses of $14,140,299 The Company intends to fund operations through equity and debt financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements through June 2019. As a result, the Company is seeking additional funding through debt and equity financing arrangements, or other funding opportunities.

The Company’s success is dependent upon, among other things, obtaining the additional financing to continue operations and to execute its business plan. No assurances can be made that management will be successful in pursuing its business plan.

These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Plan of Operation

The Company’s anticipated plan of operation is to continue to (1) identify and train sales personnel in regions of the country that have advantageous utility company rebate programs, (2) identify and train lighting installation personnel where we have established sales personnel, (3) seek out the best current and incipient solutions in the Energy Efficiency marketplace and become a reseller of those solutions, (4) develop our own solutions for the EE marketplace, and (5) seek to acquire other businesses in the market where such acquisitions makes strategic sense and are accretive to earnings.

The Company continues to expand its solutions portfolio for both indoor and outdoor applications to capitalize on the evolving and growing market for intelligent networked systems that collect and exchange data to increase efficiency as well as provide a host of other economic benefits resulting from data analytics to better enable smart buildings and smart cities. The transition to solid-state lighting provides the opportunity for lighting to be integrated with other building automation systems to create an optimal platform for enabling the “Internet of Things” (IoT), which will support the advancement of smart buildings, smart cities, and the smart grid.

The Company’s ability to grow its incipient operations is primarily dependent upon its ability to raise additional capital, most likely through the sale of additional shares of the Company’s common stock or other securities. There can be no guarantee that the Company will be able raise additional capital on terms that are acceptable to the Company, or at all.

The realization of revenues in the next twelve months is important in the execution of the plan of operations. However, if the Company cannot raise additional capital by issuing capital stock in exchange for cash, or through obtaining commercial or bank financing, in order to continue as a going concern, the Company may have to curtail or cease its operations. As of the date of this Report, there were no formal or informal agreements to attain such financing. The Company cannot assure any investor that, if needed, sufficient financing can be obtained or, if obtained, that it will be on reasonable terms. Without realization of additional capital, it would be unlikely for operations to continue.

Critical Accounting Policies

There have been no changes to our critical accounting policies from those included in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on June 6, 2018.

Recently Issued Accounting Pronouncements

We are required to adopt certain new accounting pronouncements. See Note 1 to the condensed consolidated financial statements included in Item 1 of this Form 10-Q.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements or issued guarantees to third parties.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are the controls and other procedures that are designed to provide reasonable assurance that information required to be disclosed by the issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the principal executive and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.  Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

We have carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and our Chief Financial Officer of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of the end of the period covered by this Quarterly Report.

Based upon that evaluation we have concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this report due to a material weakness in our internal control over financial reporting, which is described below.

Our management identified the following material weaknesses which are indicative of many small companies with small staff: (i) inadequate segregation of duties and effective risk assessment; and (ii) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of both US GAAP and SEC guidelines. Although we plan to take steps to enhance and improve the design of our internal control over financial reporting, we have not been able to remediate the material weaknesses identified above. To remediate such weaknesses, we hope to implement the following changes during our fiscal year ending December 31, 2018: (i) appoint additional qualified personnel to address inadequate segregation of duties and ineffective risk management; and (ii) adopt sufficient written policies and procedures for accounting and financial reporting. The remediation efforts set out in (i) and (ii) are largely dependent upon our securing additional financing to cover the costs of implementing the changes required. If we are unsuccessful in securing such funds, remediation efforts may be adversely affected in a material manner.

Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the three-month period ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. - OTHER INFORMATION

Item 1. Legal Proceedings

On September 26, 2016,Znergy (“Registrant”) filed in the United States District Court for the Middle District of Florida a Complaint against defendants The Mazzal Trust, Nissim S. Trabelsi and Shawn Telsi (collectively the “Defendants”), seeking the disgorgement of profits obtained by Defendants and certain of their shareholder affiliates defined under Rule 16a-1(a)(1) under the Exchange Act defined below (collectively, the “Group”) through “short swing profits” in violation of Section 16(b) of the Securities Exchange Act of 1934 (the “Exchange Act”). Specifically, Registrant alleged that the Group acted under the guidance and control of the Defendants, whose individual defendants had filed forms 3 and 4 with the Securities and Exchange Commission (the “SEC”, declaring themselves to be “insiders” for the purpose of Section 16(b). The Group owned 100% of the shares of Registrant at the time that members of the group were engaged in the sale and purchase of such shares. The sales and purchases referenced all occurred with six months of other sales and purchases, subjecting Defendants to disgorge to Registrant all profits made by the Group in such sales and purchases. As detailed in paragraphs 16-22 of the Complaint, the total profits received by the Group is $1,695,689. Accordingly, Registrant has demanded the return of all such profits to Registrant plus the statutory payment of attorneys’ fees.

On August 24, 2017, the Plaintiff received a Clerk’s Entry of Default against Nissim Trabelsi.  The Plaintiff filed a Motion for Default Judgment for damages against Trabelsi on September 13, 2017, which to date has not been addressed by the Court.  On March 5, 2018, Nissim Trabelsi filed a notice of bankruptcy.  The Plaintiff is still pursuing its options in the Case and the Court has yet to address the service issues with the Mazzal Trust. 

On January 26, 2017, the Company received an email from its transfer agent, VStock Transfer, LLC, (“VStock”) informing the Company that it had been served with a Summons and Complaint (B2 Opportunity Fund (“B2”) v. Trabelsi et al. - Index No.:17-CV-10043, the “Claim”) and further stating that the Company was obligated to indemnify VStock for fees and expenses incurred in defending the Claim.  The Company responded on February 24, 2017 stating that (1) we reviewed the Transfer Agent and Registrar Agreement between Mazzal and VStock dated May 20, 2014 and that in Article VI(c) of that agreement it states that indemnification will not be offered if the acts of VStock constitute bad faith or gross negligence, (2) we reviewed the lawsuit filed by B2 against VStock and others and find that VStock’s actions constitute gross negligence and perhaps bad faith, and we therefore deny indemnification of VStock relating to the Claim, and (3) should VStock take any action to seek indemnification by Znergy in any manner, Znergy will either join B2 in its lawsuit or will file an action on its own.  The Company terminated its agreement with VStock.  The issue in its entirety was settled with no impact to the Company on April 25, 2018.

Item 5. Other Information.

None

Item 6. Exhibits

(a)          Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

ZNERGY, INC.