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

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2018

☐	Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______ to _______

000-55152

(Commission file number)

ZNERGY, INC.

(Exact name of registrant as specified in its charter)

Nevada		46-1845946
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

808A South Huntington Street, Syracuse, Indiana		46567
(Address of principal executive offices)		(Zip Code)

800-931-5662

(Registrant’s telephone number, including area code)

MAZZAL HOLDING CORP.

(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 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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☐ 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.

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)		Smaller reporting company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if he 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 ☒

On August 9, 2018, there were 232,624,960 shares of the registrant’s common stock outstanding.

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TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
	Item 1.	Condensed Consolidated Financial Statements	3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
	Item 4.	Controls and Procedures	19

Part II - OTHER INFORMATION			21
	Item 1.	Legal Proceedings	21
	Item 5.	Other Information	21
	Item 6.	Exhibits	22

SIGNATURES			23

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PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

ZNERGY, INC.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

CONTENTS:

Condensed Consolidated Balance Sheets as of March 31, 2018 (unaudited), and December 31, 2017	4

Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017 (unaudited)	5

Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficit) for the three months ended March 31, 2018(unaudited)	6

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017 (unaudited)	7

Notes to Condensed Consolidated Unaudited Interim Financial Statements	8

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ZNERGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

as of

	March 31,			December 31,
	2018			2017
	(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash	$	46,502		$	116,481
Accounts receivable, net		195,515			112,818
Prepaid expenses		41,706			35,365
Inventory		469,868			444,606
Total current assets		753,591			709,270

Building, equipment and furniture, net		111,610			364,093
Intangible assets, net		1,845			1,845
TOTAL ASSETS	$	867,046		$	1,075,208

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable	$	247,060		$	431,267
Accrued expenses		147,435			179,628
Customer deposits		43,069			39,453
Loan, building		-			225,000
Loans from related parties		671,337			171,518
Total current liabilities		1,108,901			1,046,866

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ (DEFICIT) EQUITY
Preferred stock, $0.0001 par value, 100,000,000 authorized shares; no shares issued and outstanding		-			-
Common stock, $0.0001 par value; 500,000,000 shares authorized; 235,724,960 and 230,724,960 shares issued and 230,624,960 and 227,624,960 outstanding at March 31, 2018 and December 31, 2017, respectively		23,572			23,072
Additional paid-in-capital		13,266,358			12,444,488
Accumulated deficit		(13,531,785	)		(12,439,218	)
Total Stockholders’ Equity (Deficit)		(241,855	)		28,342
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY	$	867,046		$	1,075,208

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

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ZNERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED

(Unaudited)

	March 31,			March 31,
	2018			2017

Revenue	$	482,972		$	143,679
Cost of revenue		229,628			58,046
Gross profit		253,344			85,633

Selling, general and administrative expenses		1,234,352			863,646

Loss from operations		(981,008	)		(778,013	)

Other income (expense)
Interest Expense		(111,559	)		-
Total other income		(111,559	)		-

Provision for income taxes		-			-

Net loss	$	(1,092,567	)	$	(778,013	)

Net loss per common share - basic and diluted	$	(0.01	)	$	(0.00	)

Weighted average number of shares outstanding - basic and diluted		214,644,216			196,015,000

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

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ZNERGY, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE THREE MONTHS ENDED MARCH 31, 2018

(Unaudited)

										Total
					Additional					Stockholders’
	Common Stock				Paid in		Accumulated			Equity
	Shares		Amount		Capital		Deficit			(Deficit)
Balance at December 31, 2017		230,724,960	$	23,072	$	12,444,488	$	(12,439,218	)	$	28,342

Stock and options issued for services		5,000,000		500		771,129		-			771,629

Warrants issued with debt						50,741					50,741

Net loss								(1,092,567	)		(1,092,567	)

Balance at March 31, 2018		235,724,960	$	23,572	$	13,266,358	$	(13,531,785	)	$	(241,855	)

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

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ZNERGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED

(unaudited)

	March 31,			March 31
	2018			2017

CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss	$	(1,092,567	)	$	(778,013	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		7,830			234
Loss on sale of building		29,739			-
Common stock and options issued for services		771,629			784,189
Non-cash interest expense		105,560			-
Accounts receivable		(82,697	)		(37,078	)
Prepaid expenses		(6,341	)		1,250
Inventory		(25,262	)		1,411
Accounts payable & accrued expenses		(216,400	)		(16,024	)
Customer deposits		3,616			(6,605	)
Net cash used in operating activities		(504,893	)		(50,636	)

CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of fixed assets		(10,086	)		-
Net cash used in investing activities		(10,086	)		-

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of advances from third parties		-			20,750
Proceeds from advances from related parties		445,000			7,873
Net cash provided by financing activities		445,000			28,623

DECREASE IN CASH		(69,979	)		(22,013	)

CASH, BEGINNING OF PERIOD		116,481			40,507

CASH, END OF PERIOD	$	46,502		$	18,494

Supplemental Disclosures
Non-cash investing and financing activities:
Transfer of building to related party in exchange for payment of loan	$	225,000		$	-

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

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ZNERGY, INC.

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS

MARCH 31, 2018

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. The Company is now focused solely on the EE marketplace with an emphasis on LED retrofitting and installing new lamps.

Basis of Presentation

The accompanying interim condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and do not include all of the information and footnotes required by GAAP for complete financial statements.

Certain information and footnote disclosures normally included in the Company’s annual audited consolidated financial statements and accompanying notes have been condensed or omitted in these interim condensed consolidated financial statements. Accordingly, the unaudited condensed consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2017, as filed with the Securities and Exchange Commission (“SEC”) on Form 10-K.

The results of operations presented in this quarterly report are not necessarily indicative of the results of operations that may be expected for any future periods. In the opinion of management, these unaudited condensed consolidated financial statements include all adjustments and accruals, consisting only of normal recurring adjustments that are necessary for a fair presentation of the results of all interim periods reported herein.

Consolidation

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

Revenue Recognition

The Company accounts for revenue in accordance with ASC 606-10. The Company generally has three revenue sources – installation contracts, sales of lighting products and rebate income.

When Znergy gets 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. In the first quarter, this amounted to $24,095 or approximately 5% of the quarterly revenue.

Installation contract revenue, $408,437 for the first quarter or approximately 85% of the quarterly 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 unallocable 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 first quarter there was approximately $31,000 in contracts which were not complete by the end of the first quarter, the receipts for which are recorded in Customer deposits in the current liability section of the balance sheet.

The Company quotes its customers the total costs of product installation and materials minus the expected rebates, if any, from a given utility. For projects larger than $10,000, rebates must be pre-approved by the utility. Rebate revenue is recognized when collectability is assured which is when payment is received by the Company.

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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 March 31, 2018, the company had a working capital deficit of $355,310, insufficient cash resources to meet its planned business objectives, and accumulated losses of $13,531,785. 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 any of these strategies.

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. Mr. Mikles and the Company are negotiating the terms of a lease for the office space. The Company recorded a loss on the sale of $29,739.

NOTE 4 – INTANGIBLE ASSETS

The Company was granted a federally registered trademark for “ZNERGY”. The cost of applying for and prosecuting this trademark was $1,845 which cost was accounted for as a non-amortizing intangible asset.

NOTE 5 – LOANS FROM RELATED PARTIES

	March 31, 2018		December 31, 2017
R. Mikles	$	274,218	$	47,248
W. Miller	$	349,711	$	124,270
P. Ladd	$	47,408	$	0
	$	671,337	$	171,518

On November 15, 2017, the Company executed an unsecured promissory note in the amount of $50,000, payable to the Company’s chairman, Rick Mikles. The note was payable on December 1, 2017 with interest at 4% per annum. On December 1, 2017, the payment date was extended to June 1, 2018. The balance at March 31, 2018 was $50,745 which includes unpaid interest. As of the date of this report, the principal and interest remain unpaid.

On December 6, 2017, 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 March 12, 2018, with interest of $6,000. 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. The balance at March 31, 2018 was $180,467 which includes unpaid interest and penalties. As of the date of this Report, the principal balance remains unpaid. Pursuant to the terms of the Note, there was a 15-day grace period granted, which expired on March 27, 2018, at which time, a 15% penalty of the unpaid balance become due and payable together with the unpaid principal and any accrued interest.

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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. 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. The value of the warrants was calculated based on its relative fair value basis to the debt and carried as a reduction of the related debt on the balance sheet and amortized to interest expense through the maturity date of the note. The balance at March 31, 2018 was $149,244, which includes unpaid principal and interest of $153,498, reduced by the unamortized accretion of debt of $4,254. As of the date of this Report, the principal and one interest payment of $3,000 remains unpaid. 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 becomes due and payable together with the unpaid principal and accrued interest.

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. The balance at March 31, 2018 was $25,419 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. The balance at March 31, 2018 was $198,054 which includes unpaid interest of $806 and an offset of $2,72 due to prior advances made to him by the Company. As of the date of this Report, the note and accrued interest 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. 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. The value of the warrants was calculated based on its relative fair value basis to the debt and carried as a reduction of the related debt on the balance sheet and amortized to interest expense through the maturity date of the note. The balance at March 31, 2018 was $47,408 which includes the unpaid principal and interest of $50,073, reduced by the unamortized accretion of $2,665. As of the date of this Report, the note and accrued interest remain unpaid.

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.

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.

The Company has entered into employment agreements with their sales representatives, either as independent contractors or employees of the Company. The employees or contractors have at will contracts to provide sales and sales support services. In addition to a salary and commission, the Company has issued options to purchase common stock of the Company. The expiration periods range from 1-3 years, with options to purchase shares at $0.10 per share, vesting over three years. The options granted in the aggregate total 5,700,000 shares to a total of 8 individuals, of which 5,000,000 shares are performance-based options and 700,000 are time-based options which vest over 8 quarters,

Options

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

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Options - Time Vesting

There were 14,400,000 options issued and outstanding as of March 31, 2018. The following table shows the stock option activity during the periods ended March 31, 2018 and March 31, 2017, respectively:

	March 31, 2018
	Number of Options		Weighted Average Exercise Price

Options outstanding at beginning of year		14,400,000	$	0.10
Changes during the period:
Granted - at market price		-	$	0.10
Exercised		-
Forfeited		-	$	0.10
Options outstanding at end of period		14,400,000	$	0.10
Options exercisable at end of period		8,150,002	$	0.10
Weighted average fair value of options granted during the period	$	-	$	-

Options issued were valued using the Black-Sholes model assuming zero dividends, a $0.10 strike price, 3-year expiration, 1.53% average risk-free rate and 265.18% average volatility. Costs incurred in respect of stock based compensation for employees, advisors and consultants for the three month period ended March 31, 2018 was $129,562.

Unrecognized compensation costs related to options for the three month period ended March 31, 2018 was $563,029, which is expected to be recognized ratably over approximately 18 months.

Options - Performance Vesting

There were 31,341,094 options issued and outstanding as of December 31, 2017. 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 March 31, 2018 :

	March 31, 2018
	Number of Options		Weighted Average Exercise Price

Options outstanding at beginning of year		31,341,094	$	0.10
Changes during the period:
Granted - at market price		5,500,000	$	0.10
Exercised		-
Expired/Forfeit		-	$	0.10
Options outstanding at end of period		36,841,094	$	0.10
Options exercisable at end of period		5,492,092	$	0.10
Weighted average fair value of options granted during the period	$	511,500	$	0.10

Options issued were valued using the Black-Sholes model assuming zero dividends, a $0.10 strike price, 3-year expiration, 2.34% average risk-free rate and 209% average volatility. Costs incurred in respect of stock based compensation for employees, advisors and consultants for the three months ended March 31, 2018 was $142,067.

Unrecognized compensation costs related to options for the three months ended March 31, 2018 was $2,871,009 which is expected to be recognized ratably over approximately 33 months.

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Warrants

The following table shows the warrant activity during the period ended March 31, 2018:

			Weighted
	Number		Average
	Of		Exercise
	Warrants		Price

Warrants outstanding at beginning of year		16,924,960
Changes during the period:
Granted		1,050,000	$	0.15
Exercised		-
Expired		-
Warrants outstanding at end of period		17,974,960	$	0.15
Warrants exercisable at end of period		17,974,960	$	-

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 $50,741 for the three months ended March 31, 2018.

NOTE 7 – LITIGATION

On September 26, 2016, 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. Management cannot at this time estimate what, if any, financial impact this matter will have on the Company.

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NOTE 8 – CUSTOMER CONCENTRATION

During the three months ended March 31, 2018, the Company recognized installation revenue of $178,898 from one customer which represented approximately 37% of revenue for the quarter.

At March 31, 2018, that customer’s accounts receivable balance of $178,898 represented approximately 91% of the accounts receivable balance at March 31, 2018.

NOTE 9 – SUBSEQUENT EVENTS

On May 11, 2018, the Company received $30,000 as a short-term advance from its Chairman, Rick Mikles and on May 18, 2018 and on May 25, 2018, the Company received an additional $50,000 and $10,000, respectively, as additional short-term advances from the Company’s Chairman, Rick Mikles. The amounts are payable on demand and do not accrue interest.

On June 5, 2018, the Company received $30,000 from one of its investors and executed a promissory note which matures on June 30, 2018. The note is senior to the other notes and obligations. Under the note obligation, the Company issued warrants to purchase 1,000,000 shares at an exercise price of $0.10 per share. The warrants expire on the first anniversary date of the initial exercise date of the warrants. As of the date of this report, the note remains unpaid.

The contract for William McMahon to provide interim Chief Financial Officer duties expired June 15, 2018. The Company has not replaced the position.

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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.”

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.

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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 $482,972 and $143,679 for the three-month periods ended March 31, 2018, and March 31, 2017, respectively. Revenues in 2018 and 2017 comprise LED installation projects and associated rebates from utilities. The increase in revenues is due to the increase in sales personnel, the implementation of formalized training programs, and an increase in marketing efforts. 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 $229,628 and $58,046 for the three-month periods ended March 31, 2018, and March 31, 2017, respectively. Costs of revenue in 2018 and 2017 comprise primarily LED product and installation costs, including labor and rental equipment.

The Company had general and administrative expenses of $1,234,352 and $863,646 for the three-month periods ended March 31, 2018, and March 31, 2017, respectively. General and administrative costs for the three months ended March 31, 2018 are comprised primarily of stock-based compensation and consulting costs of $771,629, sales and marketing costs of $185,686, bad debt expense of $41,382, personnel expenses of $55,348, professional fees of $90,258 and other expenses of $90,049. General and administrative costs for the three months ended March 31, 2017 are comprised primarily of stock-based consulting costs of $784,189.

The Company had net losses of $1,092,567 and $778,013 for the three-month periods ended March 31, 2018 and March 31, 2017, respectively.

Liquidity and Capital Resources

As of March 31, 2018, the Company had a working capital deficit of $355,310 with total current assets of $753,591 comprising $46,502 in cash, $195,515 in accounts receivable, $41,706 in prepaid expenses, and $469,868 in inventory, and total current liabilities of $1,108,901 comprising $247,060 in accounts payable, $147,435 in accrued expenses, $43,069 in customer deposits, and $671,337 in loans from related parties. Use of cash for operating activities totaled $504,893 primarily for funding a decrease in accounts payable and accrued expenses of $216,400 and an increase in inventory of $25,262 and accounts receivable of $82,697. The primary source of funds was loans from related parties in the amount of $445,000.

On July 22, 2017, the Company entered into a purchase agreement for a property located at 808 A South Huntington Street, Syracuse, Indiana. The agreement stipulates a purchase price of $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 payable on the balance due. 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 16,2018, a quitclaim was recorded to Rick Mikles as the new owner of the building. Mr. Mikles and the Company are negotiating the terms of a lease for the office space.

Going Concern Discussion

The accompanying 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. At March 31, 2018, the Company has a working capital deficit of $355,310, insufficient cash resources to meet its planned business objectives, and accumulated losses of $13,531,785. The Company intends to fund operations through debt and equity financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements through June 2019.

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For the year ending December 31, 2017, our auditors issued an explanatory note regarding our ability to continue as a going concern. This means that our auditors believe there is substantial doubt that we can continue as an on-going business for the next 12 months. Accordingly, we must raise cash from sources other than operations. Our only other source for cash at this time is investments by third parties and loans from others in our company.

The Company is dependent upon, among other things, obtaining additional financing to continue operations and to execute its business plan. In response to these problems, management intends to raise additional funds through public or private placement offerings. No assurances can be made that management will be successful in pursuing any of these strategies.

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

As of March 31, 2018, management believes that generating revenues in the next six to twelve months is important to support our planned ongoing operations. However, we cannot guarantee that we will generate such growth. If we do not generate sufficient cash flow to support our operations over the next six to twelve months, we will need to raise additional capital by issuing capital stock in exchange for cash or obtain loans in order to continue as a going concern. There are no formal or informal agreements to attain such financing. We cannot assure you that any financing can be obtained or, if obtained, that it will be on reasonable terms. Without realization of additional capital, it would be unlikely for us to continue as a going concern. No adjustments have been made to the financial statements to reflect our doubt to continue as a going concern.

Our management does not expect to incur significant research and development costs in 2018.

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

The Company’s most critical accounting policies include (a) use of estimates, (b) revenue recognition, (c) going concern, and (d) share based payments. The methods estimates and judgments the Company uses in applying these most critical accounting policies have a significant impact on the results the Company reports in its financial statements.

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(a) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts or revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates, judgments and assumptions used in these consolidated financial statements include those related to revenues, accounts receivable and related allowances, contingencies, and the fair values of stock-based compensation. These estimates, judgments, and assumptions are reviewed periodically and the effects of material revisions in estimates are reflected in the financial statements prospectively from the date of any change in estimate.

(b) Revenue Recognition

The Company accounts for revenue in accordance with ASC 606-10. The Company generally has three revenue sources – installation contracts, sales of lighting products and rebate income.

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 March 31, 2018, the Company had a working capital deficit of $355,310, and accumulated losses of $13,531,785 and it continues to experience operating losses. The Company intends to fund operations through debt and equity financing arrangements, which may be insufficient to fund its capital expenditures, working capital and other cash requirements through June 2019.

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(d) Share-Based Payments

Certain employees, officers, directors, and consultants of the Company participate in incentive plans that provide for granting stock options and performance-based awards. Time based stock options generally vest in equal increments over a two -year period and expire on the third anniversary following the date of grant. Performance-based stock options vest once the applicable performance conditions are satisfied.

The Company recognizes stock-based compensation for equity awards granted to employees, officers, directors and consultants as compensation and benefits expense in the consolidated statements of operations. The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant. Stock-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period. For performance-based stock options, compensation is recognized once the applicable performance condition is satisfied.

The Company recognizes stock-based compensation for equity awards granted as selling, general and administrative expense in the consolidated statements of operations.

The fair value of restricted stock awards is equal to the closing price of the Company’s stock on the date of grant multiplied by the number of shares awarded. Stock-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period.

Recently Issued Accounting Pronouncements

JOBS Act

On April 5, 2012, the JOBS Act was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company,” we have the option to delay adoption of new or revised accounting standards until those standards would otherwise apply to private companies, until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period for complying with such new or revised accounting standards. We have elected to opt out of this extended transition period. As noted, this election is irrevocable.

Our significant accounting policies, as described in our financial statements in the Summary of Significant Accounting Policies, should be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2014-09, Revenue From Contracts With Customers, or ASU 2014-09. Pursuant to this update, an entity should recognize revenue to depict 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 amendments in this update are currently effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and are to be applied retrospectively, or on a modified retrospective basis. Early application is not permitted. In July 2015, the FASB approved a one-year deferral of the effective date for annual reporting periods beginning after December 15, 2017 with early adoption permitted for annual periods beginning after December 15, 2016. We have determined that adopting ASU 2014-09 did not have a material impact on our consolidated financial statements.

On February 24, 2016, the FASB issued ASU No. 2016-02, Leases, requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. Lessor accounting is similar to the current model but updated to align with certain changes to the lessee model. Lessors will continue to classify leases as operating, direct financing or sales-type leases. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. We are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.

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On May 10, 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718), which was issued to clarify and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation – Stock Compensation, to a change to the terms or conditions of a share-based payment award. An entity may change the terms or conditions of a share-based payment award for many different reasons. The amendments in this update provide guidance about which changes to the terms or conditions of a share-based payment aware require an entity to apply modification accounting in Topic 718. The amendments in the update are effective for all entities for annual periods, and interim periods within those annual periods beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (10) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. We have determined that adoption of this standard did not have a material impact on our consolidated financial statements.

On September 29, 2017, the FASB issued ASU No. 2017-13 – Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842), which was issued to add SEC paragraphs pursuant to the SEC Staff Announcement at the July 20, 2017 Emerging Issues Task Force meeting. The July announcement addressed transition related to Accounting Standards Updates No 2014-09, Revenue from Contracts with Customers (Topic 606). The transition provisions in ASC Topic 606 require that a public business entity and certain other entities adopt ASC Topic 606 for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities are required to adopt ASC Topic 606 for annual reporting periods beginning after December 14, 2018 and interim reporting within annual reporting periods beginning after December 15, 2019. The Company has adopted the revenue reporting requirements under ASC Topic 606 which did not have a material impact on our consolidated financial statements.

The Company does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.

Off-Balance Sheet Arrangements

None.

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.

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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 was no change in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Other than described below, we know of no pending legal proceedings to which we are a party which are material or potentially material, either individually or in the aggregate. We are from time to time, during the normal course of our business operations, subject to various litigation claims and legal disputes. We do not believe that the ultimate disposition of any of these matters will have a material adverse effect on our consolidated financial position, results of operations or liquidity.

16(b) Litigation

VStock Transfer Communications

Item 5. Other Information.

None

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Item 6. Exhibits

(a) Exhibits

Exhibit No.		Description
3.1		Articles of Incorporation for BIDC (previously filed as an exhibit to the Company’s registration statement on Form S-1, filed with the Commission on June 10, 2013)
3.2		Bylaws of BIDC (previously filed as an exhibit to the Company’s registration statement on Form S-1, filed with the Commission on June 10, 2013)
3.3		Amended and Restated Articles of Incorporation, as filed with the Nevada Secretary of State on July 15, 2016 (previously filed as an exhibit to the Company’s information statement on Form Def 14C, filed with the Commission on May 31, 2016)
10.1		Share Exchange Agreement, dated as of October 26, 2015 (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Commission on October 27, 2015)
10.2		Master Stock Purchase Agreement (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Commission on February 12, 2016)
10.3		Employment Agreement with Dave Baker (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Commission on October 4, 2016)
10.4		Employment Agreement with Dave Baker (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Commission on May 15, 2017)
10.5		Employment Agreement with Christopher Floyd (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Commission on May 15, 2017)
10.6		Employment Agreement with Ryan Smith (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed with the Commission on July 12, 2017)
31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. §1350 as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
101 INS		XBRL Instance Document*
101 SCH		XBRL Schema Document*
101 CAL		XBRL Calculation Linkbase Document*
101 DEF		XBRL Definition Linkbase Document*
101 LAB		XBRL Labels Linkbase Document*
101 PRE		XBRL Presentation Linkbase Document*

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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.

By: /s/ Dave Baker
Dave Baker
Chief Executive Officer and Director
(Principal Executive Officer)
Date: August 10, 2018