Notes to Unaudited Financial Statements
For The Three Month Interim Period Ended March
31, 2017 and 2016
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Illumination America, Inc., formerly Illumination
America, LLC, a Florida limited liability company, was formed on October 6, 2009. A Certificate of Conversion and Articles of Incorporation
were filed August 4, 2014, with an organizational date deemed effective October 6, 2009, for Illumination America, Inc., the resulting
Florida corporation.
Letter of Intent to Acquire Grom Holdings,
Inc
.
On January 11, 2017, the Company executed a
non-binding Letter of Intent (“LOI”) with Grom Holdings, Inc., a Delaware corporation (“Grom”), whereby
the Company reached an agreement in principle to acquire all of Grom’s issued and outstanding common stock. Darren Marks,
Melvin Leiner and Dr. Thomas Rutherford are directors of both companies and Messrs. Marks and Leiner are the principal shareholders
of both companies. Under the terms of the LOI, the Company will issue 4.17 shares of its common stock in exchange for every share
of Grom common stock issued and outstanding at closing. It is anticipated that Grom will have no more than 25 million of its common
shares issued and outstanding immediately prior to the closing date.
The proposed transaction is subject to
various conditions, including but not limited to execution of applicable Exchange Agreements, approval of the same by the
shareholders of both companies, completion and acceptance by the Company of the results of independent financial audits of Grom
for the years ended December 31, 2016 and 2015, the issuance of an order of effectiveness to a registration statement the
Company is required to file on Form S-4, and various other matters.
The Company’s accounting year end is
December 31.
NOTE 2 – GOING CONCERN
The Company’s financial statements as
of March 31, 2017, have been prepared using generally accepted accounting principles in the United States of America applicable
to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue
as a going concern. The Company has incurred significant losses.
In order to continue as a going concern, the
Company will need, among other things, additional capital resources. Since it is very unlikely that the Company can obtain sufficient
capital to profitably run its LED lighting business in the current competitive LED environment, the Company has entered into an
agreement to acquire another company. See “Letter of Intent to Acquire Grom Holdings, Inc.” above.
If the acquisition is successfully consummated,
of which there can be no assurance, management’s plan is to thereafter operate the Company primarily as a social media company
for children. Based upon the results of operations of the Company’s LED lighting business, management may then elect to dispose
of the LED lighting business, either through sale or other means. Management cannot provide any assurances that the Company will
be successful in accomplishing its plan. These financial statements do not include any adjustments related to the recoverability
and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable
to continue as a going concern.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of the Company have
been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).
This basis of accounting involves the application of accrual accounting and consequently, revenues and gains are recognized when
earned, and expenses and losses or recognized when incurred.
Use of Estimates
The preparation of financial statements in
conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant estimates relate to revenue recognition, valuation of accounts receivable
and inventories, purchase price allocation of acquired businesses, impairment of long lived assets and goodwill, valuation of financial
instruments, income taxes, and contingencies. The Company bases its estimates on historical experience, known or expected trends
and various other assumptions that are believed to be reasonable given the quality of information available as of the date of these
financial statements. The results of these assumptions provide the basis for making estimates about the carrying amounts of assets
and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid temporary cash investments
with an original maturity of three months or less to be cash equivalents.
Accounts Receivable
We record accounts receivable at net realizable
value. This value includes an appropriate allowance for estimated uncollectible accounts to reflect any loss anticipated on the
accounts receivable balances and is charged to Other income (expense) in the statements of operations. We calculate this allowance
based on our history of write-offs, the level of past-due accounts based on the contractual terms of the receivables, and our relationships
with, and the economic status of, our customers. As of March 31, 2017 and December 31, 2016, an allowance for estimated uncollectible
accounts was determined to be unnecessary.
Stock Purchase Warrants
The Company accounts for warrants issued to
purchase shares of its common stock as equity in accordance with FASB ASC 480, Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity.
Net Loss per Share
Net loss per common share is computed by dividing
net loss by the weighted average common shares outstanding during the period as defined by Financial Accounting Standards, ASC
Topic 260, "Earnings per Share." Basic earnings per common share (“EPS”) calculations are determined by dividing
net income by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per common share
calculations are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents
outstanding.
Revenue Recognition
We recognize revenue when the four revenue recognition criteria
are met, as follows:
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Persuasive evidence of an arrangement exists
– our customary
practice is to obtain written evidence, typically in the form of a sales contract or purchase order;
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Delivery
– when custody is transferred to our customers
either upon shipment to or receipt at our customers’ locations, with no right of return or further obligations, such as installation;
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The price is fixed or determinable
– prices are typically
fixed at the time the order is placed and no price protections or variables are offered; and
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Collectability is reasonably assured
– we typically work
with businesses with which we have a long standing relationship, as well as monitoring and evaluating customers’ ability
to pay.
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Refunds and returns, which are minimal, are
recorded as a reduction of revenue. Payments received by customers prior to our satisfying the above criteria are recorded as unearned
income in the balance sheets. To date, substantially all of the Company’s revenue has come from the sale of LED tubes and
fixtures. If the Company enters into a project requiring installation, this installation is performed by the client or from a third
party contractor and no revenue is recognized on the installation since the third party directly bills the client.
Fair Value of Financial Instruments
The Company applies the accounting guidance
under Financial Accounting Standards Board (“FASB”) ASC 820-10, “Fair Value Measurements”, as well as certain
related FASB staff positions. This guidance defines fair value as the price that would be received from selling an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair
value measurements for assets and liabilities required to be recorded at fair value, the Company considers the principal or most
advantageous market in which it would transact business and considers assumptions that marketplace participants would use when
pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.
The guidance also establishes a fair value hierarchy for measurements
of fair value as follows:
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Level 1 - quoted market prices in active markets for identical assets
or liabilities.
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Level 2 - inputs other than Level 1 that are observable, either directly
or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar
assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
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·
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Level 3 - unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or liabilities.
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The carrying amount of the Company's financial
instruments approximates their fair value as of March 31, 2017 and December 31, 2016, due to the short-term nature of these instruments.
Recent Accounting Pronouncements
The Company has implemented all new accounting
pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new
pronouncements that have been issued that might have a material impact on its financial position or results of operations.
NOTE 4 – OTHER ASSETS, IMPAIRMENT OF INTANGIBLE ASSETS
At December 31, 2016, as a result of deteriorating
profitability of Catalyst LED and significant delays associated with new business opportunities, the Company performed the impairment
test as prescribed by ASC 350 on the carrying value of its intangible asset, and as a result, recorded an impairment charge totaling
$50,000.
NOTE 5 – RELATED PARTY TRANSACTIONS
Since January 1, 2013 the Company has sub-leased
a portion of its office space to a related company, Grom Holdings, Inc. at the rate of $2,000 per month, plus miscellaneous additional
charges for other office services. As of March 31, 2017 and December 31, 2016, the balance of the related party receivables on
the Company’s balance sheet were $-0- and $-0-, respectively, all of which represented unpaid rent due from the related party.
Related party receivables and donated capital
On January 11, 2017, the Company executed a
non-binding Letter of Intent (“LOI”) with Grom whereby the Company reached an agreement in principle to acquire all
of Grom’s issued and outstanding common stock. Darren Marks, Melvin Leiner and Dr. Thomas Rutherford are directors of both
companies and Messrs. Marks and Leiner are the principal shareholders of both companies. In order to expedite and facilitate the
consummation of the transaction in an economical fashion; and to fund accounting, legal and other expenses associated with the
transaction, these directors agreed to do following during the three month period ended March 31, 2017:
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In order to minimize share dilution and
to help raise capital to fund the transaction, Mr. Marks and Mr. Leiner each voluntarily agreed to donate up to 1,000,000 of their
Company shares back to the Company, donating one share back to the Company for every share of Common Stock sold by the Company.
No other individuals donated any capital for the three month period ended March 31, 2017.
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In February 2017, Dr. Thomas Rutherford,
an independent director for both the Company and Grom, purchased 400,000 Units at a price of $0.75 per Unit offered by the Company
as part of a private offering. Each Unit is comprised of one share of the Company’s Common Stock and one Common Stock Purchase
Warrant exercisable to purchase one share of the Company’s Common Stock at an exercise price of $1.50 per Warrant. At that
time Messrs. Marks and Leiner donated an aggregate of 400,000 of their shares back to the Company to avoid dilution to the remaining
shareholders of the Company. See “Note 6. Stockholders Equity,” below.
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In February, 2017 the Company agreed
to extend up to $1.0 million in unsecured interest free loans to Grom.
As of March 31, 2017, the Company had extended
$212,660 in loans receivable to Grom, compared to $-0- for the period ended December 31, 2016.
Related party payables
Since the inception of the Company, Mr. Marks
and Mr. Leiner have advanced working capital to pay expenses of the Company. These loans payable are due on demand and non-interest
bearing. The outstanding amount due to related parties was $178,669 and $154,447 as of March 31, 2017 and December 31, 2016. respectively.
NOTE 6 – STOCKHOLDERS EQUITY
Common Stock
The Company has 100,000,000 shares of Common
Stock authorized with a par value of $0.001 per share and 25,000,000 shares of Preferred Stock authorized, with a par value of
$0.001 per share. As of March 31, 2017 and December 31, 2016, there were 10,264,744 common shares outstanding. No shares of Preferred
Stock are outstanding.
Common Stock Issued in Private Placements
During the year ended December 31, 2016, the
Company accepted subscription agreements from 4 investors and issued 214,744 shares of its common stock at a price of $0.78 per
share along with an equal number of stock purchase warrants exercisable at $1.00 per share for gross proceeds totaling $167,500.
These proceeds were used exclusively for working capital purposes.
During the three month period ended March 31,
2017, the Company sold 523,166 Units to 6 “accredited” investors at a price of $0.75 per Unit and received aggregate
proceeds of $392,735. Each Unit consisted of one share of Common Stock and one Common Stock Purchase Warrant exercisable to purchase
one share of Common Stock at an exercise price of $1.50 per warrant. The proceeds from this Offering are primarily to pay for expenses
related to the proposed acquisition of Grom by the Company. Messrs Marks and Leiner donated an aggregate of 523,166 of their shares
back to the Company to avoid dilution to the remaining shareholders of the Company. Under the guidelines of FASB Topic 505-30 “Treasury
Stock”, the amount of $392,735 is considered donated capital on the cost basis, and is included in Paid in Capital on the
Company’s balance sheet.
The stock purchase warrants have been accounted
for as equity in accordance with FASB ASC 480, Accounting for Derivative Financial Instruments indexed to, and potentially settled
in, a company’s own stock, distinguishing liabilities from equity. Using the Black-Scholes model, the Company allocated a
relative fair value of $333,862 for 523,166 stock purchase warrants using the following variables as of March 31, 2017:
Common stock price
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$
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0.75
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Warrant exercise price
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$
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1.50
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Expected dividend yield
(1)
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0.00%
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Risk-free interest rate
(2)
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1.93%
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Expected volatility
(3)
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184.55%
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Expected life (in years)
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3
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_____________________
(1)
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The Company has no history or expectation of paying cash dividends on its common stock.
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(2)
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The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant.
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(3)
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The volatility is based upon the average volatility rate of three similar publicly traded companies.
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Common Stock Issued in Exchange for Services
On December 31, 2016, the Company issued 50,000
shares of its common stock to a Company salesman pursuant to the terms of his employment agreement with the Company. This common
stock issued for services was valued at $0.78 per share, amounting to $39,000. The price of $0.78 represented the Company’s
share price in its private placement throughout all of 2016.
Stock Purchase Warrants
The following table reflects all outstanding and exercisable warrants
at March 31, 2017:
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Number of
Warrants
Outstanding
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Weighted
Average
Exercise Price
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Average
Remaining
Contractual
Life (Years)
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Balance, January 1, 2016
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–
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Warrants issued
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214,744
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$
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1.00
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4.25
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Balance December 31, 2016
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214,744
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$
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1.00
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4.25
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Warrants issued for the period ended March 31, 2017
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523,166
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$
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1.50
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2.75
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Balance, March 31, 2017
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737,910
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$
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1.35
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3.18
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