Notes to Condensed Consolidated Financial Statements

Note 1 — Description of Business and Summary of Significant Accounting Policies

ExeLED Holdings Inc. was incorporated in the State of Delaware on October 20, 1986 under the name “Verilink Corporation.” We have also been known as Energie Holdings, Inc. and Alas Aviation Corp. We have two wholly-owned subsidiaries, Energie LLC (hereinafter referred to as “Energie”), and OELC, LLC.

All references herein to “us,” “we,” “our,” “Holdings,” or the “Company” refer to ExeLED Holdings Inc. and its subsidiaries.

Description of Business

We are focused on acquiring and growing specialized LED lighting companies for the architecture and interior design markets for both commercial and residential applications. Our lighting products include both conventional fixtures and advanced solid-state technology that can integrate with digital controls and day-lighting to create energy efficiencies and a better visual environment. Our objective is to grow, innovate, and fully capture the rapidly growing lighting market opportunities associated with solid state lighting.

Énergie was founded in 2001 and is engaged in the import and sale of specialized interior lighting solutions to the architecture and interior design markets in North America. Our headquarters is located in Wheat Ridge, Colorado, and we also maintain a production and assembly facility in Zeeland, Michigan.

Basis of Presentation

The accompanying condensed consolidated balance sheet as of December 31, 2015, has been derived from audited financial statements. The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual audited financial statements and in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. In the opinion of management, such unaudited information includes all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of this interim information. All intercompany transactions have been eliminated in consolidation. Operating results and cash flows for interim periods are not necessarily indicative of results that can be expected for the entire year. The information included in this report should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.

Significant Accounting Policies

In accordance with the FASB’s issuance of ASU No. 2015-03,  Interest-Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03) and ASU No. 2015-15,  Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements—Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update) (ASU 2015-15), we have changed our presentation of debt issuance costs. Consistent with the application of ASU 2015-03 and 2015-15, we now present debt issuance costs as a direct deduction from the carrying amount of that debt rather than as an asset on the condensed consolidated balance sheet. The impact of this change on the condensed consolidated financial statements for the six months ended June 30, 2016, was a decrease of total assets and a decrease of debt and total liabilities of $155,029. The impact of this change on the condensed consolidated financial statements for the year ended December 31, 2015 was a decrease of total assets and a decrease of debt and total liabilities of $101,358. The change had no impact on shareholders’ equity (deficit) or net loss in either period.

Going Concern

As shown in the accompanying condensed consolidated financial statements, we had an equity deficit of $11,553,552 and a working capital deficit of $10,649,341 as of June 30, 2016, and have reported net losses of $1,599,530 and $1,331,838 for the six months ended June 30, 2016 and 2015, respectively.  These factors raise substantial doubt regarding our ability to continue as a going concern. 

Our ability to continue as a going concern is dependent on our ability to further implement our business plan, attract additional capital and, ultimately, upon our ability to develop future profitable operations. We intend to fund our business development, acquisition endeavors and operations through equity and debt financing arrangements. However, there can be no assurance that these arrangements will be sufficient to fund our ongoing capital expenditures, working capital, and other cash requirements. The outcome of these matters cannot be predicted at this time. These matters raise substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. Additionally, current economic conditions in the United States and globally create significant challenges attaining sufficient funding.

Reclassifications

Certain prior year amounts have been reclassified to conform with the current year presentation.

Recently Issued Accounting Pronouncements

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (ASU 2016-10). ASU 2016-10 amends the new revenue recognition standard that it issued jointly with the IASB in 2014. The amendments do not change the core principles of the standard, but clarify the accounting for licenses of intellectual property, as well as the identification of distinct performance obligations in a contract. We are currently evaluating the impact of ASU 2016-10 on our financial statements.

In May 2016, the FASB issued ASU No. 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting (ASU 2016-11). ASU 2016-11 rescinds 1) certain SEC Observer comments that are codified in FASB ASC Revenue Recognition (Topic 605) , and FASB ASC Topic 932, Extractive Activities—Oil and Gas (Topic 932) , effective on adoption of FASB ASC Revenue from Contracts with Customers (Topic 606) and 2) SEC Staff Announcement, "Determining the Nature of a Host Contract Related to a Hybrid Instrument Issued in the Form of a Share Under Topic 815," which is codified in FASB ASC Derivatives and Hedging (Topic 815) . The rescinded guidance is effective on adoption of FASB ASU No. 2014-16, Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or Equity . We are currently evaluating the impact of ASU 2016-11 on our financial statements.

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (ASU 2016-12). ASU 2016-12 addresses issues such as collectability, contract modifications, completed contracts at transition, and noncash considerations as they relate to the new revenue recognition standard. We are currently evaluating the impact of ASU 2016-12 on our financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 requires the immediate recognition of estimated credit losses that are expected to occur over the life of many financial assets. We are currently evaluating the impact of ASU 2016-13 on our financial statements.

A – Line of Credit – We utilized this entire bank line of credit for working capital purposes. The outstanding obligation is due on demand, has a stated initial interest rate of 10.5% that is subject to adjustment, and is guaranteed by our majority shareholder/CEO. Energie and our CEO (collectively, “the defendants”) were served with a summons and complaint, wherein the bank brought an action to collect the amount due, including interest, costs and attorney’s fees. The parties to this action have entered into a settlement whereby the defendants agreed to pay to the bank the sum of $59,177 on or before April 30, 2016. The bank requested a judgment against both defendants jointly and severally for $59,177 pursuant to the settlement agreement. The defendants are currently engaged in settlement discussions with the plaintiff in this matter and while no assurance can be provided, we believe our settlement efforts will be successful.

B – Note payable to distribution partner – Note payable to a significant European distribution partner, entered into in October 2014, bearing interest at 5% payable quarterly, with principal payable monthly through September 2019. The 2014 note payable aggregated the 2007 promissory note, accrued interest and accounts payable.

C – Investor Debt – Notes payable to lenders having an ownership interest in Holdings at June 30, 2016 and December 31, 2015. These loans are not collateralized. The following summarizes the terms and balances of the investor debt:

D – Related Parties Debt – The following summarizes notes payable to related parties:

D1 – Notes payable to Symbiote, Inc. (“Symbiote”), entered into from December 2014 to June 2016, with monthly principal and interest payable through November 2017. The 2014 notes aggregated the previous notes payable, accrued interest and accounts payable. Symbiote holds a large ownership percentage in Holdings, is the lessor of our manufacturing facility, and provides our payroll services.

D2 – Notes payable to an executive vice president, entered into from December 2014 through December 2015, with monthly principal and interest payable through November 2017. The 2014 note aggregated previous notes payable, accrued interest and accounts payable.

D3 – Note payable to our chief executive officer (“CEO”), entered into in December 2014, with monthly principal and interest payable through December 2016.

D4 – Notes payable to the spouse of our CEO, entered into from September 2013 to October 2015, with principal and interest payments due upon a specific event or upon demand.

D5  – Notes payable to the consulting firm that employs our Chief Financial Officer, entered into in June 2015. These notes aggregated the previous accounts payable and accrued interest due to the consulting firm. Beginning January 1, 2016, the notes are convertible into shares of our common stock at a conversion rate of 75% of the volume weighted average market price of our stock over the 20 days preceding the notification of conversion. We determined that this conversion feature did not meet the requirements to be treated as a derivative; however, we did determine it was a beneficial conversion feature. Accordingly, we recorded a debt discount of $217,725, which was amortized through interest expense.

D6 – Notes payable to the principal shareholders of Symbiote, entered into in April 2016, with principal and interest payments due upon a specific event or upon demand.

E – Other Notes Payable – Represents the outstanding principal balance on four separate notes bearing interest at 6 - 18% annually. In the event we receive proceeds as the beneficiary of a life insurance policy covering our majority shareholder/CEO, repayment of principal and interest is due on these notes prior to using the proceeds for any other purpose.

F – Cash draw agreements – Under these agreements, the lender advances us the principal balance and then automatically withdraws a stated amount each business day. Accordingly, there is no stated interest rate. The total remaining daily payments due under these arrangements was $219,897 as of June 30, 2016. The maturity dates of the agreements range from July to September 2016.

G – Convertible promissory notes – Represents the outstanding principal balance on two separate convertible promissory notes payable to an entity with interest of 8% annually, due in August 2016. During the third quarter of 2015, the current holder of the notes purchased all of our similar outstanding convertible notes from another entity and consolidated those notes into two new notes. At the option of the holder, the notes may be settled in cash or converted into shares of our common stock at any time beginning 180 days from the date of the notes at a price equal to 61% of the average closing bid price of our common stock during the 10 trading days immediately preceding the date of conversion. In the event we fail to pay the notes when they become due, the balance due under the notes incurs interest at the rate of 22% per annum. The notes contain additional terms and conditions normally included in instruments of this kind, including a right of first refusal wherein we have granted the holders the right to match the terms of any future financing in which we engage on the same terms and contemplated in such future financing. We estimate that the fair value of the conversion feature is minimal, so no value has been assigned to the beneficial conversion feature. During the six months ended June 30, 2016, $36,800 of principal and $2,029 of accrued interest was converted into 44,059,044 shares of common stock. We also recorded a loss on conversion of debt of $56,101 related to these transactions.

Debt issuance costs of $155,029 are being amortized over the life of the respective notes.

Note 5 — Commitments and Contingencies

Current management discovered that the Company’s former management recorded various obligations to itself and to third parties for expenditures not deemed benefitting the Company or authorized by the Company’s sole director, as required. The amount of these unauthorized expenditures totaled $91,172, including $60,000 in management fees. These expenditures were reversed and are not part of the accompanying financial statements.  While current management believes that none of the $91,172 is an obligation of ours, it is not known what representations were made to these vendors or whether we could, in fact, be eventually responsible to pay some or all of the indicated amount.