Notes to Consolidated
Financial Statements
Note 1 – Description of
Business and Summary of Significant Accounting Policies
Formation of the Company
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. On December 31, 2013, we entered into a Share Exchange
Agreement (the “Share Exchange Agreement”) with OELC, LLC, a Delaware limited liability company, and its wholly-owned
subsidiary, Energie LLC (hereinafter referred to as, “Energie”). The Share Exchange Agreement was not effective until
July 2, 2014 due to a variety of conditions subsequent that needed to be met, which are described below. Upon effectiveness, we
issued 33,000,000 “restricted” shares of our common stock, representing approximately 65% of our then issued and outstanding
voting securities, in exchange for all of the issued and outstanding member interests of Energie. The accounting is identical
to that resulting from a reverse acquisition, except that no goodwill or other intangible is recorded.
Thereafter,
on January 27, 2014, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with two of our then
wholly owned subsidiaries, Energie Holdings, Inc. and Alas Acquisition Company. The net effect of the Merger Agreement was to
effectuate a name change from Alas Aviation Corp., to Energie Holdings, Inc. in order to provide a better understanding to investors
of our entry into the LED lighting industry. Our management also changed.
All
references herein to “us,” “we,” “our,” “Holdings,” or the “Company”
refer to ExeLED Holdings, Inc. and its subsidiaries, and their respective business following the consummation of the Merger and
Share Exchange Agreements, unless the context otherwise requires.
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. The 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.
Energie
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 Arvada, Colorado, and we also maintain a production and assembly
facility in Zeeland, Michigan.
Basis of Presentation
Our
financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).
The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Although these estimates are based on our knowledge of current events and actions
we may undertake in the future, actual results may ultimately differ from these estimates and assumptions. Furthermore, when testing
assets for impairment in future periods, if management uses different assumptions or if different conditions occur, impairment
charges may result.
Going Concern
As
shown in the accompanying financial statements, we had an equity deficit of $13,300,927 and a working capital deficit of $13,087,377
as of December 31, 2016, and have reported net losses of $3,455,227 and $2,995,626, respectively, for the years ended December
31, 2016 and 2015. 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 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.
Some
of our debt agreements are due on demand. If demand for payment is made by one or multiple vendors, we would experience a liquidity
issue as we do not currently have the funds available to pay off these debts. While we have entered into extensions with several
of our lenders, there can be no assurances that any of the lenders will be cooperative or that if they are willing to provide
extensions or forbearances, that the terms under which they may be willing to provide them will be favorable to us.
Reclassifications
Certain
prior year amounts have been reclassified to conform with the current year presentation.
Summary of Significant Accounting
Policies
Cash and cash equivalents
Cash
and cash equivalents include cash on hand, deposits with banks, and investments that are highly liquid and have maturities of
three months or less at the date of purchase.
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 consolidated
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.
At
our discretion, we may sell our accounts receivable with recourse in order to accelerate the receipt of cash. Upon the sale of
selected accounts receivable, title transfers to the counterparty to the factoring agreement, we receive 85% of the face amount
sold, and we remove the account receivable from our balance. We pay a commission and, if the balance is not collected by the counterparty
within 30 days, a factoring fee. We are responsible for repaying the factoring counterparty for any amounts they are unable to
collect. The factoring counterparty retains a reserve in the event the amount they ultimately collect is less than the amount
paid to us. Depending on the volume of activity and uncollected accounts, therefore, we may have a receivable from or a liability
to the factoring counterparty.
Inventory
Inventory
is stated at the lower of cost or market, using the first-in, first-out method (“FIFO”) to determine cost. We monitor
inventory cost compared to selling price in order to determine if a lower of cost or market reserve is necessary. We also estimate
and maintain an inventory reserve, as needed, for such matters as obsolete inventory, shrink and scrap.
Intangible assets
Our
intangible assets consist of the following:
UL
Listings
– Energie has over 20 United Laboratories
TM
(“UL”) files, which include UL Listings
for over 14,000 products for sale in the United States and Canada. UL is an independent safety testing laboratory. A UL Listing
means that UL has tested representative samples of the product and determined that it meets UL’s requirements. These requirements
are based primarily on UL’s published and nationally recognized standards for safety. UL’s testing certifies the design,
construction and assembly of the certified products. UL Listings do not expire as long as the product certified is not materially
changed. Ownership of a UL Listing may also be transferred between companies. Most customers in the lighting industry will only
buy UL listed products.
Trademarks
– Energie is a registered trademark.
Marketing
and design
– These consist of engineering and marketing materials covering the majority of our product offerings.
Intangible
assets are recorded at the cost to acquire the intangible, net of amortization over their estimated useful lives on a straight-line
basis. We determine the useful lives of our intangible assets after considering the specific facts and circumstances related to
each intangible asset. Factors we consider when determining useful lives include the contractual term of any agreement related
to the asset, the historical performance of the asset, our long-term strategy for using the asset, any laws or other local regulations
that could impact the useful life of the asset, and other economic factors, including competition and specific market conditions.
Property and equipment
Property
and equipment are stated at cost. Depreciation is recorded using the straight-line method over the estimated useful lives of our
assets, which are reviewed periodically.
Impairment of long-lived assets
When
facts and circumstances indicate that the carrying value of long-lived assets may not be recoverable, management assesses the
recoverability of the carrying value by preparing estimates of revenues and the resulting gross profit and cash flows. These estimated
future cash flows are consistent with those we use in our internal planning. If the sum of the expected future cash flows (undiscounted
and without interest charges) is less than the carrying amount, we recognize an impairment loss. The impairment loss recognized,
if any, is the amount by which the carrying amount of the asset (or asset group) exceeds the fair value. We may use a variety
of methods to determine the fair value of these assets, including discounted cash flow models, which are consistent with the assumptions
we believe hypothetical marketplace participants would use.
We
have the option to perform a qualitative assessment of long-lived assets prior to completing the impairment test described above.
We must assess whether it is more likely than not that the fair value of the long-lived assets is less than their carrying amount.
If we conclude that this is the case, we must perform the test described above. Otherwise, we do not need to perform any further
assessment.
As
a result of applying the above procedures, we fully impaired all long-lived assets during the year ended December 31, 2014. Since
that time, we have not acquired any long-lived assets.
Warranty reserve
We
provide limited product warranty for one year on our products and, accordingly, accrue an estimate of the related warranty expense
at the time of sale, included in Accrued liabilities on the consolidated balance sheets.
Convertible debt
We
first evaluate our convertible debt to determine whether the conversion feature is an embedded derivative that requires bifurcation
and derivative treatment. Based on our analysis, we determined derivative treatment was not required. We then evaluate whether
the conversion feature is a beneficial conversion feature. Our convertible debt is treated as a liability and permits settlement
in cash. Accordingly, in order to determine the value of the conversion feature, we compared the estimated fair value of the convertible
debt to the fair value of debt that did not have the conversion feature. Based on this analysis, we concluded that the value of
the conversion feature was immaterial.
Revenue recognition
We
recognize revenue when the four revenue recognition criteria are met, as follows:
|
·
|
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;
|
|
·
|
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;
|
|
·
|
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
|
|
·
|
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.
|
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 consolidated balance sheets.
Shipping and handling
Payments
by customers to us for shipping and handling costs are included in revenue on the consolidated statements of operations, while
our expense is included in cost of revenues. Shipping and handling for inventory and materials purchased by us is included as
a component of inventory on the consolidated balance sheets, and in cost of revenues in the consolidated statements of operations
when the product is sold.
Research and development costs
Internal
costs related to research and development efforts on existing or potential products are expensed as incurred. External costs incurred
for intangible assets, such as UL listing costs and attorney fees for patents, are capitalized.
Income taxes
We
recognize deferred income tax assets and liabilities for the expected future tax consequences of temporary differences between
the income tax and financial reporting carrying amount of our assets and liabilities. We monitor our deferred tax assets and evaluate
the need for a valuation allowance based on the estimate of the amount of such deferred tax assets that we believe do not meet
the more-likely-than-not recognition criteria. We also evaluate whether we have any uncertain tax positions and would record a
reserve if we believe it is more-likely-than-not our position would not prevail with the applicable tax authorities. Our assessment
of tax positions as of December 31, 2016 and 2015, determined that there were no material uncertain tax positions.
Concentration of credit risk
Financial
instruments that potentially subject us to concentrations of credit risk consist of accounts receivable and the amount due, if
any, from our factoring counterparty. For the year ended December 31, 2016 one customer represented more than 20% of our total
revenues. As of December 31, 2016, our accounts receivable balance was not material to the overall consolidated financial statements.
Fair value of financial instruments
Our
financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and long-term
debt. The carrying value of these financial instruments is considered to be representative of their fair value due to the short
maturity of these instruments. The carrying amount of our long-term debt approximates fair value, because the interest rates on
these instruments approximate the interest rate on debt with similar terms available to us.
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on
the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize
the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which the first two are considered
observable and the last unobservable, as follows:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
or liabilities; quoted prices 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.
Level
3 – Unobservable inputs that are supported by little or no market activity and that are significant to the measurement of
the fair value of the assets or liabilities.
Reportable segments
We
have identified our operating segments, our chief operating decision maker (“CODM”), and the discrete financial information
reviewed by the CODM. After evaluating this information, we have determined that we have one reportable segment.
Recently Issued Accounting Pronouncements
In
July 2015, the FASB issued ASU No. 2015-11 (ASU 2015-11),
Inventory (Topic 330): Simplifying the Measurement of Inventory.
ASU
2015-11 more closely aligns the measurement of inventory in GAAP with the measurement of inventory in International Financial
Reporting Standards (IFRS). As such, an entity should measure inventory that is within the scope of this ASU at the lower of cost
and net realizable value. We do not expect the impact of the adoption of ASU 2015-11 to be material to our consolidated financial
statements.
In
September 2015, the FASB issued ASU No. 2015-16 (ASU 2015-16),
Business Combinations (Topic 805): Simplifying the Accounting
for Measurement-Period Adjustments
. ASU 2015-16 requires an acquirer to “recognize adjustments to provisional amounts
that are identified during the measurement period in the reporting period in which the adjustment amounts are determined.”
Further, the acquirer must record, in the financial statements for the same period, “the effect on earnings of changes in
depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated
as if the accounting had been completed at the acquisition date.” We do not expect the impact of the adoption of ASU 2015-16
to be material to our consolidated financial statements.
In November 2015, the FASB
issued ASU No. 2015-17 (ASU 2015-17) ,
Balance Sheet Classification of Deferred Taxes (Topic 740)
. The guidance in
this new standard eliminated the current requirement to present deferred tax assets and deferred tax liabilities as current
and noncurrent in a classified balance sheet and now requires entities to classify all deferred tax assets and deferred
tax liabilities as noncurrent. Public companies are required to apply the guidance beginning with the quarter ending March
31, 2017. We do not expect the impact of the adoption of ASU 2015-17 to be material to our consolidated
financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(ASU 2016-02). ASU 2016-02 requires that lessees
will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases
with terms of more than 12 months. ASU 2016-02 also will require disclosures designed to give financial statement users information
on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative
information. For public companies, the standard will take effect for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2018 with earlier application permitted. We are currently evaluating the impact of ASU 2016-02
on our financial statements.
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting
(ASU 2016-09) which simplifies several aspects of accounting for share-based payment transactions
including income tax consequences, classification of awards as either equity or liabilities, classification on the statement of
cash flows and accounting for forfeitures. ASU 2016-09 is effective for financial statements issued for fiscal years beginning
after December 15, 2016. We are currently evaluating the impact of ASU 2016-09 on our financial statements.
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
August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-15,
Statement
of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(ASU 2016-15). Stakeholders indicated
that there is a diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement
of cash flows. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in
practice. ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within
those fiscal years. Early adoption is permitted. We do not expect the impact of the adoption of ASU 2016-15 to have a significant
impact on our statement of cash flows.
Other
recent accounting pronouncements issued by the FASB and the SEC did not, or management believes will not, have a material impact
on our present or future consolidated financial statements.
Note 2 – Receivables
Receivables consist of the following:
|
|
December
31,
|
|
|
2016
|
|
2015
|
Customer
receivables
|
|
$
|
14,432
|
|
|
$
|
21,431
|
|
Less: Allowance
for uncollectible accounts
|
|
|
(14,401
|
)
|
|
|
(12,880
|
)
|
|
|
$
|
31
|
|
|
$
|
8,55
1
|
|
Note 3 – Inventory
Inventory consists of the following:
|
|
December
31,
|
|
|
2016
|
|
2015
|
Raw
materials
|
|
$
|
332,612
|
|
|
$
|
348,342
|
|
Less:
Reserve
|
|
|
(175,434
|
)
|
|
|
(158,191
|
)
|
|
|
$
|
157,178
|
|
|
$
|
190,15
1
|
|
Note 4 – Debt
Debt consists of the following:
|
|
December
31,
|
Description
|
Note
|
2016
|
2015
|
Line
of credit
|
A
|
$ 47,000
|
$ 47,000
|
Note
payable to distribution partner
|
B
|
550,000
|
550,000
|
Investor
debt
|
C
|
371,507
|
267,787
|
Related
party debt
|
D
|
6,719,979
|
5,632,543
|
Other
notes payable
|
E
|
981,137
|
66,786
|
Cash
draw agreements
|
F
|
211,076
|
204,423
|
Convertible
promissory notes
|
G
|
71,637
|
154,437
|
Total
|
|
8,952,336
|
6,922,976
|
Less: unamortized
discount and debt issuance costs
|
|
(280,555)
|
(173,668)
|
Debt,
net of unamortized discount and debt issuance costs
|
|
8,671,781
|
6,479,308
|
Less: current
portion
|
|
(8,451,781)
|
(5,156,305)
|
Debt,
long-term portion
|
|
$ 220,000
|
$ 1,593,003
|
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. On April 4, 2016, the
parties to this action entered into a settlement agreement whereby the defendants agreed to pay to Vectra Bank the sum of $59,177
on or before April 30, 2016. This payment was not made and the bank requested and received a judgment against both defendants
jointly and severally for $61,502 plus interest of 5.25% per annum plus 9.90% per annum on the default margin.
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.
C
–
Investor Debt –
Notes payable to lenders having an ownership interest in Holdings at December 31, 2016
and 2015. These loans are not collateralized. The following summarizes the terms and balances of the investor debt:
December
31,
|
|
2016
|
2015
|
Interest
Rate
|
$ 87,787
|
$ 87,787
|
24%
|
50,000
|
50,000
|
24%
|
50,000
|
50,000
|
24%
|
25,000
|
25,000
|
8%
|
25,000
|
25,000
|
8%
|
20,000
|
20,000
|
2%
|
113,720
|
10,000
|
various
|
$ 351,507
|
$ 267,787
|
|
D
– Related Party Debt
– The following summarizes notes payable to related parties.
|
December
31,
|
|
|
2016
|
2015
|
Interest
Rate
|
D1
|
$ 4,635,865
|
$ 4,120,465
|
various
|
D2
|
--
|
528,214
|
various
|
D3
|
34,888
|
34,888
|
12%
|
D4
|
356,550
|
280,800
|
various
|
D5
|
668,176
|
668,176
|
18%
|
D6
|
1,024,500
|
--
|
6%
|
Total
|
$ 6,719,979
|
$ 5,632,543
|
|
D1
– Notes payable to Symbiote, Inc. (“Symbiote”), entered into from December 2014 to June 2016, with monthly
principal and interest payable through November 2017. Symbiote is an owner of the common stock of Holdings, is the lessor of our
manufacturing facility, and the provider of our payroll services. We also owe Symbiote $315,815 in accounts payable.
D2
– Notes payable to a former executive vice president, entered into from December 2014 through December 2015, with monthly
principal and interest payable through November 2017. As of December 31, 2016, this individual is no longer employed by Holdings
and is no longer considered a related party.
D3
– Note payable to our chief executive officer (“CEO”), entered into in December 2014, with monthly principal
and interest payable through December 2016. We also owe Hal $700,391 in accrued compensation and expenses incurred on behalf of
the Company.
D4
– Notes payable to the spouse of our CEO, entered into from September 2013 to November 2016, 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 from June 2015 to December 2015. These
notes aggregated the previous accounts payable and accrued interest due to the consulting firm at the time the notes were made.
As of 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 does 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 over the life of the
notes. We also owe NOW CFO $436,786 in accounts payable.
D6
–
Notes payable to the principal shareholders of Symbiote, entered into from April to December 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 between 6% and 24% 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 one of 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 $285,131 as of December 31, 2016. The maturity dates of the agreements range from February to
May 2017.
G
–
Convertible promissory notes –
Represents the outstanding principal balance on two separate convertible
promissory notes payable to an entity with interest of 8% annually, that were 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 year ended December 31, 2016, $82,800 of principal and $5,661 of accrued interest was converted
into 135,532,715 shares of common stock. We also recorded a loss on conversion of debt of $114,791 related to these transactions.
Subsequent to December 31, 2016, we paid off the remaining $12,700 of principal on one of the notes leaving one note outstanding
as of the date of this report.
Debt
issuance costs of $280,555 are being amortized over the life of their respective notes.
The
future maturities of debt are as follows:
Year
ending December 31,
|
|
2017
|
$ 8,451,781
|
2018
|
120,000
|
2019
|
100,000
|
|
$ 8,671,781
|
Note 5 – Equity
We
have authorized 5,000,000 shares of preferred stock at $0.0001 par value, with no shares issued and outstanding as of December
31, 2016. Upon issuing preferred stock, if any, the terms of each tranche of issuance may be determined by our board of directors,
including dividends and voting rights.
In
July 2014, we entered into an agreement with Dutchess Opportunity Fund, II, LP (“Dutchess”), under which Dutchess
has agreed to purchase from us 5,000,000 shares of our common stock, up to $5 million, during a 36 month period commencing on
the date a Registration Statement on Form S-1 was declared effective, October 29, 2014. We will sell these shares to Dutchess
at a price equal to 94% of the lowest daily volume weighted-average price of our common stock during the five consecutive trading
days beginning on the day we make notice to Dutchess and ending on and including the date that is four trading days after such
notice. We have the right to withdraw all or any portion of any put before the closing, subject to certain limitations. As part
of the agreement with Dutchess, we transferred 2,000,000 shares of our common stock for no proceeds. We will receive proceeds
when we make notice to Dutchess to sell these shares. The market price of the 2,000,000 shares was $40,000, based on the trading
price on the date of transfer. If we do not make notice to Dutchess, these shares will be returned to us at the end of the 36
month contractual period. As of December 31, 2016, we had not made notice to Dutchess to sell any of these shares. Accordingly,
the net impact to our stockholders equity is zero.
Note 6 – Commitments
and Contingencies
Future
minimum rental payments required under all leases that have remaining non-cancelable lease terms in excess of one year as of December
31, 2016, are as follows:
2017
|
$ 82,145
|
2018
|
28,890
|
|
$ 111,035
|
Note 7 – Income Taxes
The
components of the provision for income taxes are as follows:
|
|
Year
ended December 31,
|
|
|
2016
|
|
2015
|
Current
tax provision
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,100,820
|
)
|
|
$
|
(941,497
|
)
|
State
|
|
|
(143,630
|
)
|
|
|
(122,690
|
)
|
|
|
|
(1,244,450
|
)
|
|
|
(1,064,187
|
)
|
Deferred
tax provision
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,100,820
|
|
|
|
941,497
|
|
State
|
|
|
143,630
|
|
|
|
122,690
|
|
|
|
|
1,244,450
|
|
|
|
1,064,187
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The
components of net deferred tax assets and liabilities are as follows:
|
|
Year
ended December 31,
|
|
|
2016
|
|
2015
|
Current
deferred tax asset (liability):
|
|
|
|
|
|
|
|
|
Inventory
reserve
|
|
$
|
67,430
|
|
|
$
|
60,794
|
|
Warranty
reserve
|
|
|
7,148
|
|
|
|
7,148
|
|
Net
operating loss carryforward
|
|
|
3,185,120
|
|
|
|
1,940,670
|
|
Valuation
allowance
|
|
|
(3,259,698
|
)
|
|
|
(2,008,612
|
)
|
|
|
|
—
|
|
|
|
—
|
|
Long-term
deferred tax asset (liability)
|
|
|
|
|
|
|
|
|
Long-lived
assets
|
|
|
112,895
|
|
|
|
124,515
|
|
Valuation
allowance
|
|
|
(112,895
|
)
|
|
|
(124,515
|
)
|
|
|
|
—
|
|
|
|
—
|
|
Net
deferred tax asset (liability)
|
|
$
|
—
|
|
|
$
|
—
|
|
A
reconciliation of our income tax provision and the amounts computed by applying statutory rates to income before income taxes
is as follows:
|
|
Year
ended December 31,
|
|
|
2016
|
|
2015
|
Income
tax benefit at statutory rate
|
|
$
|
(1,169,297
|
)
|
|
$
|
(1,018,511
|
)
|
State
income tax, net of Federal benefit
|
|
|
(105,092
|
)
|
|
|
(91,540
|
)
|
Amortization
of debt discount
|
|
|
27,793
|
|
|
|
55,884
|
|
Other
|
|
|
7,130
|
|
|
|
6,765
|
|
Valuation
allowance
|
|
|
1,239,466
|
|
|
|
1,047,402
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Note 8 – Net Loss Per Share
Basic
net loss per share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting
period. Diluted net loss per share is computed similarly to basic net loss per share, except that it includes the potential dilution
that could occur if dilutive securities are exercised. In a net loss position, however, potential securities are excluded, because
they are considered anti-dilutive. Since Energie, the “predecessor company,” was an LLC, it did not have common shares
outstanding prior to the Share Exchange on July 2, 2014. Accordingly, we have prepared the calculation of Net Loss Per Share using
the weighted-average number of common shares of Holdings that were outstanding during the years ended December 31, 2016 and 2015.
The
following table presents a reconciliation of the denominators used in the computation of net loss per share – basic and
diluted:
|
|
Year
ended December 31,
|
|
|
2016
|
|
2015
|
Net
loss available for stockholders
|
|
$
|
(3,455,227
|
)
|
|
$
|
(2,995,626
|
)
|
Weighted
average outstanding shares of
common stock
|
|
|
176,839,038
|
|
|
|
74,761,927
|
|
Dilutive
effect of securities
|
|
|
—
|
|
|
|
—
|
|
Common
stock and equivalents
|
|
|
176,839,038
|
|
|
|
74,761,927
|
|
|
|
|
|
|
|
|
|
|
Net
loss per share – Basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.04
|
)
|
There
are no dilutive instruments outstanding during the years ended December 31, 2016 and 2015.