Notes
to Condensed Consolidated Financial Statements
For
the Three and Nine Month Periods Ended September 30, 2017 and 2016
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. 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, Énergie LLC (hereinafter referred to as, “Énergie”). 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 Énergie.
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. 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 Arvada, Colorado, and we also maintain a production and assembly
facility in Zeeland, Michigan.
Basis
of Presentation
The
accompanying condensed consolidated balance sheet as of September 30, 2017, 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, 2016.
Going
Concern
As
shown in the accompanying condensed consolidated financial statements, we had an equity deficit of $15,995,127 and a working capital
deficit of $15,871,327 as of September 30, 2017, and have reported net losses of $2,694,200 and $2,575,522 for the nine months
ended September 30, 2017 and 2016, 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 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.
Recently
Issued Accounting Pronouncements
In
July 2017, the FASB issued ASU No. 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480)
and Derivatives and Hedging (Topic 815)
(ASU 2017-11). ASU 2017-11 eliminates the requirement to consider “down round”
features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s
own stock. ASU 2017-11 is effective for annual periods beginning after December 15, 2018, and for interim periods within
those years, with early adoption permitted. We are currently assessing whether or not this ASU will have a significant impact
on our consolidated financial statements and related disclosures.
The
Financial Accounting Standards Board and other entities have issued other new or modifications to, or interpretations of, existing
accounting guidance during 2017. Management has carefully considered the new pronouncements that altered generally accepted accounting
principles and does not believe that any other new or modified principles will have a material impact on the Company’s reported
financial position or operations in the near term.
Note 2 — Accounts receivable
The
following is a summary of accounts receivable:
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
|
|
|
Customer receivables
|
|
$
|
37,806
|
|
|
$
|
14,432
|
|
Less: Allowance for uncollectible accounts
|
|
|
(35,381
|
)
|
|
|
(14,401
|
)
|
|
|
$
|
2,425
|
|
|
$
|
31
|
|
Note
3 — Inventory
The
following is a summary of inventory:
|
|
September 30, 2017
|
|
December 31, 2016
|
|
|
|
|
|
Raw materials
|
|
$
|
327,277
|
|
|
$
|
332,612
|
|
Less: reserve
|
|
|
(175,434
|
)
|
|
|
(175,434
|
)
|
|
|
$
|
151,843
|
|
|
$
|
157,178
|
|
Note
4 — Debt
Debt
is comprised of the following:
Description
|
|
Note
|
|
September 30,
2017
|
|
December 31,
2016
|
Line of credit
|
|
|
A
|
|
|
$
|
41,588
|
|
|
$
|
47,000
|
|
Note payable to distribution partner
|
|
|
B
|
|
|
|
550,000
|
|
|
|
550,000
|
|
Investor debt
|
|
|
C
|
|
|
|
371,507
|
|
|
|
371,507
|
|
Related party debt
|
|
|
D
|
|
|
|
8,777,979
|
|
|
|
6,719,979
|
|
Other notes payable
|
|
|
E
|
|
|
|
981,137
|
|
|
|
981,137
|
|
Cash draw notes
|
|
|
F
|
|
|
|
260,767
|
|
|
|
211,076
|
|
Convertible promissory notes
|
|
|
G
|
|
|
|
58,937
|
|
|
|
71,637
|
|
Total
|
|
|
|
|
|
|
11,041,915
|
|
|
|
8,952,336
|
|
Less: unamortized discount and debt issuance costs
|
|
|
|
|
|
|
(465,074
|
)
|
|
|
(280,555
|
)
|
Debt, net of unamortized discount and debt issuance costs
|
|
|
|
|
|
|
10,576,841
|
|
|
|
8,671,781
|
|
Less: current portion
|
|
|
|
|
|
|
(10,446,841
|
)
|
|
|
(8,451,781
|
)
|
Debt, long-term portion
|
|
|
|
|
|
$
|
130,000
|
|
|
$
|
220,000
|
|
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. Énergie 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 the 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 (the “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. On May 10, 2017, the bank agreed to stay further execution on the judgment so long as the defendants pay the balance of
the judgment in monthly payments of $5,000 per month on the fifteenth of each month, commencing on May 15, 2017. Under this agreement,
interest will continue to accrue at the judgment interest rate.
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 September 30, 2017 and
December 31, 2016. These loans are not collateralized. The following summarizes the terms and balances of the investor debt:
|
|
|
September 30,
2017
|
|
December 31, 2016
|
|
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
|
|
|
|
113,720
|
|
|
|
various
|
|
$
|
371,507
|
|
|
$
|
371,507
|
|
|
|
|
|
D
–Related Parties Debt –
The following summarizes notes payable to related parties:
|
|
September 30,
2017
|
|
December 31, 2016
|
|
Interest Rate
|
|
D1
|
|
|
$
|
4,635,865
|
|
|
$
|
4,635,865
|
|
|
|
various
|
|
|
D3
|
|
|
|
34,888
|
|
|
|
34,888
|
|
|
|
12
|
%
|
|
D4
|
|
|
|
362,550
|
|
|
|
356,550
|
|
|
|
various
|
|
|
D5
|
|
|
|
668,176
|
|
|
|
668,176
|
|
|
|
18
|
%
|
|
D6
|
|
|
|
3,076,500
|
|
|
|
1,024,500
|
|
|
|
6
|
%
|
|
Total
|
|
|
$
|
8,777,979
|
|
|
$
|
6,719,979
|
|
|
|
|
|
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 $438,217 in accounts payable.
D3
–
Note payable to our Chief Executive Officer (“CEO”), entered into in December 2014, with monthly principal
and interest originally payable through December 2016. We are still continuing to accrue interest on this note payable. We also
owe our CEO $775,342 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 March 2017, 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 $511,382 in accounts payable.
D6 –
Notes payable to the principal shareholders of Symbiote, entered into from April to September 2017, with principal and interest
payments due upon a specific event or upon demand.
E
– Other Notes Payable –
Represents the outstanding principal balance on six 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
of principal and interest due under these arrangements was $341,225 as of September 30, 2017. The maturity dates of the agreements
range from October 2017 to January 2018.
G
– Convertible promissory notes –
Represents the outstanding principal balance related to a convertible promissory
note entered into during October 2014. During February 2017, the Company and LG Capital Funding, LLC (“LG”) entered
into an agreement to settle all principal and interest related to an outstanding note with a face amount of $58,937 for $75,000,
with payment being due in March 2017. The Company did not make the payment, and LG has brought an action against the Company
in the Southern District of New York to collect damages for the breach, including consequential damages. The Company is
disputing this matter and is vigorously defending itself against the matter.
Debt
issuance costs of $465,074 are being amortized over the life of the respective notes.
Note
5 — Related Party Transactions
Parties
are considered related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are
controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its
management, members of the immediate families of principal owners of the Company and its management and other parties with which
the Company may deal if one party controls or can significantly influence the management or operating policies of the other to
an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses
all related party transactions.
During
the quarter ended September 30, 2017, the Company made payments totaling $21,270 on behalf of an entity related via common ownership.
As of September 30, 2017, the Company had not been reimbursed for any of these expenses.
See
Note 4 for additional disclosures concerning debt due to related parties.
Note
6 — Commitments and Contingencies
To
the best of the Company’s knowledge and belief, no current legal proceedings of merit are currently pending or threatened
against the Company, other than those described in Note 4 (G).
Note
7 — 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.
There
are no dilutive instruments outstanding during the three and nine months ended September 30, 2017 and 2016.
Note
8 — Subsequent Events
There
are no events subsequent to September 30, 2017 and up to the date of this filing that would require disclosure.