Notes to
Condensed Consolidated Financial Statements
For the
Three Month Periods Ended March 31, 2018 and 2017
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. We issued 33,000,000 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.
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 December 31, 2017, has been derived from our 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, 2017.
Significant
Accounting Policy Updates
Revenue Recognition
During the three months ended March 31, 2018,
we adopted the following accounting principles related to revenue recognition: (a) FASB ASU 2016-12 “
Revenue from Contracts
with Customers (Topic 606)
;” (b) FASB ASU 2016-11 “
Revenue Recognition (Topic 605) and Derivatives and Hedging
(Topic 815)
;” and (c) FASB ASU 2016-10 “
Revenue from Contracts with Customers (Topic 606)
.” Due to
the nature of our contracts with customers, adopting the new accounting principles did not have a significant impact on our prior
period results of operations, cash flows or financial position.
Our revenues arise from contracts with customers
and consists of operations segment product sales. The majority of our revenue is derived from distinct performance obligations,
such as the delivery of a specific product.
We may also enter into contracts with customers
that identify a single, or few, distinct performance obligations, but that also have non-distinct, underlying performance obligations.
These contracts are typically fulfilled within one to three months. Only an insignificant portion of our revenue would
be assessed for allocation between distinct (contractual) performance obligations and non-distinct deliverables between reporting
periods and, accordingly, we do not record a contract asset for completed, non-distinct performance obligations prior to invoicing
the customer.
We recognize revenue when the following criteria
are met:
Identify the contract(s) with customer
–
our customary practice is to obtain written evidence, typically in the form of a contract or purchase order.
Identify the performance obligations in
the contract
–
we have rights to payment 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.
Determine the transaction price
–
prices are typically fixed and no price protections or variables are offered.
Allocate the transaction price to the performance
obligations
– our contracts disclose exact products and therefore allocate the transaction price by individual product.
Recognize revenue when (or as) the
performance obligation is satisfied
– payment terms are typically zero to fifteen days within delivery of the good.
Customer deposits are contract liabilities
with customers that represent our obligation to either transfer goods or services in the future, or refund the amount received.
Customer deposits are recognized as revenue as we perform under the contract.
Going Concern
As shown in
the accompanying condensed consolidated financial statements, we had an equity deficit of $18,496,724 and a working capital deficit
of $17,886,437 as of March 31, 2018, and have reported net losses of $1,176,804 and $816,917 for the three months ended March
31, 2018 and 2017, 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
The Financial
Accounting Standards Board and other entities have issued other new or modifications to, or interpretations of, existing accounting
guidance during 2018. 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:
|
|
March 31, 2018
|
|
December 31, 2017
|
|
|
|
|
|
Customer receivables
|
|
$
|
35,821
|
|
|
$
|
35,821
|
|
Less: Allowance for uncollectible accounts
|
|
|
(35,821
|
)
|
|
|
(35,821
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Note 3 — Debt
Debt is comprised of the
following:
Description
|
|
Note
|
|
March 31,
2018
|
|
December 31,
2017
|
Line of credit
|
|
|
A
|
|
|
$
|
16,531
|
|
|
$
|
31,588
|
|
Note payable to distribution partner
|
|
|
B
|
|
|
|
550,000
|
|
|
|
550,000
|
|
Investor debt
|
|
|
C
|
|
|
|
371,507
|
|
|
|
371,507
|
|
Related party debt
|
|
|
D
|
|
|
|
11,021,537
|
|
|
|
10,038,037
|
|
Other notes payable
|
|
|
E
|
|
|
|
1,017,437
|
|
|
|
1,021,937
|
|
Cash draw notes
|
|
|
F
|
|
|
|
343,122
|
|
|
|
338,083
|
|
Convertible promissory notes
|
|
|
G
|
|
|
|
58,937
|
|
|
|
58,937
|
|
Total
|
|
|
|
|
|
|
13,379,071
|
|
|
|
12,410,089
|
|
Less: unamortized discount and debt issuance costs
|
|
|
|
|
|
|
(574,508
|
)
|
|
|
(484,948
|
)
|
Debt, net of unamortized discount and debt issuance costs
|
|
|
|
|
|
|
12,804,563
|
|
|
|
11,925,141
|
|
Less: current portion
|
|
|
|
|
|
|
(12,163,005
|
)
|
|
|
(11,249,083
|
)
|
Debt, long-term portion
|
|
|
|
|
|
$
|
641,558
|
|
|
$
|
676,058
|
|
A
– L
i
ne of Cr
e
d
i
t
– 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. 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 continues to accrue at the judgment
interest rate. The current principal balance is $16,531.
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 March 31, 2018 and
December 31, 2017. These loans are not collateralized. The following summarizes the terms and balances of the investor debt:
|
|
|
March 31,
2018
|
|
December 31, 2017
|
|
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
–
Re
l
a
t
ed
Par
t
ies Debt –
The following summarizes notes payable to related parties:
|
|
March 31,
2018
|
|
December 31, 2017
|
|
Interest Rate
|
|
D1
|
|
|
$
|
4,635,865
|
|
|
$
|
4,635,865
|
|
|
|
various
|
|
|
D2
|
|
|
|
34,888
|
|
|
|
34,888
|
|
|
|
12
|
%
|
|
D3
|
|
|
|
366,550
|
|
|
|
362,550
|
|
|
|
various
|
|
|
D4
|
|
|
|
1,205,234
|
|
|
|
1,205,234
|
|
|
|
18
|
%
|
|
D5
|
|
|
|
4,779,000
|
|
|
|
3,799,500
|
|
|
|
6
|
%
|
|
Total
|
|
|
$
|
11,021,537
|
|
|
$
|
10,038,037
|
|
|
|
|
|
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 the Company, is the lessor of our
manufacturing facility, and the provider of our payroll services. We also owe Symbiote $1,370,666 in accounts payable and accrued
interest.
D2
– 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 Hal $895,424 in accrued compensation, accrued interest, and expenses incurred on behalf of the Company.
D3
– Notes payable to the spouse of our CEO, entered into from September 2013 to January 2018, with principal and interest
payments due upon a specific event or upon demand. We also owe her $214,571 in accrued interest.
D4
–
Notes payable to the consulting firm that employs our Chief Financial Officer, entered into from June 2015 to December 2017. These
notes aggregated previous accounts payable and accrued interest due to the consulting firm at the time the notes were made. As
of January 1, 2016, three of 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 over the
life of the notes. We also owe this firm $347,905 in accrued interest.
D5
–
Notes payable to the principal shareholders of Symbiote, entered into from April 2016 to March 2018, with principal and
interest payments due upon a specific event or upon demand. We also owe them $147,562 in accrued interest.
E
–
O
t
h
er
No
t
es Pay
a
b
l
e
–
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. During November 2017,
one of these noteholders requested a summary judgment for a note that is in default as principal and interest payments were not
made in accordance with the note. The note had consolidated past due rent amounts and interest to one of our former landlords.
In January 2018, a summary judgment in the amount of $475,832, which represents the total principal and interest outstanding on
the note as of October 31, 2017 was granted by the court.
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 $465,887 as of March 31,2018. The maturity dates of the agreements
range from April to June 2018.
G
–
Convertible promissory notes –
Represents the outstanding principal balance related to a convertible
promissory note entered into during October 2014. In May 2017, LG Capital Funding LLC (“LG”), filed a complaint
against us in the U.S. District Court for the Southern District of New York, Civil Action No. 17-cv-4006-(RJS), alleging that
we owed LG the principal balance of $75,000 plus interest, costs and attorneys’ fees, arising out of two convertible notes
issued to LG. LG amended its complaint in July 2017 and we filed our answer a week later denying any liability and affirmatively
stating that LG had been repaid many times over. LG then immediately filed a pre-discovery motion for summary judgment. We submitted
our opposition to the motion on September 25, 2017. LG filed reply papers in further support on October 5, 2017. LG asserts that
no factual issues exist and that summary judgment is therefore appropriate. Our opposition asserts that summary judgment, as to
both liability and damages, is woefully premature and unwarranted given the many factual issues that exist regarding, among other
things, LG’s failure to disclose material facts, potential short selling and fraudulent concealment, usury, and fraud on
the market. The motion remains pending before the Court.
Our defense
in this matter is based in part on a separate action filed by the Securities and Exchange Commission against unrelated defendants
in the U.S. District Court for the Southern District of Florida alleging that the defendant there, which follows the same business
model as LG, has violated federal securities laws by not registering as a dealer. We understand that LG also was not and is not
registered as a dealer even though it too should be given it too trades securities for its own account as part of its business.
The SEC asserts that all gains reaped by defendants in the attached complaint should be disgorged due to the ill-gotten gains
received. LG has, admittedly, likewise received substantial profits trading our stock for its own account.
As a result,
we have filed an amended answer, alleging that LG is entitled to no recovery, and that it should disgorge to us all gains unlawfully
received from selling our shares of common stock.
Debt issuance costs of $574,508
are being amortized over the life of the respective notes.
Note 4 — 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 3 (E) and 3 (G).
Note 5 — 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 months ended March 31, 2018 and 2017.
Note 6 — Subsequent Events
There are no events subsequent
to March 31, 2018 and up to the date of this filing that require disclosure.