Notes to Condensed Consolidated Financial
Statements
For the Three and Nine Months Periods
Ended September 30, 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, 2014. 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 unaudited condensed consolidated
balance sheet as of September 30, 2018, 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 first quarter of 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 contracts with the 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 therefor 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 $22,083,023 and a working capital deficit of $21,545,632 as of September
30, 2018, and have reported net losses of $4,763,103 and $2,694,200 for the nine months ended September 30, 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 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.
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.
Prepaid Expenses and Other
We have created a joint venture with Kasper
Consulting called Kas-Exe Parking Solutions LLC (“Kas-Exe”). The purpose of the joint venture is to capitalize on attractive
business opportunities that present themselves. As of September 30, 2018, we have paid Kasper Consulting $43,148 in order to help
launch Kas-Exe. At this point, the joint venture no longer seen as viable and we are in the process of being refunded the amounts
paid to Kasper Consulting. The amount is included as prepaid expenses and other in the accompanying unaudited condensed consolidated
financial statements.
Inventory
During the third
quarter of 2018, we wrote down the full value of all inventory. We wrote down the full value of the inventory as we determined
the inventory on hand to be either obsolete or slow-moving. We included the effect of the write-down on the condensed consolidated
statements of operations in cost of goods sold.
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, net
The following is a summary of accounts receivable:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Customer receivables
|
|
$
|
37,788
|
|
|
$
|
35,821
|
|
Less: Allowance for uncollectible accounts
|
|
|
(35,821
|
)
|
|
|
(35,821
|
)
|
|
|
$
|
1,967
|
|
|
$
|
–
|
|
Note 3 — Debt, net
Debt is comprised of the following:
Description
|
|
Note
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Line of credit
|
|
A
|
|
$
|
6,531
|
|
|
$
|
31,588
|
|
Note payable to distribution partner
|
|
B
|
|
|
550,000
|
|
|
|
550,000
|
|
Investor debt
|
|
C
|
|
|
371,507
|
|
|
|
371,507
|
|
Related party debt
|
|
D
|
|
|
12,659,270
|
|
|
|
10,038,037
|
|
Other notes payable
|
|
E
|
|
|
642,444
|
|
|
|
1,021,937
|
|
Cash draw notes
|
|
F
|
|
|
717,590
|
|
|
|
338,083
|
|
Convertible promissory notes
|
|
G
|
|
|
58,937
|
|
|
|
58,937
|
|
Total
|
|
|
|
|
15,006,279
|
|
|
|
12,410,089
|
|
Less: unamortized discount and debt
issuance costs
|
|
|
|
|
(530,979
|
)
|
|
|
(484,948
|
)
|
Debt, net of unamortized discount and debt issuance costs
|
|
|
|
|
14,475,300
|
|
|
|
11,925,141
|
|
Less: current portion
|
|
|
|
|
(13,902,742
|
)
|
|
|
(11,249,083
|
)
|
Debt, long-term portion
|
|
|
|
$
|
572,558
|
|
|
$
|
676,058
|
|
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. 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
principal balance at September 30, 2018 was $6,531.
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 September 30, 2018 and December 31, 2017.
These loans are not collateralized. The following summarizes the terms and balances of the investor debt:
September 30,
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
–
Related Parties Debt –
The following
summarizes notes payable to related parties:
|
|
September 30,
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
|
|
|
6,416,733
|
|
|
|
3,799,500
|
|
|
6%
|
Total
|
|
$
|
12,659,270
|
|
|
$
|
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 a shareholder, is the lessor of our manufacturing facility, and the provider of our payroll
services. We also owe Symbiote $1,565,207 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 our CEO $939,681 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 $245,444 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. These notes
mature at various dates through December 2019. We also owe this firm $456,673 in accrued interest.
D5
– Notes
payable to the principal shareholders of Symbiote, entered into from April 2016 to September 2018, with principal and interest
payments due upon a specific event or upon demand. We also owe them $264,492 in accrued interest.
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. 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 $717,590 as of September 30, 2018. The maturity dates of the agreements range from November 2018 to January
2019. During 2018, judgment was entered against us and in favor of ML Factors Funding, Green Capital Funding, and Queen Funding,
whereby we are required to pay the outstanding principal and interest balance on the agreements. In addition, ML Factors Funding,
Green Capital Funding, and Queen Funding also claim that they are to be paid additional interest, attorney’s fees, and other
ancillary expenses. While we are vigorously defending ourselves in these matters and believe that we will not be required to pay
more than the total principal and interest outstanding on the agreements, we have recorded the entire amount of all judgments into
our financial statements as of September 30, 2018. We recorded the entire requested amount from ML Factors Funding of $240,480,
the entire requested amount from Green Capital Funding of $312,056, and the entire requested amount from Queen Funding of $304,826.
In addition, we have reclassified these amounts to accrued liabilities.
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 $530,979 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 the paragraph below as well as in Notes 3 (E), 3 (F), and 3 (G).
During November 2017, Autumnwood Investments,
LLC requested a summary judgment for a note that was 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 due to Autumwood. 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 to Autumnwood by the court. The principal balance of the note has been reclassified from debt to accrued liabilities. The
interest that had accrued on the note was already included in accrued liabilities.
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 nine months ended September 30, 2018 and 2017.
Note 6 — Subsequent Events
There are no events subsequent to September 30, 2018 and up
to the date of this filing that require disclosure.