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 Wheat Ridge, Colorado, and we also maintain a production and assembly facility in Zeeland, Michigan.
Basis of Presentation
As a result of the Share Exchange, Energie is considered to be
the “accounting acquirer” and, accordingly, is treated as the predecessor company. The consolidated financial statements
include the results of operations and financial position of Energie for all periods, and the results of operations and financial
position of Holdings as of and for the year ended December 31, 2015 and for the six months ended December 31, 2014.
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 $10,048,952 and a working capital deficit of $8,569,652 as of December 31, 2015, and have reported net losses of $2,995,626
and $3,713,292, respectively, for the years ended December 31, 2015 and 2014. 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
our long-lived assets during the year ended December 31, 2014.
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.
Equity
As a result of the Share Exchange, Energie is considered to be
the “accounting acquirer” and, accordingly, is treated as the predecessor company. Accordingly, the equity presented
prior to the effective date of the Share Exchange is that of Energie, LLC. Subsequent to the effective date of the Share Exchange,
July 2, 2014, the equity presented represents the equity of Holdings.
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, 2015 and 2014, determined
that there were no material uncertain tax positions.
Prior to the Share Exchange, we were a limited liability company
(“LLC”), which is treated as a partnership for income tax purposes, where all tax obligations flow through to the
owners of the LLC during the period in which income taxes were incurred.
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, 2015 two customers represented more than 36% of our total revenues, and as of December 31, 2015,
one customer represented more than 51% of our gross accounts receivable balance.
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 May 2014, the FASB issued ASU
No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(ASU 2014-09), which amends the existing accounting
standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity
expects to be entitled when products are transferred to customers. The original effective date for ASU 2014-09 would have required
adoption beginning in the first quarter of 2018. In August 2015, the FASB issued ASU No. 2015-14,
Revenue from Contracts
with Customers (Topic 606) – Deferral of the Effective Date
, which defers the effective date of ASU 2014-09 for one
year and permits early adoption as early as the original effective date of ASU 2014-09. Accordingly, the standard may be adopted
in either the first quarter of 2018 or 2019. The new revenue standard may be applied retrospectively to each prior period presented
or retrospectively with the cumulative effect recognized as of the date of adoption. We are currently evaluating the impact of
these standards on our consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02 (ASU 2015-02),
Consolidation
(Topic 810) – Amendments to the Consolidation Analysis
. ASU 2015-02 focuses on the consolidation evaluation for reporting
organizations (public and private companies and not-for-profit organizations) that are required to evaluate whether they should
consolidate certain legal entities. We do not expect the impact of the adoption of ASU 2015-02 to be material to our consolidated
financial statements.
In April 2015, the FASB issued ASU No. 2015-03 (ASU
2015-03),
Interest-Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs
. This
ASU requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct
deduction from the carrying amount of that debt liability. This ASU will be effective for our financial statements beginning
with the quarter ending March 31, 2016. In August 2015, the FASB issued ASU No. 2015-15 (ASU
2015-15),
Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt
Issuance Costs Associated with Line-of-Credit Arrangements—Amendments to SEC Paragraphs Pursuant to Staff Announcement
at June 18, 2015 EITF Meeting (SEC Update)
. ASU 2015-15 amends subtopic 835-30 to include the SEC Staff Announcement at
the June, 18 2015 EITF meeting regarding the presentation and subsequent measurement of debt issuance costs associated with
line-of-credit arrangements. We are currently evaluating the impact of these standards on our consolidated financial
statements.
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,
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 believe this ASU will have a material impact on our financial statements.
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 – Recapitalization
On July 2, 2014, we completed the Share Exchange Agreement with
Energie. The impact to equity of the Share Exchange includes a) the issuance of 33,000,000 shares of Holdings’ common stock
at $0.05 per share, the closing price of Holdings’ stock on December 31, 2013, the date of the Share Exchange Agreement,
for total consideration effectively transferred of $1,650,000; and b) removing Holdings’ accumulated deficit and adjusting
equity for the recapitalization.
The accompanying consolidated statements of operations include
the results of the Share Exchange Agreement from the share exchange date of July 2, 2014. The pro forma effects of the acquisition
on the results of operations as if the transaction had been completed on January 1, 2013, are as follows:
|
|
Year ended December 31,
|
|
|
2014
|
Pro forma results:
|
|
|
|
|
Total net revenues
|
|
$
|
756,385
|
|
Net loss
|
|
|
(3,987,209
|
)
|
Net loss per common share:
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.08
|
)
|
The assets and liabilities of Holdings on the effective date of
the Share Exchange Agreement were as follows:
Accounts payable
|
|
$
|
363,676
|
|
|
|
|
|
|
Preferred stock
|
|
|
—
|
|
Common stock
|
|
|
194,604
|
|
Additional paid-in capital
|
|
|
91,046,859
|
|
Accumulated deficit
|
|
|
(91,605,139
|
)
|
Total stockholders’ deficit
|
|
$
|
(363,676
|
)
|
Note 3 – Receivables
Receivables consist of the following:
|
|
December 31,
|
|
|
2015
|
|
2014
|
Customer receivables
|
|
$
|
21,431
|
|
|
$
|
41,234
|
|
Less: Allowance for uncollectible accounts
|
|
|
(12,880
|
)
|
|
|
(13,897
|
)
|
|
|
$
|
8,551
|
|
|
$
|
27,337
|
|
Note 4 – Inventory
Inventory consists of the following:
|
|
December 31,
|
|
|
2015
|
|
2014
|
Raw materials
|
|
$
|
348,342
|
|
|
$
|
420,424
|
|
Less: Reserve
|
|
|
(158,191
|
)
|
|
|
(171,762
|
)
|
|
|
$
|
190,151
|
|
|
$
|
248,662
|
|
Note 5 – Intangible Assets
Amortization expense for the years ended December 31, 2015 and
2014 was $0 and $179,431, respectively. We recorded impairment expense of $972,895 during the year ended December 31, 2014.
For the year ended December 31, 2014, we determined that the carrying
value of our intangible assets was greater than their estimated fair value and recorded an impairment loss of $972,895. Fair value
was estimated using discounted, estimated future cash flows, which were projected based on recent, actual results. The estimated
future cash flows did not include the benefit of additional capital or acquisitions, as there can be no assurance that they will
occur.
Note 6 – Property and Equipment
Depreciation expense for the years ended December 31, 2015 and
2014 was $0 and $19,166, respectively. We recorded impairment expense of $4,505 during the year ended December 31, 2014.
For the year ended December 31, 2014, we determined the carrying
value of our property and equipment was greater than their estimated fair value and recorded an impairment loss of $4,505. Fair
value was estimated using discounted, estimated future cash flows, which were projected based on recent, actual results. The estimated
future cash flows did not include the benefit of additional capital or acquisitions, as there can be no assurance that they will
occur.
Note 7 – Debt
Debt consists of the following:
|
|
|
|
December 31,
|
Description
|
|
Note
|
|
2015
|
|
2014
|
Line of credit
|
|
|
A
|
|
|
$
|
47,000
|
|
|
$
|
47,000
|
|
Note payable to distribution partner
|
|
|
B
|
|
|
|
550,000
|
|
|
|
580,000
|
|
Investor debt
|
|
|
C
|
|
|
|
267,787
|
|
|
|
267,787
|
|
Related party debt
|
|
|
D
|
|
|
|
5,632,543
|
|
|
|
3,840,749
|
|
Other notes payable
|
|
|
E
|
|
|
|
66,786
|
|
|
|
57,692
|
|
Cash draw agreements
|
|
|
F
|
|
|
|
204,423
|
|
|
|
255,793
|
|
Convertible promissory notes
|
|
|
G
|
|
|
|
154,437
|
|
|
|
217,500
|
|
Total
|
|
|
|
|
|
|
6,922,976
|
|
|
|
5,266,521
|
|
Less: unamortized discount
|
|
|
|
|
|
|
(72,310
|
)
|
|
|
—
|
|
Debt, net of unamortized discount
|
|
|
|
|
|
|
6,850,666
|
|
|
|
5,266,521
|
|
Less: current portion, net of unamortized discount
|
|
|
|
|
|
|
(5,257,663
|
)
|
|
|
(2,373,307
|
)
|
Debt, long-term portion
|
|
|
|
|
|
$
|
1,593,003
|
|
|
$
|
2,893,214
|
|
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 defentants”) 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. As of April 4, 2016, the parties to this action have entered into a
settlement whereby the defendants agreed to pay to the bank the sum of $59,177 on or before April 30, 2016. In the event of a
default on this settlement agreement, the bank may request entry of a judgment against both defendants jointly and severally for
any amounts unpaid pursuant to the settlement agreement.
B
–
Note Payable to Distribution Partner
–
Note payable to a significant European distribution partner, entered into in October 2014, bearing interest at 5%
payable quarterly, with principal payable monthly through September 2019. The 2014 note payable aggregated the 2007 promissory
note, accrued interest and accounts payable.
C
–
Investor Debt –
Notes payable to
lenders having an ownership interest in Holdings at December 31, 2015 and 2014. These loans are not collateralized. The following
summarizes the terms and balances of the investor debt:
December 31,
|
|
|
2015
|
|
2014
|
|
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
|
%
|
|
10,000
|
|
|
|
10,000
|
|
|
|
24
|
%
|
$
|
267,787
|
|
|
$
|
267,787
|
|
|
|
|
|
D – Related Party Debt
– The following
summarizes notes payable to related parties.
|
|
December 31,
|
|
|
|
|
2015
|
|
2014
|
|
Interest Rate
|
|
D1
|
|
|
$
|
4,120,465
|
|
|
$
|
3,152,231
|
|
|
|
6
|
%
|
|
D2
|
|
|
|
528,214
|
|
|
|
497,130
|
|
|
|
12
|
%
|
|
D3
|
|
|
|
34,888
|
|
|
|
34,888
|
|
|
|
12
|
%
|
|
D4
|
|
|
|
280,800
|
|
|
|
156,500
|
|
|
|
24
|
%
|
|
D5
|
|
|
|
668,176
|
|
|
|
—
|
|
|
|
18
|
%
|
|
Total
|
|
|
$
|
5,632,543
|
|
|
$
|
3,840,749
|
|
|
|
|
|
D1 –
Notes payable to Symbiote, Inc. (“Symbiote”),
entered into from December 2014 to December 2015, with monthly principal and interest payable through November 2017. The 2014
notes aggregated the previous notes payable, accrued interest and accounts payable. Neither the 2014 nor the 2015 notes are convertible.
The previous note agreement gave Symbiote, at its option at any time after default, the right to convert any remaining balance
of the notes to equity at a rate equal to the proportion of the remaining balance of the note divided by $4,000,000 enterprise
value. Symbiote holds a large ownership percentage in Holdings, is the lessor of our manufacturing facility, and the provider
of our payroll services.
We evaluated the agreements for derivatives and determined
that they do not qualify for derivative treatment for financial reporting purposes, because the agreements relate to our own equity,
and the debt and the equity are not closely related. We also determined this does not qualify as a beneficial conversion feature.
D2
– Notes payable to an executive vice
president, entered into from December 2014 through December 2015, with monthly principal and interest payable through November
2017. The 2014 note aggregated previous notes payable, accrued interest and accounts payable.
D3
– Note payable to our chief executive
officer (“CEO”), entered into in December 2014, with monthly principal and interest payable through December 2016.
D4
– Notes payable to the spouse of
our CEO, entered into from September 2013 to October 2015, with principal and interest payments due upon a specific event or upon
demand.
D5
– Notes payable to the consulting
firm that employs our Chief Financial Officer, entered into in June 2015. These notes aggregated the previous accounts payable
and accrued interest due to the consulting firm. If we have not paid $300,000 by December 31, 2015, then beginning January 1,
2016, the notes are convertible into shares of our common stock at a conversion rate of 75% of the volume weighted average market
price of our stock over the 20 days preceding the notification of conversion. We determined that this conversion feature 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 is being amortized through interest expense over the life of the notes.
E
–
Other Notes Payable –
Represents
the outstanding principal balance on three separate notes bearing interest at approximately 12% annually. In the event we receive
proceeds as the beneficiary of a life insurance policy covering our majority shareholder/CEO, repayment of principal and interest
is due on these notes prior to using the proceeds for any other purpose.
F – Cash draw agreements
– Under these
agreements, the lender advances us the principal balance and then automatically withdraws a stated amount each business day. Accordingly,
there is no stated interest rate. The total remaining daily payments due under these arrangements was $284,220 as of December
31, 2015. The maturity dates of the agreements range from March to May 2016.
G
–
Convertible promissory notes –
Represents the outstanding principal balance on two separate convertible promissory notes payable to an entity with interest
of 8% annually, due in August 2016. During the third quarter of 2015, the current holder of the notes purchased all of our similar
outstanding convertible notes from another entity and consolidated those notes into two new notes. At the option of the holder,
the notes may be settled in cash or converted into shares of our common stock at any time beginning 180 days from the date of
the notes at a price equal to 61% of the average closing bid price of our common stock during the 10 trading days immediately
preceding the date of conversion. In the event we fail to pay the notes when they become due, the balance due under the notes
incurs interest at the rate of 22% per annum. The notes contain additional terms and conditions normally included in instruments
of this kind, including a right of first refusal wherein we have granted the holders the right to match the terms of any future
financing in which we engage on the same terms and contemplated in such future financing. We estimate that the fair value of the
conversion feature is minimal, so no value has been assigned to the beneficial conversion feature. During the year ended December
31, 2015, $129,642 of principal and $4,512 of accrued interest was converted into 55,948,051 shares of common stock. We also recorded
a loss on conversion of debt of $211,304 related to these transactions.
Debt issuance costs of $101,358 are being amortized over
the life of the respective notes.
The future maturities of debt are as follows:
Year ending December 31,
|
|
|
|
2016
|
|
|
$
|
5,329,973
|
|
|
2017
|
|
|
|
1,373,003
|
|
|
2018
|
|
|
|
120,000
|
|
|
2019
|
|
|
|
100,000
|
|
|
|
|
|
$
|
6,922,976
|
|
Note 8 – 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, 2015. 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, 2015, we had not made notice to Dutchess to sell any of these shares. Accordingly, the
net impact to our stockholders equity is zero.
Note 9 – Commitments and Contingencies
Current management discovered that the Company’s former management
recorded various obligations to itself and to third parties for expenditures not deemed benefitting the Company or authorized
by the Company’s sole director, as required. The amount of these unauthorized expenditures totaled $91,172, including $60,000
in management fees. These expenditures were reversed and are not part of the accompanying financial statements. While
current management believes that none of the $91,172 is an obligation of ours, it is not known what representations were
made to these vendors or whether we could, in fact, be eventually responsible to pay some or all of the indicated amount.
Future minimum rental payments required under all leases that have
remaining non-cancelable lease terms in excess of one year as of December 31, 2015, are as follows:
|
2016
|
|
|
$
|
168,811
|
|
|
2017
|
|
|
|
142,752
|
|
|
2018
|
|
|
|
28,890
|
|
|
|
|
|
$
|
340,453
|
|
Note 10 – Income Taxes
The components of the provision for income taxes are as follows:
|
|
Year ended December 31,
|
|
|
2015
|
|
2014
|
Current tax provision
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(941,497
|
)
|
|
$
|
(775,545
|
)
|
State
|
|
|
(122,690
|
)
|
|
|
(100,938
|
)
|
|
|
|
(1,064,187
|
)
|
|
|
(876,483
|
)
|
Deferred tax provision
|
|
|
|
|
|
|
|
|
Federal
|
|
|
941,497
|
|
|
|
775,545
|
|
State
|
|
|
122,690
|
|
|
|
100,938
|
|
|
|
|
1,064,187
|
|
|
|
876,483
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The components of net deferred tax assets and liabilities are as
follows:
|
|
Year ended December 31,
|
|
|
2015
|
|
2014
|
Current deferred tax asset (liability):
|
|
|
|
|
|
|
|
|
Inventory reserve
|
|
$
|
60,794
|
|
|
$
|
66,000
|
|
Warranty reserve
|
|
|
7,148
|
|
|
|
7,109
|
|
Net operating loss carryforward
|
|
|
1,940,670
|
|
|
|
876,483
|
|
Valuation allowance
|
|
|
(2,008,612
|
)
|
|
|
(949,592
|
)
|
|
|
|
—
|
|
|
|
—
|
|
Long-term deferred tax asset (liability)
|
|
|
|
|
|
|
|
|
Long-lived assets
|
|
|
124,515
|
|
|
|
136,132
|
|
Valuation allowance
|
|
|
(124,515
|
)
|
|
|
(136,132
|
)
|
|
|
|
—
|
|
|
|
—
|
|
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,
|
|
|
2015
|
|
2014
|
Income tax benefit at statutory rate
|
|
$
|
(1,018,511
|
)
|
|
$
|
(1,262,519
|
)
|
State income tax, net of Federal benefit
|
|
|
(91,540
|
)
|
|
|
(113,471
|
)
|
Change from LLC to C Corp
|
|
|
—
|
|
|
|
284,869
|
|
Amortization of debt discount
|
|
|
55,884
|
|
|
|
—
|
|
Other
|
|
|
6,765
|
|
|
|
5,477
|
|
Valuation allowance
|
|
|
1,047,402
|
|
|
|
1,085,644
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Note 11 – 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, 2015 and 2014.
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,
|
|
|
2015
|
|
2014
|
Net loss available for stockholders
|
|
$
|
(2,995,626
|
)
|
|
$
|
(3,713,292
|
)
|
Weighted average outstanding shares of
common stock
|
|
|
74,761,927
|
|
|
|
42,392,913
|
|
Dilutive effect of securities
|
|
|
—
|
|
|
|
—
|
|
Common stock and equivalents
|
|
|
74,761,927
|
|
|
|
42,392,913
|
|
|
|
|
|
|
|
|
|
|
Net loss per share – Basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.09
|
)
|
There are no dilutive instruments outstanding during the years
ended December 31, 2015 and 2014.