Notes to Condensed Consolidated Financial
Statements
For the Three Month Periods Ended March
31, 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 December
31, 2016, 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 period ended December 31, 2016.
Going Concern
As shown in the accompanying condensed consolidated financial statements,
we had an equity deficit of $14,117,844 and a working capital deficit of $13,934,294 as of March 31, 2017, and have reported net
losses of $816,917 and $890,586 for the three months ended March 31, 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 January 2017, the FASB issued ASU No. 2017-01,
Clarifying
the Definition of a Business (Topic 805)
(ASU 2017-01). ASU 2017-01 changes the definition of a business to assist entities
with evaluating when a set of transferred assets and activities is a business. ASU 2017-01 requires an entity to evaluate
if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group
of similar identifiable assets; if so, the set of transferred assets and activities is not a business. ASU 2017-01 also
requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning
it with how outputs are described in ASC 606. ASU 2017-01 is effective for annual reporting periods beginning after December
15, 2017, and for interim periods within those years. We do not expect this ASU to have a significant impact on our consolidated
financial statements and related disclosures.
Note 2 — Accounts receivable
The following is a summary of accounts receivable:
|
|
March
31, 2017
|
|
December
31, 2016
|
|
|
|
|
|
Customer
receivables
|
|
$
|
35,412
|
|
|
$
|
14,432
|
|
Less: Allowance
for uncollectible accounts
|
|
|
(14,401
|
)
|
|
|
(14,401
|
)
|
|
|
$
|
21,011
|
|
|
$
|
31
|
|
Note 3 — Inventory
The following is a summary of inventory:
|
|
March
31, 2017
|
|
December
31, 2016
|
|
|
|
|
|
Raw
materials
|
|
$
|
326,848
|
|
|
$
|
332,612
|
|
Less:
reserve
|
|
|
(175,434
|
)
|
|
|
(175,434
|
)
|
|
|
$
|
151,414
|
|
|
$
|
157,178
|
|
Note
4 — Debt
Debt is comprised of the
following:
Description
|
|
Note
|
|
March
31,
2017
|
|
December
31,
2016
|
Line
of credit
|
|
|
A
|
|
|
$
|
47,000
|
|
|
$
|
47,000
|
|
Note
payable to distribution partner
|
|
|
B
|
|
|
|
550,000
|
|
|
|
550,000
|
|
Investor
debt
|
|
|
C
|
|
|
|
371,507
|
|
|
|
371,507
|
|
Related
party debt
|
|
|
D
|
|
|
|
7,352,979
|
|
|
|
6,719,979
|
|
Other
notes payable
|
|
|
E
|
|
|
|
980,837
|
|
|
|
981,137
|
|
Cash
draw notes
|
|
|
F
|
|
|
|
297,628
|
|
|
|
211,076
|
|
Convertible
promissory notes
|
|
|
G
|
|
|
|
58,937
|
|
|
|
71,637
|
|
Total
|
|
|
|
|
|
|
9,658,888
|
|
|
|
8,952,336
|
|
Less: unamortized
discount and debt issuance costs
|
|
|
|
|
|
|
(350,916
|
)
|
|
|
(280,555
|
)
|
Debt,
net of unamortized discount and debt issuance costs
|
|
|
|
|
|
|
9,307,972
|
|
|
|
8,671,781
|
|
Less: current
portion
|
|
|
|
|
|
|
(9,117,972
|
)
|
|
|
(8,451,781
|
)
|
Debt,
long-term portion
|
|
|
|
|
|
$
|
190,000
|
|
|
$
|
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 March 31, 2017 and December 31, 2016. These
loans are not collateralized. The following summarizes the terms and balances of the investor debt:
|
|
|
March
31,
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:
|
|
March
31,
2017
|
|
December
31, 2016
|
|
Interest
Rate
|
|
D1
|
|
|
$
|
4,635,865
|
|
|
$
|
4,635,865
|
|
|
|
various
|
|
|
D3
|
|
|
|
34,888
|
|
|
|
34,888
|
|
|
|
12
|
%
|
|
D4
|
|
|
|
365,550
|
|
|
|
365,550
|
|
|
|
various
|
|
|
D5
|
|
|
|
668,176
|
|
|
|
668,176
|
|
|
|
18
|
%
|
|
D6
|
|
|
|
1,648,500
|
|
|
|
1,024,500
|
|
|
|
6
|
%
|
|
Total
|
|
|
$
|
7,352,979
|
|
|
$
|
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 $351,900 in 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. We also owe Hal $718,941 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 $462,099 in accounts payable.
D6
–
Notes payable to the principal shareholders of Symbiote, entered into from April to March 2017, with principal and interest payments
due upon a specific event or upon demand.
E
–
Other
Notes Payable –
Represents the outstanding principal balance on four separate notes bearing interest at between 6% and
24% annually. In the event we receive proceeds as the beneficiary of a life insurance policy covering our majority shareholder/CEO,
repayment of principal and interest is due on one of these notes prior to using the proceeds for any other purpose.
F – Cash draw
agreements
– Under these agreements, the lender advances us the principal balance and then automatically withdraws a
stated amount each business day. Accordingly, there is no stated interest rate. The total remaining daily payments due under these
arrangements was $424,341 as of March 31, 2017. The maturity dates of the agreements range from June to September 2017.
G
–
Convertible promissory
notes –
Represents the outstanding principal balance on a convertible promissory note payable to an entity with interest
of 8% annually, that were due in August 2016. 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. As we have failed to pay
the note when it became due, the balance due incurs interest at the rate of 22% per annum. The note contains 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.
Debt issuance costs of $350,916 are
being amortized over the life of the respective notes.
Note 5 — Commitments
and Contingencies
To the best of the Company’s
knowledge and belief, no legal proceedings of merit are currently pending or threatened against the Company, other than those
described in Note 4.
Note 6 — Subsequent Events
There are no events subsequent to
March 31, 2017 and up to the date of this filing that would require disclosure.
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 months ended March 31, 2017 and 2016.