Attached files

file filename
EX-32 - CERTIFICATION PURSUANT TO 18 USC, SECTION 1350, - ExeLED Holdings Inc.eled10q111616ex32.htm
EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - ExeLED Holdings Inc.eled10q111616ex31_2.htm
EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - ExeLED Holdings Inc.eled10q111616ex31_1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

 

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________ to _______________.

 

Commission file number: 000-28562

 

EXELED HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

Delaware

(State or other jurisdiction of

incorporation or organization)

 

94-2857548

(I.R.S. Employer

Identification No.)

 

4885 Ward Road, Suite 300,

Wheat Ridge, CO

(Address of principal executive offices)

 

80033

(Zip Code)

 

Registrant’s telephone number, including area code: (720) 963-8055

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes X No __

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer __ Accelerated filer __ Non-accelerated filer __ Smaller reporting company X
    (Do not check if a smaller reporting company)  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes __ No X

 

As of November 16, 2016, there were 249,447,433 shares of common stock, $0.0001 par value, issued and outstanding.

 
 

 

EXELED HOLDINGS INC.

Table of Contents

 

Part I – FINANCIAL INFORMATION  
     
Item 1. Financial Statements 1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
Item 4. Controls and Procedures 13
     
Part II – OTHER INFORMATION  
     
Item 1. Legal Proceedings 13
Item 1A. Risk Factors 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14
Item 3. Defaults upon Senior Securities 14
Item 4. Mine Safety Disclosures 14
Item 5. Other Information 14
Item 6. Exhibits 14

 

 
 

 

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

 

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements”. Forward-looking statements are based upon our current assumptions, expectations and beliefs concerning future developments and their potential effect on our business. In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “approximately,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing,” or the negative of these terms or other comparable terminology, although the absence of these words does not necessarily mean that a statement is not forward-looking. This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from the future results, performance or achievements expressed or implied by any forward-looking statements.

 

Factors that may cause or contribute actual results to differ from these forward-looking statements include, but are not limited to, for example:

 

• adverse economic conditions;

• risks related to the construction market;

• risks related to the U.S. import market;

• the inability to attract and retain qualified senior management and technical personnel;

• other risks and uncertainties related to the changing lighting market and our business strategy.

 

All forward-looking statements speak only as of the date of this Report. We undertake no obligation to update any forward-looking statements or other information contained herein, except as may be required under applicable securities laws. Stockholders and potential investors should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements in this report are reasonable, we cannot assure stockholders and potential investors that these plans, intentions or expectations will be achieved.

 

These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of the Quarterly Report on Form 10-Q. All subsequent written and oral forward-looking statements concerning other matters addressed in this Quarterly Report on Form 10-Q and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Quarterly Report on Form 10-Q.

 

 
 

 

PART I. Financial Information

 

Item 1. Financial Statements

 

EXELED HOLDINGS INC.

Condensed Consolidated Balance Sheets

 

  

September 30, 2016

(Unaudited)

 

 

December 31, 2015

ASSETS          
           
Current assets:          
   Cash and cash equivalents  $5,012   $17,987 
   Accounts receivable, net   1,263    8,551 
   Inventory   171,154    190,151 
   Prepaid expenses and other   53,023    52,759 
Total current assets   230,452    269,448 
           
Noncurrent assets:          
   Deposits   11,695    12,345 
           
  Total assets  $242,147   $281,793 
           
LIABILITIES AND EQUITY          
Current liabilities:          
   Accounts payable  $3,268,848   $2,505,397 
   Accrued liabilities   1,568,667    1,076,040 
   Debt, current portion, net of discount and debt issuance costs   7,255,538    5,156,305 
Total current liabilities   12,093,053    8,737,742 
           
Debt, long-term portion   570,316    1,593,003 
   Total liabilities   12,663,369    10,330,745 
           
           
Commitments and contingencies (Note 5)   —      —   
           
Equity:          
Preferred stock, $.0001 par value; 5,000,000 shares
authorized; no shares issued and outstanding at
September 30, 2016 or December 31, 2015
   —      —   
Common stock, $.0001 par value; 250,000,000 shares
authorized; 249,447,433 and 113,914,718 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively
   24,743    11,191 
Additional paid-in capital   2,635,896    2,446,196 
Accumulated deficit   (15,081,861)   (12,506,339)
  Total deficit   (12,421,222)   (10,048,952)
           
Total liabilities and equity  $242,147   $281,793 
           

 

See accompanying notes to condensed consolidated financial statements.

 

 

EXELED HOLDINGS INC.

Condensed Consolidated Statements of Operations

(Unaudited)

 

   Three months ended September 30,  Nine months ended September 30,
   2016  2015  2016  2015
             
Sales revenue  $26,836   $117,002   $331,983   $421,636 
Cost of goods sold   (18,785)   (66,767)   (176,792)   (212,759)
   Gross profit   8,051    50,235    155,191    208,877 
                     
Operating expenses:                    
   Research and development   68,560    64,715    212,166    192,087 
   Sales and marketing   6,168    28,882    45,479    98,784 
   General and administrative   359,877    275,301    967,079    1,060,021 
Total operating expenses   434,605    368,898    1,224,724    1,350,892 
                     
Loss from operations   (426,554)   (318,663)   (1,069,533)   (1,142,015)
                     
Other income (expense):                    
   Interest expense   (475,981)   (365,861)   (1,357,481)   (856,817)
   Other income   (73,457)   (10,041)   (148,508)   (27,571)
Other income (expense), net   (549,438)   (375,902)   (1,505,989)   (884,388)
                     
Net loss  $(975,992)  $(694,565)  $(2,575,522)  $(2,026,403)
                     
Net loss per common share:                    
  Basic and diluted  $(0.01)  $(0.01)  $(0.02)  $(0.03)
                     
Weighted average common shares outstanding:                    
  Basic and diluted   168,604,321    70,112,403    151,814,179    64,985,322 

 

See accompanying notes to condensed consolidated financial statements

 


EXELED HOLDINGS INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

   Nine months ended September 30,
   2016  2015
Operating Activities:          
  Net loss  $(2,575,522)  $(2,026,403)
  Adjustments to reconcile net loss to net cash used in operating          
     activities:          
    Amortization of debt issuance costs and debt discount   274,625    132,564 
    Common stock issued for services   —      40,400 
    Loss on conversion of debt   114,791    —   
Changes in operating assets and liabilities (net of Share Exchange):          
  Accounts receivable   7,288    12,087 
  Inventory   18,997    15,240 
  Prepaid expenses and other   (264)   17,960 
  Deposits   650    (650)
  Accounts payable   763,451    785,683 
  Accrued liabilities   498,288    400,156 
Net cash used in operating activities   (897,696)   (622,963)
           
Financing Activities:          
  Proceeds from debt   1,253,921    1,287,112 
  Payments of debt   (369,200)   (704,601)
Net cash provided by financing activities   884,721    582,511 
           
Net change in cash   (12,975)   (40,452)
           
Cash, beginning of period   17,987    43,879 
           
Cash, end of period  $5,012   $3,427 
           
Cash paid for:          
  Interest  $420,949   $279,060 
  Taxes   —      —   
Non-cash transactions:          
  Debt and accrued interest converted to common stock  $82,800   $99,307 
  Accounts payable and accrued interest converted to debt  $—     $706,229 

 

See accompanying notes to condensed consolidated financial statements.

 

EXELED HOLDINGS INC.

Notes to Condensed Consolidated Financial Statements

 

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. We have two wholly-owned subsidiaries, Energie LLC (hereinafter referred to as “Energie”), and OELC, LLC.

 

All references herein to “us,” “we,” “our,” “Holdings,” or the “Company” refer to ExeLED Holdings Inc. and its subsidiaries.

 

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 Wheat Ridge, 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, 2015, has been derived from audited financial statements. The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual audited financial statements and in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. In the opinion of management, such unaudited information includes all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of this interim information. All intercompany transactions have been eliminated in consolidation. Operating results and cash flows for interim periods are not necessarily indicative of results that can be expected for the entire year. The information included in this report should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015.

 

Significant Accounting Policies

 

In accordance with the FASB’s issuance of ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03) and ASU No. 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), we have changed our presentation of debt issuance costs. Consistent with the application of ASU 2015-03 and 2015-15, we now present debt issuance costs as a direct deduction from the carrying amount of that debt rather than as an asset on the condensed consolidated balance sheet. The impact of this change on the condensed consolidated financial statements for the nine months ended September 30, 2016, was a decrease of total assets and a decrease of debt and total liabilities of $236,017. The impact of this change on the condensed consolidated financial statements for the year ended December 31, 2015 was a decrease of total assets and a decrease of debt and total liabilities of $101,358. The change had no impact on shareholders’ equity (deficit) or net loss in either period.

 

 

Going Concern

 

As shown in the accompanying condensed consolidated financial statements, we had an equity deficit of $12,421,222 and a working capital deficit of $11,862,601 as of September 30, 2016, and have reported net losses of $2,575,522 and $2,026,403 for the nine months ended September 30, 2016 and 2015, 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.

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform with the current year presentation.

 

Recently Issued Accounting Pronouncements

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-10). Stakeholders indicated that there is a diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Adoption of ASU 2016-15 will not have a significant impact on our statement of cash flows.

 


Note 2 — Accounts receivable

 

The following is a summary of accounts receivable:

   September 30, 2016 

 

December 31, 2015

           
Customer receivables  $15,664   $21,431 
Less:  Allowance for uncollectible accounts   (14,401)   (12,880)
   $1,263   $8,551 

 

Note 3 — Inventory

 

The following is a summary of inventory:

   September 30, 2016  December 31, 2015
           
Raw materials  $329,345   $348,342 
Less: reserve   (158,191)   (158,191)
   $171,154   $190,151 

 

Note 4 — Debt

 

Debt is comprised of the following:

 

Description  Note 

September 30,

2016

 

December 31,

2015

Line of credit   A   $47,000   $47,000 
Note payable to distribution partner   B    550,000    550,000 
Investor debt   C    371,507    267,787 
Related party debt   D    6,773,443    5,632,543 
Other notes payable   E    84,230    66,786 
Cash draw notes   F    164,054    204,423 
Convertible promissory notes   G    71,637    154,437 
Total        8,061,871    6,922,976 
Less:  unamortized discount and debt issuance costs        (236,017)   (173,668)
Debt, net of unamortized discount and debt issuance costs        7,825,854    6,749,308 
Less:  current portion        (7,255,538)   (5,156,305)
Debt, long-term portion       $570,316   $1,593,003 

 

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. 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. 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. Energie is currently making payments to resolve this obligation.

 

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 September 30, 2016 and December 31, 2015. These loans are not collateralized. The following summarizes the terms and balances of the investor debt:

September 30, 2016

December 31, 2015

 

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 10,000 various
$ 371,507 $ 267,787  

 

D Related Party Debt – The following summarizes notes payable to related parties:

 

 

September 30, 2016

December 31, 2015

 

Interest Rate

D1 $ 4,635,865 $ 4,120,465 various
D2 528,214 528,214 various
D3 34,888 34,888 12%
D4 316,800 280,800 various
D5 668,176 668,176 18%
D6 589,500 -- 6%
Total $ 6,773,443 $ 5,632,543  

 

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 holds a large ownership percentage in Holdings, is the lessor of our manufacturing facility, and provides our payroll services.

 

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.

 

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 April 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. 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 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.

 

D6 – Notes payable to the principal shareholders of Symbiote, entered into from April to September 2016, 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 6 - 18% 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 $205,563 as of September 30, 2016. The maturity dates of the agreements range from October to December 2016.

 

G Convertible promissory notes – Represents the outstanding principal balance on two separate convertible promissory with interest of 8% annually, that were 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. As we failed to pay the notes when they became due, the balance due under the notes is now incurring 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 nine months ended September 30, 2016, $82,800 of principal and $5,661 of accrued interest was converted into 135,532,715 shares of common stock. We also recorded a loss on conversion of debt of $114,793 related to these transactions.

 

Debt issuance costs of $236,017 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 September 30, 2016 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 nine months ended September 30, 2016 and 2015.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included herein. We caution readers regarding certain forward looking statements in the following discussion and elsewhere in this report and in any other statement made by, or on our behalf, whether or not in future filings with the Securities and Exchange Commission. Forward looking statements are statements not based on historical information and which relate to future operations, strategies, financial results or other developments. Forward looking statements are necessarily based upon estimates and assumptions that are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control and many of which, with respect to future business decisions, are subject to change. These uncertainties and contingencies can affect actual results and could cause actual results to differ materially from those expressed in any forward looking statements made by, or on our behalf. We disclaim any obligation to update forward looking statements except as may be required under applicable securities laws.

 

Overview

 

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 November 30, 2015, we filed a Certificate of Amendment to our Certificate of Incorporation with the State of Delaware to change our name from “Energie Holdings, Inc.” to “ExeLED Holdings Inc.” We have two wholly-owned subsidiaries, Énergie LLC (hereinafter referred to as “Énergie”), and OELC, LLC. 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.

 

We are a holding company engaged in the business of the import and sale of specialized interior lighting solutions to the architecture and interior design markets in North America. Our current business objective is to become a leading provider of advanced LED lighting solutions by acquiring and growing complementary LED based lighting fixture companies. We are focused on acquiring specialized LED lighting companies for the architecture and interior design markets for both commercial and residential applications, with the intention to grow, innovate, and fully capture the rapidly growing lighting market opportunities associated with solid state lighting. The lighting products will 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. These objectives are subject to our obtaining additional financing, of which there can be no assurance.

 

Our management team and advisory board is comprised of experienced executives in the lighting industry with recent specific focus on the LED lighting industry. The group has over 300 years of combined experience in this industry.

 

Our principal place of business is located at 4885 Ward Road, Suite 300, Wheat Ridge, Colorado, telephone (720) 963-8055. Our website is www.exeledholdings.com. Énergie also maintains a production and assembly facility in Zeeland, Michigan. Énergie’s website is www.energielighting.com.

 

Énergie acts as our operating subsidiary. Our creative 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. Énergie was founded in 2001and is engaged in the import and sale of specialized interior lighting solutions to the architecture and interior design markets in North America. We have developed an end-to-end production and distribution platform for imported lighting products featuring HID, fluorescent, and LED technologies. Long term contracts with five European manufacturers and one in Taiwan provide us with exclusive North American distribution rights to over 270 total products in 37 categories. After processing any modifications necessary to meet UL standards and building code requirements, the products are sold to customers through a network of over 60 independent lighting sales agents. In addition to a highly competitive commission structure, we provide our sales force with promotional materials, product training, and technical support.

 

 

Our independent accountants have expressed a “going concern” opinion. Our condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.  The condensed consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty.

 

Results of Operations

 

   Three months ended September 30,      
   2016  2015  Change  %
Sales revenue  $26,836   $117,002   $(90,166)   (77)%
Cost of revenue   (18,785)   (66,767)   47,982    72%
  Gross profit   8,051    50,235    (42,184)   (84)%
                     
Total operating expenses   434,605    368,898    (65,707)   (18)%
                     
Interest expense   (475,981)   (365,861)   (110,120)   30%
Other income (expense)   (73,457)   (10,041)   (63,416)   632%
Net loss  $(975,992)  $(694,565)  $(281,427)   41%

 

   Nine months ended September 30,      
   2016  2015  Change  %
Sales revenue  $331,983   $421,636   $(89,653)   (21)%
Cost of revenue   (176,792)   (212,759)   35,967    17%
  Gross profit   155,191    208,877    (53,686)   (26)%
                     
Total operating expenses   1,224,724    1,350,892    126,168    9%
                     
Interest expense   (1,357,481)   (856,817)   (500,664)   58%
Other income (expense)   (148,508)   (27,571)   (120,937)   439%
Net loss  $(2,575,522)  $(2,026,403)  $(549,119)   27%

 

Sales Revenue, Cost of Revenue and Gross Profit

 

Sales revenue decreased in 2016 compared to 2015 due to an overall lack of funding necessary for development and product launch costs. Cost of revenue decreased proportionally to the decrease in revenues.

 

Other

 

Interest expense increased due to additional gross debt of approximately $1,450,000 over the same period in 2015.

 

Other income (expense) consists primarily of expenses related to costs associated with debt and conversions of debt.

 

Operating expenses

 

   Three months ended September 30,      
   2016  2015  Change  %
Research and development  $68,560   $64,715   $3,845    6%
Sales and marketing   6,168    28,882    (22,714)   (79)%
General and administrative   359,877    275,301    84,576    31%
   $434,605   $368,898   $65,707    18%

 

 

   Nine months ended September 30,      
   2016  2015  Change  %
Research and development  $212,166   $192,087   $20,079    10%
Sales and marketing   45,479    98,784    (53,305)   (54)%
General and administrative   967,079    1,060,021    (92,942)   (9)%
   $1,224,724   $1,350,892   $(126,168)   (9)%

 

The increase in operating expenses during the three months ended September 30, 2016 compared to 2015 was driven by our payments for professional fees in an attempt to secure external funding. The decrease in operating expenses during the nine months ended September 30, 2016 was driven by controlling our spending due to a limitation of funding.

 

Liquidity and Capital Resources

 

At September 30, 2016, we had $5,012 in cash. We have not generated positive cash flows from operations. Accordingly, our sources of liquidity may include potential debt and equity offerings. We believe that our principal difficulty in our inability to successfully generate positive cash flows has been the lack of available capital to operate and expand our business. We believe we need a minimum of approximately $2,000,000 in additional working capital to be utilized for (i) development and launching of new products for Energie; (ii) funding the business development efforts to identify, qualify and acquire other LED lighting companies; and (iii) the balance for working capital, and general and administrative expense. Other than as disclosed below, we have no other commitments from any investor or investment-banking firm to provide us with the necessary funding and there can be no assurances we will obtain such funding in the future. Failure to obtain this additional financing will have a material negative impact on our ability to generate profits in the future.

 

To fund our acquisition plan and fund working capital for our continuing operations, we continue to seek out and discuss financing with potential partners or lenders. While no assurances can be provided, we expect that we will be able to obtain financing to implement our plans.

 

In August 2015, LG Capital Funding LLC, (“LG”) purchased from KBM Worldwide, Inc., (“KBM”) all outstanding convertible notes and accrued interest payable to KBM under previous agreements with KBM. The outstanding amount due to KBM was restructured into two new convertible notes under a Securities Purchase Agreement, Convertible Notes and other ancillary documents. Under these agreements, we issued 8% convertible promissory notes in the principal amount of $188,684. These notes are convertible into shares of our common stock at a price ranging from 58% - 65% of the lowest closing bid price of our common stock during the 15 trading days immediately preceding the date of conversion. The notes contain additional terms and conditions normally included in instruments of this kind. During the nine months ended September 30, 2016, LG converted $82,800 of principal and $5,661 of accrued interest into 135,532,715 shares of common stock.

 

On July 16, 2014 we entered into an Investment Agreement and Registration Rights Agreement with Dutchess Opportunity Fund, II, LP (“Dutchess”). Pursuant to the Investment Agreement, Dutchess committed to purchase, subject to certain restrictions and conditions, up to $5 million of our common stock upon issuance by us of a put to Dutchess at a price equal to ninety-four percent (94%) of the lowest daily VWAP (volume weighted average price) of our common stock during the five (5) consecutive Trading Days beginning on the Put Notice Date and ending on and including the date that is four (4) Trading Days after such Put Notice Date. The Put Amount shall be equal to up to either 1) two hundred percent (200%) of the average daily volume (U.S. market only) of the common stock for the three (3) Trading Days prior to the applicable Put Notice Date, multiplied by the average of the three (3) daily closing prices immediately preceding the Put Date or 2) one hundred thousand dollars ($100,000). The obligation of Dutchess to purchase our shares is contingent upon our filing of a registration statement registering the shares of our common stock with the US Securities and Exchange Commission and such registration statement being declared effective, as well as our common stock continuing to be listed for trading, among other things. We filed such a registration statement with the SEC on October 6, 2014 and it became effective on November 7, 2014.

 

 

11

 
 

Working Capital

 

Working capital is the amount by which current assets exceed current liabilities. We had negative working capital of $11,862,601 and $8,468,294, respectively, as of September 30, 2016 and December 31, 2015. The increase in negative working capital is due to the increase in gross debt of approximately $1,140,000 since December 31, 2015, and a resulting increase in accrued liabilities of approximately $490,000 from interest expense. We also currently have insufficient cash flow to meet our debt obligations. This raises substantial doubt about our ability to continue as a going concern.

 

Cash Flows

 

Our cash flows from operating, investing and financing activities were as follows: 

 

   Nine months ended September 30,
   2016  2015
Net cash used in operating activities  $(897,686)  $(622,963)
Net cash provided by financing activities   884,721    582,511 

 

Net cash used in operating activities increased in 2016 by $274,733 compared to 2015.  We relied heavily on increased debt, accounts payable, and accrued liabilities to keep our operations running. We anticipate that overhead costs in current operations will increase in the future if we are successful in raising the capital described herein as a result of our anticipated increased marketing and operating activities.

 

During 2016, we relied on additional borrowings under both new and existing debt agreements. In 2016, net cash flows provided by financing activities were composed of $1,253,921 of additional cash borrowings and $369,200 of debt pay down. In 2015, we borrowed $1,287,112 of additional debt and paid down $704,601 of debt.

 

Inflation

 

Although our operations are influenced by general economic conditions, we do not believe that inflation had a material effect on our results of operations during the nine month period ended September 30, 2016.

 

Off-Balance Sheet Arrangements

 

We had no off-balance sheet arrangements as of September 30, 2016 and December 31, 2015.

 

Critical Accounting Estimates

 

Our condensed consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the condensed consolidated financial statements. The estimates are based on historical experience and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed in our Annual Report on Form 10-K for the year ended December 31, 2015 in the Critical Accounting Policies section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

As a smaller reporting company, as that term is defined in Item 10(f)(1) of Regulation S-K, we are not required to provide information required by this Item.

 

 

12

 
 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As required by Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we have carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2016.   This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer.

 

Based on this evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were not effective as of September 30, 2016, because (a) we have limited entity-level controls, because of the time constraints for our management team; (b) we have a lack of segregation of duties due to limited personnel; and (c) we have not implemented adequate system-based and manual controls.  We have engaged consultants to evaluate our processes and procedures, and to implement, document and test additional internal controls. We can provide no assurance, however, that our disclosure controls will be effective in the near future.

  

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the last quarterly period covered by this report that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.

 

PART II. Other Information

 

Item 1. Legal Proceedings

 

In July 2015, Energie LLC and Harold Hansen, our CEO (collectively, “the defendants”), were served with a summons and complaint wherein Vectra Bank Colorado, National Association brought an action to collect monies due pursuant to a promissory note in the current principal balance of $47,000, plus interest, costs, and attorneys’ fees. The action was brought in the District Court for the City and County of Denver, Colorado (the “Court”). 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. Energie is currently making payments to resolve this obligation.

 

Other than the above, we are not party to any material legal proceedings, nor have any such actions been threatened against us.

 

 

13

 
 

Item 1A. Risk Factors

 

As a smaller reporting company, as that term is defined in Item 10(f)(1) of Regulation S-K, we are not required to provide information required by this Item.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

During the three months ended September 30, 2016, one of our lenders converted $49,632 of principal and interest on convertible promissory notes into 91,473,671 of our common shares. This issuance was completed in accordance with Section 3(a)(9) of the Securities Act, as amended, in an offering without any public offering or distribution. These shares are restricted securities and include an appropriate restrictive legend.

 

Item 3. Defaults upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

31.1   Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
     
31.2   Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
     
32   Certifications of the Chief Executive and Financial Officers pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  

       
Date:  November 18, 2016   By: /s/ Harold Hansen
      Harold Hansen
     

Chief Executive Officer

(Principal Executive Officer)

       
    By:   /s/ Richard Cole Dennard
      Richard Cole Dennard
     

Chief Financial Officer

(Principal Financial and Accounting Officer)