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, 2017

 

[ ] 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.)
5310 Ward Road, Suite 106, Arvada, CO (Address of principal executive offices)	80002 (Zip Code)

 

Registrant’s telephone number, including area code: (720) 361-2056

 

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

 

	Large accelerated filer  [ ]	Accelerated filer  [ ]
	Non-accelerated filer  [ ]	Smaller reporting company  [X]
	Emerging growth company  [X]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

 

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 20, 2017, 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			2
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			14
Item 4.		Controls and Procedures			14
Part II – OTHER INFORMATION
Item 1.		Legal Proceedings			15
Item 1A.		Risk Factors			15
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			16
Item 3.		Defaults upon Senior Securities			16
Item 5.		Other Information			16
Item 6.		Exhibits			16

 

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

 

This Quarterly Report on Form 10-Q (this “Report”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. 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, 2017 (Unaudited)				December 31, 2016
ASSETS
Current assets:
Cash and cash equivalents		$	1,048			$	5,454
Accounts receivable, net			2,425				31
Inventory			151,843				157,178
Due from related parties			21,270				—
Prepaid expenses and other			59,576				48,307
Total current assets			236,162				210,970
Noncurrent assets:
Deposits			6,200				6,450
Total assets		$	242,362			$	217,420
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	3,176,957			$	2,988,439
Accrued liabilities			2,483,691				1,858,127
Debt, current portion, net of discount and debt issuance costs			10,446,841				8,451,781
Total current liabilities			16,107,489				13,298,347
Debt, long-term portion			130,000				220,000
Total liabilities			16,237,489				13,518,347
Commitments and contingencies (Note 6)			—				—
Equity:
Preferred stock, $.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding at September 30, 2017 or December 31, 2016			—				—
Common stock, $.0001 par value; 250,000,000 shares authorized; 249,447,433 shares issued and outstanding at September 30, 2017 and December 31, 2016			24,743				24,743
Additional paid-in capital			2,635,896				2,635,896
Accumulated deficit			(18,655,766	)			(15,961,566	)
Total deficit			(15,995,127	)			(13,300,927	)
Total liabilities and equity		$	242,362			$	217,420

 

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,
		2017				2016				2017				2016
Sales revenue		$	5,167			$	26,836			$	49,721			$	331,983
Cost of goods sold			(3,036	)			(18,785	)			(23,430	)			(176,792	)
Gross profit			2,131				8,051				26,291				155,191
Operating expenses:
Research and development			60,535				68,560				204,292				212,166
Sales and marketing			79				6,168				2,341				45,479
General and administrative			201,201				359,877				580,690				967,079
Total operating expenses			261,815				434,605				787,323				1,224,724
Loss from operations			(259,684	)			(426,554	)			(761,032	)			(1,069,533	)
Other income (expense):
Interest expense			(648,131	)			(475,981	)			(1,776,470	)			(1,357,481	)
Other income (expense)			(101,486	)			(73,457	)			(156,698	)			(148,508	)
Other income (expense), net			(749,617	)			(549,438	)			(1,933,168	)			(1,505,989	)
Net loss		$	(1,009,301	)		$	(975,992	)		$	(2,694,200	)		$	(2,575,522	)
Net loss per common share:
Basic and diluted		$	(0.00	)		$	(0.01	)		$	(0.01	)		$	(0.02	)
Weighted average common shares outstanding:
Basic and diluted			249,447,433				168,604,321				249,447,433				151,814,179

 

See accompanying notes to condensed consolidated financial statements

EXELED HOLDINGS INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

		Nine months ended September 30,
		2017				2016
Operating Activities:
Net loss		$	(2,694,200	)		$	(2,575,522	)
Adjustments to reconcile net loss to net cash used in operating
activities:
Amortization of debt issuance costs and debt discount			502,481				274,625
Loss on conversion of debt			—				114,791
Changes in operating assets and liabilities:
Accounts receivable			(2,394	)			7,288
Inventory			5,335				18,997
Due from related parties			(21,270	)			—
Prepaid expenses and other			(11,269	)			(264	)
Other assets			250				650
Accounts payable			188,518				763,451
Accrued liabilities			625,564				498,288
Net cash used in operating activities			(1,406,985	)			(897,696	)
Financing Activities:
Proceeds from debt			1,891,283				1,253,921
Payments of debt			(488,704	)			(369,200	)
Net cash provided by financing activities			1,402,579				884,721
Net change in cash			(4,406	)			(12,975	)
Cash, beginning of period			5,454				17,987
Cash, end of period		$	1,048			$	5,012
Cash paid for:
Interest		$	679,222			$	420,949
Taxes			—				—
Non-cash transactions:
Debt converted to common stock		$	—			$	82,800
Accrued liabilities converted to common stock			—				5,661
Debt issuance costs			687,000				363,473

 

See accompanying notes to condensed consolidated financial statements.

EXELED HOLDINGS INC.

Notes to Condensed Consolidated Financial Statements

For the Three and Nine Month Periods Ended September 30, 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 September 30, 2017, 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, 2016.

 

Going Concern

 

As shown in the accompanying condensed consolidated financial statements, we had an equity deficit of $15,995,127 and a working capital deficit of $15,871,327 as of September 30, 2017, and have reported net losses of $2,694,200 and $2,575,522 for the nine months ended September 30, 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 July 2017, the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815) (ASU 2017-11). ASU 2017-11 eliminates the requirement to consider “down round” features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock.  ASU 2017-11 is effective for annual periods beginning after December 15, 2018, and for interim periods within those years, with early adoption permitted.  We are currently assessing whether or not this ASU will have a significant impact on our consolidated financial statements and related disclosures.

 

The Financial Accounting Standards Board and other entities have issued other new or modifications to, or interpretations of, existing accounting guidance during 2017. Management has carefully considered the new pronouncements that altered generally accepted accounting principles and does not believe that any other new or modified principles will have a material impact on the Company’s reported financial position or operations in the near term.

Note 2 — Accounts receivable

 

The following is a summary of accounts receivable:

		September 30, 2017				December 31, 2016
Customer receivables		$	37,806			$	14,432
Less:  Allowance for uncollectible accounts			(35,381	)			(14,401	)
		$	2,425			$	31

 

Note 3 — Inventory

 

The following is a summary of inventory:

		September 30, 2017				December 31, 2016
Raw materials		$	327,277			$	332,612
Less: reserve			(175,434	)			(175,434	)
		$	151,843			$	157,178

 

Note 4 — Debt

 

Debt is comprised of the following:

 

Description		Note				September 30, 2017				December 31, 2016
Line of credit			A			$	41,588			$	47,000
Note payable to distribution partner			B				550,000				550,000
Investor debt			C				371,507				371,507
Related party debt			D				8,777,979				6,719,979
Other notes payable			E				981,137				981,137
Cash draw notes			F				260,767				211,076
Convertible promissory notes			G				58,937				71,637
Total							11,041,915				8,952,336
Less:  unamortized discount and debt issuance costs							(465,074	)			(280,555	)
Debt, net of unamortized discount and debt issuance costs							10,576,841				8,671,781
Less:  current portion							(10,446,841	)			(8,451,781	)
Debt, long-term portion						$	130,000			$	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 September 30, 2017 and December 31, 2016. These loans are not collateralized. The following summarizes the terms and balances of the investor debt:

 

September 30, 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:

 

				September 30, 2017				December 31, 2016				Interest Rate
	D1			$	4,635,865			$	4,635,865				various
	D3				34,888				34,888				12	%
	D4				362,550				356,550				various
	D5				668,176				668,176				18	%
	D6				3,076,500				1,024,500				6	%
	Total			$	8,777,979			$	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 $438,217 in accounts payable.

 

D3 – Note payable to our Chief Executive Officer (“CEO”), entered into in December 2014, with monthly principal and interest originally payable through December 2016. We are still continuing to accrue interest on this note payable. We also owe our CEO $775,342 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 $511,382 in accounts payable.

 

D6 – Notes payable to the principal shareholders of Symbiote, entered into from April to September 2017, with principal and interest payments due upon a specific event or upon demand.

 

E – Other Notes Payable – Represents the outstanding principal balance on six separate notes bearing interest at between 6% and 24% annually. In the event we receive proceeds as the beneficiary of a life insurance policy covering our majority shareholder/CEO, repayment of principal and interest is due on one of these notes prior to using the proceeds for any other purpose.

 

F – Cash draw agreements – Under these agreements, the lender advances us the principal balance and then automatically withdraws a stated amount each business day. Accordingly, there is no stated interest rate. The total remaining daily payments of principal and interest due under these arrangements was $341,225 as of September 30, 2017. The maturity dates of the agreements range from October 2017 to January 2018.

 

G – Convertible promissory notes – Represents the outstanding principal balance related to a convertible promissory note entered into during October 2014. During February 2017, the Company and LG Capital Funding, LLC (“LG”) entered into an agreement to settle all principal and interest related to an outstanding note with a face amount of $58,937 for $75,000, with payment being due in March 2017.  The Company did not make the payment, and LG has brought an action against the Company in the Southern District of New York to collect damages for the breach, including consequential damages.  The Company is disputing this matter and is vigorously defending itself against the matter.

 

Debt issuance costs of $465,074 are being amortized over the life of the respective notes.

 

Note 5 — Related Party Transactions

 

Parties are considered related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions.

 

During the quarter ended September 30, 2017, the Company made payments totaling $21,270 on behalf of an entity related via common ownership. As of September 30, 2017, the Company had not been reimbursed for any of these expenses.

 

See Note 4 for additional disclosures concerning debt due to related parties.

 

Note 6 — Commitments and Contingencies

 

To the best of the Company’s knowledge and belief, no current legal proceedings of merit are currently pending or threatened against the Company, other than those described in Note 4 (G).

 

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 and nine months ended September 30, 2017 and 2016.

 

Note 8 — Subsequent Events

 

There are no events subsequent to September 30, 2017 and up to the date of this filing that would require disclosure.

 

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. (“we,” “us,” “our” or the “Company”) 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 5310 Ward Road, Suite 106, Arvada, Colorado, 80002. Our telephone number is (720) 361-2056. We also maintain a production and assembly facility in Zeeland, Michigan. Our website is www.exeledholdings.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 2001 and 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 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

 

Comparison of results of operations for the three months ended September 30, 2017 and 2016

 

		Three months ended September 30,
		2017				2016				Change				%
Sales revenue		$	5,167			$	26,836			$	(21,669	)			(81	)%
Cost of revenue			(3,036	)			(18,785	)			(15,749	)			(84	)%
Gross profit			2,131				8,051				(5,920	)			(74	)%
Total operating expenses			261,815				434,605				(172,790	)			(40	)%
Interest expense			(648,131	)			(475,981	)			172,150				36	%
Other			(101,486	)			(73,457	)			28,029				38	%
Net loss		$	(1,009,301	)		$	(975,992	)		$	33,309				3	%

 

Sales Revenue, Cost of Revenue and Gross Profit

 

Sales revenue decreased during the three months ended September 30, 2017 compared to the same period in 2016 due to an overall lack of funding necessary for development and product launch costs. While we are continuing to seek out and discuss external financing, no assurances can be made that we will be successful in our efforts. Cost of revenue decreased proportionally to the decrease in revenues. See “Liquidity and Capital Resources” below.

 

Operating expenses

 

		Three months ended September 30,
		2017				2016				Change				%
Research and development		$	60,535			$	68,560			$	(8,025	)			(12	)%
Sales and marketing			79				6,168				(6,089	)			(99	)%
General and administrative			201,201				359,877				(158,676	)			(44	)%
		$	261,815			$	434,605			$	(172,790	)			(40	)%

 

The overall decrease in operating expenses was driven by our controlling spending due to a lack of operating capital. Specifically, personnel costs across all departments decreased during the three months ended September 30, 2017 compared to the same period in 2016 as we are currently operating with as few people as possible to conserve costs. In addition, rent costs decreased significantly as we moved our corporate office in conjunction with our cost-cutting measures.

 

Other

 

During the three months ended September 30, 2017, interest expense increased due to additional debt of approximately $2,750,000 compared to September 30, 2016.

 

Other income (expense) consists primarily of other fees expenses related to seeking and securing debt and other external financing.

 

As a result, we incurred a net loss of $1,009,301 during the three month period ended September 30, 2017 (approximately $0.00 per share), compared to a net loss of $975,992 during the three month period ended September 30, 2016.

 

Comparison of results of operations for the nine months ended September 30, 2017 and 2016

 

		Nine months ended September 30,
		2017				2016				Change				%
Sales revenue		$	49,721			$	331,983			$	(282,262	)			(85	)%
Cost of revenue			(23,430	)			(176,792	)			(153,362	)			(87	)%
Gross profit			26,291				155,191				(128,900	)			(83	)%
Total operating expenses			787,323				1,224,724				(437,401	)			(36	)%
Interest expense			(1,776,470	)			(1,357,481	)			418,989				31	%
Other income (expense)			(156,698	)			(148,508	)			8,190				6	%
Net loss		$	(2,694,200	)		$	(2,575,522	)		$	118,678				5	%

 

Sales Revenue, Cost of Revenue and Gross Profit

 

Sales revenue during the nine months ended September 30, 2017 was $49,721, compared to revenue of $331,983 generated during the nine months ended September 30, 2016, a decrease of $282,262. This decrease was attributable to our lack of available capital in which to generate sales in 2017. During the nine months ended September 30, 2016, we were successful selling custom LED products in several market segments such as education, commercial office space, large multi-unit luxury residential developments and health care locations. Cost of revenue and gross profit each decreased for the nine months ended September 30, 2017 compared to 2016 due to an increase in inventory costs.

 

Operating expenses

 

		Nine months ended September 30,
		2017				2016				Change				%
Research and development		$	204,292			$	212,166			$	(7,874	)			(4	)%
Sales and marketing			2,341				45,479				(43,138	)			(95	)%
General and administrative			580,690				967,079				(386,389	)			(40	)%
		$	787,323			$	1,224,724			$	(437,401	)			(36	)%

 

The overall decrease in operating expenses was driven by our controlling spending due to a lack of operating capital. Specifically, personnel costs across all departments decreased during the nine months ended September 30, 2017 compared to the same period in 2016 as we are currently operating with as few people as possible to conserve costs. In addition, rent costs decreased significantly as we moved our corporate office in conjunction with our cost-cutting measures.

 

Other

 

During the nine months ended September 30, 2017, interest expense increased due to additional debt of approximately $7,350,000 over the same period in 2016.

 

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

 

As a result, we incurred a net loss of $2,694,200 during the nine month period ended September 30, 2017 (approximately $0.01 per share), compared to a net loss of $2,575,522 during the nine month period ended September 30, 2016.

 

Liquidity and Capital Resources

 

At September 30, 2017, we had $1,048 in cash and cash equivalents.

 

 

We have not generated positive cash flows from operations in any year since our inception. Accordingly, our sources of liquidity may include potential debt and/or equity offerings. We believe that our principal difficulty in our inability to successfully generate positive cash flows has been the lack of available working 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 development and launching of new products for Énergie. In addition, we believe we need approximately $10,000,000 to pay off a significant portion of our debt and to begin funding the business development efforts to identify, qualify and acquire other LED lighting companies, with the balance for working capital and general and administrative expense. While we are in discussions with various potential financing groups, 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 and continue operations.

 

To fund our acquisition plan and fund working capital for our continuing operations we will require and are continuing to seek out and discuss financing with potential partners or lenders. These efforts have been unsuccessful thus far and there are no assurances that they will be successful in the future. Failure to obtain the financing necessary will have a significant negative impact on our Company and our ability to remain in business. We have identified multiple potential funding sources and have diligently pursued receiving financing from these sources for varying lengths of time. Management believes that these efforts will be coming to a conclusion in the near future and will either result in significant funding for us or in no funding at all. There are no assurances that these pursuits will be successful and, if none of them are successful, we will not have the financial resources to continue operations.

 

In August 2015, we entered into two new convertible notes with LG Capital Funding LLC, (“LG”) under a Securities Purchase Agreement, Convertible Notes and other ancillary documents. Under these agreements, we agreed to issue 8% convertible promissory notes. We completely paid off all but one of these notes. During February 2017, the Company and LG entered into an agreement to settle all principal and interest related to the remaining outstanding note with a face amount of $58,937 for $75,000, with payment being due in March 2017.  The Company did not make the payment, and LG has brought an action against the Company in the Southern District of New York to collect damages for the breach, including consequential damages.  The Company is disputing this matter and is vigorously defending itself against the matter.

 

Working Capital

 

Working capital is the amount by which current assets exceed current liabilities. We had negative working capital of $15,871,327 and $13,087,377, respectively, as of September 30, 2017 and December 31, 2016. The increase in negative working capital is due to the increase in debt of approximately $1,905,000 and a resulting increase in accrued liabilities of approximately $625,000 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,
		2017				2016
Net cash used in operating activities		$	(1,406,985	)		$	(897,696	)
Net cash provided by financing activities			1,402,579				884,721

 

Net cash used in operating activities increased in 2017 by $509,289 compared to 2016.  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 2017, we relied on additional borrowings under both new and existing debt agreements. In 2017, net cash flows provided by financing activities were composed of $1,891,283 of additional borrowings and $488,704 of debt pay down. In 2016, we borrowed $1,253,921 of additional debt and paid down $369,200 of debt.

 

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We believe that our principal difficulty in our inability to successfully generate profits 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 development and launching of new products for Énergie. In addition, we believe we need approximately $10,000,000 to pay off a significant portion of our debt and to begin funding the business development efforts to identify, qualify and acquire other LED lighting companies, with the balance for working capital and general and administrative expense.  As of the date of this report, other than as disclosed elsewhere, we have no other commitment 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. 

 

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, 2017.

 

Off-Balance Sheet Arrangements

 

We had no off-balance sheet arrangements as of September 30, 2017 and December 31, 2016.

 

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, 2016 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.

 

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, 2017.   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, 2017, 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 internal controls will be effective in the near future.

 

Our Board of Directors has assigned a priority to the short-term and long-term improvement of our internal control over financial reporting. We are reviewing various potential solutions to remedy the processes that would eliminate the issues that may arise due to the absence of separation of duties within the financial reporting functions. Additionally, the Board of Directors will work with management to continuously review controls and procedures to identified deficiencies and implement remediation within our internal controls over financial reporting and our disclosure controls and procedures.

 

We believe that our financial statements presented in this quarterly report on Form 10-Q fairly present, in all material respects, our financial position, results of operations, and cash flows for all periods presented herein.

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Inherent Limitations – Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all error and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.  These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. In particular, many of our current processes rely upon manual reviews and processes to ensure that neither human error nor system weakness has resulted in erroneous reporting of financial data.

 

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, Énergie 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. On May 10, 2017, Vectra 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.

 

During February 2017, the Company and LG Capital Funding, LLC (“LG”) entered into an agreement to settle all principal and interest related to an outstanding note with a face amount of $58,937 for $75,000, with payment being due in March 2017.  The Company did not make the payment, and LG has brought an action against the Company in the Southern District of New York to collect damages for the breach, including consequential damages.  The Company is disputing this matter and is vigorously defending itself against the matter.

 

As a result of our lack of available capital we are unable to pay many of our bills and outstanding promissory notes when they become due. While we have not been threatened specifically with litigation, it is impractical to believe or assume that our creditors will not pursue actions against us to collect balances due. Many of these obligations and agreements contain provisions requiring us to pay costs of collection and attorneys’ fees over and above the principal amounts due, which may increase these outstanding balances.

 

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.

15

 

 

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

 

None.

 

Item 3. Defaults upon Senior Securities

 

None.

 

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

 

101.INS		XBRL Instance Document*
101.SCH		XBRL Schema Document*
101.CAL		XBRL Calculation Linkbase Document*
101.DEF		XBRL Definition Linkbase Document*
101.LAB		XBRL Label Linkbase Document*
101.PRE		XBRL Presentation Linkbase Document*

______________________

* Pursuant to Rule 406T of Regulation S-T, these interactive data files are not deemed filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act or Section 18 of the Securities Exchange Act and otherwise not subject to liability.

 

 

 

16

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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 20, 2017		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)

 

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