Exhibit 99.1
Energie, LLC
Financial Statements
For the Twelve Months Ended December 31, 2013 and 2012
 | Energie, LLC Index to Financial Statements |
| | For the Years Ended December 31, 2013 and 2012 |
Report of Independent Public Accounting Firm……………...…………………………….…………..2
Financial Statements:
Balance Sheets..…………………………………………………………......………………………...……...3
Statements of Operations..…………………………..……………………..……………………….……….4
Statements of Changes in Members’ Deficit..…………………………..……………………..…………..5
Statements of Cash Flows......…………………………………………………..………………...…………6
Notes to Financial Statements…...……………………………………………..…………………………...7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Energie, LLC:
We have audited the accompanying balance sheets of Energie, LLC (“the Company”) as of December 31, 2013 and 2012 and the related statement of operations, changes in members’ equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above present fairly, in all material respects, the financial position of Energie, LLC, as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles in the United States of America.
The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the Company's internal control over financial reporting. Accordingly, we express no such opinion.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 4 to the financial statements, the Company’s significant operating losses raise substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ B F Borgers CPA PC
B F Borgers CPA PC
Denver, CO
July 1, 2014
| | Energie, LLC Balance Sheet |
| | Years Ended December 31, 2013 and 2012 |
| | | December 31, 2013 | | December 31, 2012 |
| Assets | | | | | | | | |
| | | | | | | | | |
| Current Assets | | | | | | | | |
| Cash and cash equivalents | | $ | 37,874 | | | $ | 59,171 | |
| Accounts receivable, net | | | 714,508 | | | | 296,612 | |
| Inventory | | | 414,308 | | | | 426,407 | |
| Prepaid expenses | | | 15,922 | | | | 48,967 | |
| Total Current Assets | | | 1,182,612 | | | | 831,157 | |
| | | | | | | | | |
| Noncurrent Assets | | | | | | | | |
| Intangible assets, net | | | 1,119,550 | | | | 1,378,566 | |
| Property and equipment, net | | | 23,421 | | | | 34,207 | |
| Deposits | | | 11,695 | | | | 11,695 | |
| Total Noncurrent Assets | | | 1,154,666 | | | | 1,424,468 | |
| | | | | | | | | |
| Total Assets | | $ | 2,337,278 | | | $ | 2,255,625 | |
| | | | | | | | | |
| | | | | | | | | |
| Liabilities and Members' Deficit | | | | | | | | |
| | | | | | | | | |
| Current Liabilities: | | | | | | | | |
| Accounts payable | | $ | 595,202 | | | $ | 628,850 | |
| Commissions payable | | | 91,967 | | | | 104,876 | |
| Unearned income | | | — | | | | 54,802 | |
| Debt | | | 3,981,932 | | | | 2,734,656 | |
| Total Current Liabilities | | | 4,669,101 | | | | 3,523,184 | |
| | | | | | | | | |
| Members' Deficit | | | | | | | | |
| Members' deficit | | | (2,331,823 | ) | | | (1,267,559 | ) |
| | | | | | | | | |
| Total Liabilities and Members' Deficit | | $ | 2,337,278 | | | $ | 2,255,625 | |
The accompanying notes are an integral part of these financial statements.
| | Energie, LLC Statement of Operations |
| | Years Ended December 31, 2013 and 2012 |
| | | For the Year Ended | | For the Year Ended |
| | | December 31, 2013 | | December 31, 2012 |
| | | | | | | | | |
| Sales revenue | | $ | 1,733,373 | | | $ | 2,020,126 | |
| Cost of goods sold | | | (758,739 | ) | | | (894,572 | ) |
| Gross Profit | | | 974,634 | | | | 1,125,554 | |
| | | | | | | | | |
| Operating Expenses | | | | | | | | |
| Commissions | | | 372,954 | | | | 288,408 | |
| Compensation | | | 600,786 | | | | 623,345 | |
| Depreciation and amortization | | | 238,053 | | | | 216,894 | |
| General and administrative | | | 161,567 | | | | 171,568 | |
| Professional fees | | | 22,746 | | | | 37,055 | |
| Rent | | | 217,088 | | | | 211,688 | |
| Travel | | | 8,502 | | | | 40,388 | |
| Total Operating Expenses | | | 1,621,696 | | | | 1,589,346 | |
| | | | | | | | | |
| Loss from Operations | | | (647,062 | ) | | | (463,792 | ) |
| | | | | | | | | |
| Other income (expense) | | | | | | | | |
| Interest expense | | | (421,787 | ) | | | (381,314 | ) |
| Other | | | 114,251 | | | | (63,113 | ) |
| Other income (expense), net | | | (307,536 | ) | | | (444,427 | ) |
| | | | | | | | | |
| Net loss and comprehensive loss | | $ | (954,598 | ) | | $ | (908,219 | ) |
| | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
| | Energie, LLC Statement of Changes in Members’ Deficit |
| | Years Ended December 31, 2013 and 2012 |
| | | Members' Deficit |
| | | | | |
| Balance at January 1, 2012 | | $ | (328,975 | ) |
| | | | | |
| Net Loss for the year ended December 31, 2012 | | | (908,219 | ) |
| | | | | |
| Contributions | | | 110,197 | |
| | | | | |
| Other | | | (140,562 | ) |
| | | | | |
| Balance at December 31, 2012 | | | (1,267,559 | ) |
| | | | | |
| Net Loss for the year ended December 31, 2013 | | | (954,598 | ) |
| | | | | |
| Other | | | (109,666 | ) |
| | | | | |
| Balance at December 31, 2013 | | $ | (2,331,823 | ) |
| | | | | |
The accompanying notes are an integral part of these financial statements.
| | Energie, LLC Statement of Cash Flows |
| | Years Ended December 31, 2013 and 2012 |
| |
| | | | For the Year Ended | | | | For the Year Ended | |
| | | | December 31, 2013 | | | | December 31, 2012 | |
| | | | | | | | | |
| Cash flow from operating activities | | | | | | | | |
| Net loss | | $ | (954,598 | ) | | $ | (908,219 | ) |
Adjustments to reconcile net loss to net cash used in
operating activities: | | | | | | | | |
| Depreciation and amortization | | | 238,053 | | | | 216,894 | |
| Unpaid interest | | | 421,787 | | | | 381,314 | |
| Change in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | (417,896 | ) | | | (129,288 | ) |
| Inventory | | | 12,099 | | | | 100,699 | |
| Prepaid expenses | | | 33,045 | | | | 43,284 | |
| Accounts payable | | | (33,648 | ) | | | 185,722 | |
| Unearned income | | | (54,802 | ) | | | 36,510 | |
| Commissions payable | | | (12,909 | ) | | | (21,473 | ) |
| Net cash used in operating activities | | | (768,869 | ) | | | (94,557 | ) |
| | | | | | | | | |
| Cash flow (used for)/provided by investing activities | | | — | | | | (21,208 | ) |
| | | | | | | | | |
| Cash flow used for financing activities | | | | | | | | |
| Proceeds from payments of notes payable, net of repayments | | | 825,489 | | | | 165,153 | |
| Member activity | | | (77,917 | ) | | | (30,365 | ) |
| Net cash provided by financing activities | | | 747,572 | | | | 134,788 | |
| | | | | | | | | |
| Net (decrease)/increase in cash | | | (21,297 | ) | | | 19,023 | |
| Cash at beginning of the year | | | 59,171 | | | | 40,148 | |
| Cash at end of the year | | $ | 37,874 | | | $ | 59,171 | |
| | | | | | | | | |
| Supplemental Disclosures: | | | | | | | | |
| Interest paid | | $ | — | | | $ | — | |
| Income taxes paid | | $ | — | | | $ | — | |
The accompanying notes are an integral part of these financial statements.
Energie LLC
Notes to Financial Statements
1. OrganizationandNatureofOperations
OrganizationandOperations–Energie,LLC(“Energie”or“theCompany”)wasestablishedonNovember29, 2001asalimitedliabilitycompanyinthestateofDelawareandisengagedintheimportandsaleofspecializedinteriorlightingsolutionstothearchitectureandinteriordesignmarketsinNorthAmerica.TheCompanyis headquarteredin Wheat Ridge, Colorado and alsomaintains a productionand assemblyfacilityinZeeland,Michigan.
Energiehasorganicallydevelopedanend-to-endproductionanddistributionplatformforimportedlighting productsfeaturingHID,fluorescent,andLEDtechnologies.LongtermcontractswithfiveEuropeanmanufacturers andoneinTaiwan provideEnergiewith exclusiveNorth American distributionrightsto over270total productsin37categories.After processinganymodifications necessarytomeet UL standardsandbuilding coderequirements,the products are soldto customersthrough a network of over 60independentlighting sales agents.In additionto a 15% commission structure, the salesforceis providedwith promotionalmaterials, producttraining,andtechnicalsupportbythe Company.
2. Summary ofSignificantAccountingPolicies
BasisofPreparation-ThefinancialstatementsarepresentedinUnitedStatesdollars,andare preparedinaccordancewithaccountingprinciples generally acceptedinthe UnitedStatesofAmerica(“GAAP”)underthe historical cost convention except as otherwise noted. The preparation offinancial statementsin conformitywithGAAPrequiresthe use of certain critical accountingestimates.It alsorequiresmanagementto exerciseits judgmentinthe processofapplyingthe Company’saccounting policies.The areasinvolvingahigherdegreeofjudgmentorcomplexity, orareaswhereassumptionsand estimatesaresignificanttothefinancialstatements are disclosedinNote 3 –CriticalAccounting Estimatesand Judgments.
Going Concern and Managements’ Plan -The Company's financial statements for the year ended December 31, 2013 and 2012 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company reported net losses of $954,598 and $908,219 for the years ended December 31, 2013 and 2012. The Company also has a members’ deficit of $2,331,823 at December 31, 2013 and negative working capital of $3,486,489 at December 31, 2013.
The future success of the Company is dependent on its ability to attract additional capital, or to find an acquisition to add value to its present shareholders and ultimately, upon its ability to develop future profitable operations. There can be no assurance that the Company will be successful in obtaining such financing, or that it will attain positive cash flow from operations for the next annual period.
Although the Company is past due on its required payments under the forgoing loans, the lenders have not made demand for repayment of the principal and interest due. If demand for payment is made by one or multiple vendors, the Company would experience a liquidity issue as it does not currently have the funds available to pay off these debts. We intend to enter into extension/forbearance agreements with each of the lenders; however, 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 the Company.
FutureAccounting PolicyChange–Thefollowing accounting standard hasbeenissued butis notyetadoptedbytheCompanyduetoafutureeffectivedate:InMarch2013,theFASBissuedguidanceonaparent’s accountingforthe cumulativetranslation adjustmentupon de-recognition ofa subsidiary orgroupof assetswithin aforeignentity. This newguidancerequiresthat the parentrelease anyrelated cumulativetranslation adjustmentinto netincome onlyifthe sale ortransferresultsinthe complete or substantially completeliquidation oftheforeignentityinwhichthesubsidiaryorgroupof assetshadresided.ThenewguidancewillbeeffectiveforusbeginningJuly 1,2014.The Company does notanticipatematerialimpactsonthefinancialstatementsuponadoption.
Cash and Cash Equivalents-Inthestatementofcashflows,cashandcashequivalentsincludescashinhand, depositsheldatcallwithbanks,othershort-termhighlyliquidinvestmentswithoriginalmaturitiesofthreemonthsorless,andbankoverdrafts.Inthebalancesheet,any bankoverdraftsareshownwithinborrowingsin currentliabilities.
AccountsReceivable-Accountsreceivablerepresentnormaltradeobligationsfromcustomersthataresubjecttonormaltradecollectionterms,withoutdiscountsorrebates.Ifcollectionisexpectedinoneyearorlessthey areclassifiedascurrentassets.Ifnot,theyarepresentedasnon-currentassets. Accountsreceivablearerecognizedinitiallyatfairvalue and subsequentlymeasured at amortized cost usingthe effectiveinterestmethod,lessprovisionforimpairment. Notwithstandingthese collections,the Company periodicallyevaluatesthe collectabilityof accountsreceivable and considersthe needto establish an allowancefordoubtful debts basedupon historicalcollectionexperienceandspecificallyidentifiableinformationaboutitscustomers. AsofDecember 31, 2013 and 2012,theCompanydeterminedthatno suchallowancewasnecessary.
AccountsReceivable Factoring-The Company factors certain receivables under its own discretion. In accordance with ASC 860-10-40 the Company properly accounts for factoring under the sale of receivables method. Factored receivables at December 31, 2013 and 2012 have been properly accounted for under this method.
Inventory–TheCompanyvaluesinventories,consistingofpurchasedgoodsforresale,atthelowerofcostormarket.Costisdeterminedusingtheweightedaveragemethod.TheCompanyreducesinventoriesforthe diminution ofvalue,if any,resultingfrom product obsolescence, damage or otherissues affectingmarketability, equaltothedifferencebetweenthecostoftheinventoryanditsestimatedmarketvalue.Thesemarkdownsare estimates,which couldvary significantlyfrom actualrequirementsiffuture economicconditions,customer demand orcompetition differ fromexpectations.
Warranty Reserve–The Company Warranties items for one year after purchase. The Company components and modifications are minimal and the Company rarely runs into warranty claims. However, this occasionally does occur and when it does the amount of warranty expense can be substantial. As a result, a warranty reserve of $18,600 has been booked and is maintained on the books for both 2012 and 2013.
PrepaidExpenses–Prepaymentsmadeforservicesaredeferredasanassetandrecognized as expense asthe servicesare performed.
IntangibleAssets-Purchasedintangibleassetsarerecordedatcost,wherecostistheamountofcashorcash equivalentspaidorthefairvalueofotherconsiderationgiventoacquireanassetatthetimeofitsacquisition. Thecost ofsuch anintangibleassetismeasuredatfairvalueunlesstheexchangetransactionlackscommercial substanceorthefairvalueofneithertheassetreceivednortheassetgivenupisreliablymeasurable.Ifthefairvalueofeithertheassetreceivedortheasset givenupcanbemeasuredreliably,thenthefairvalueoftheasset given upis usedtomeasurecostunlessthefairvalue ofthe asset receivedismore clearly evident (SeeNote8–Intangible Assets).
Intangibleassetswithfiniteusefullivesthatareacquiredseparatelyarecarriedatcostlessaccumulated amortizationandaccumulatedimpairmentlosses.Amortizationisrecognizedonastraight-line basisovertheir estimatedusefullives.The estimatedusefullifeandamortizationmethod arereviewedattheend ofeachreporting period,withthe effect of any changesin estimate being accountedfor on a prospective basis.Intangible assetswhich haveindefinitelivesare notamortized, andarestated atcostlessaccumulatedimpairmentlosses.
PropertyandEquipment-Property andequipmentisstatedathistoricalcostlessdepreciation.Historicalcostincludesexpenditurethatisdirectlyattributabletotheacquisitionoftheitems.Subsequentcostsareincludedintheasset’scarryingamountorrecognizedasaseparateasset,as appropriate,onlywhenitisprobablethatfuture economic benefitsassociatedwiththeitemwillflowtothe Company,andthe costoftheitemcan bemeasuredreliably.Subsequenttorecognition,propertyandequipmentismeasuredatcostlessaccumulateddepreciation andimpairmentlosses.
Deposits – Consist of security deposits for leased office space.
AccountsPayable–Accountspayableareobligationstopayforgoodsorservicesthathavebeenacquiredintheordinarycourseofbusinessfromsuppliers.Accountspayableareclassifiedascurrentliabilitiesifpaymentisduewithinoneyearorless(orinthenormaloperatingcycleofthebusinessiflonger).Ifnot,they arepresented asnon-currentliabilities.
UnearnedIncome–Cashcollectedfromcustomerspriortodeliveryofproductsisdeferredasaliabilityuntil suchtimethesaletransactionmeetstherevenuerecognition criteria described below.
NotesPayable-Borrowingsarerecognizedinitially atfairvalue,netoftransactioncostsincurred.Borrowings aresubsequentlycarriedatamortizedcost;anydifferencebetweentheproceeds(netoftransactioncosts)andtheredemptionvalueisrecognizedintheincomestatementoverthe periodoftheborrowingsusingthe effectiveinterestmethod.
CommissionsPayable–Commissions payable consist of commissions owed to third party sales agents and distributors in accordance with executed sales representative agreements. Commissions are based on a percentage of sales generated by the representative on behalf of the Company. The percentage is scalable depending on the relation to the “list price,” so a lower, or no, commission is received depending on the discount.
SalesRevenueandCostofGoodsSold–TheCompanyrecognizesrevenuewhenitisrealizedorrealizableand earned.The Companyconsidersrevenuerealizedorrealizableandearnedwhenpersuasiveevidenceofanarrangement exists,theproducthasbeenshipped ortheserviceshavebeenrenderedtothecustomer,thesalespriceisfixed or determinable, and collectionisreasonably assured. The Companyrecordsrevenue on a gross basis. Gross basisreportingreflectsrevenueatthegrosssalespricereceivedbytheCompanyfromthebuyeroftheproducts, andcostofgoodssoldrepresentstheCompany’scosttoacquiretheproductsfromthemanufacturersforresale. TheCompanytakestitletotheproductstoberesoldonthedatetheproductisshippedtotheCompanyfromthemanufacturer. Refunds and returns, which are minimal, are recorded as a reduction of sales revenue.
OperatingExpenses-Expensesnecessarytogeneraterevenueareexpensedintheperiodincurred.Commission expenseisrecognizedatthetimerevenueisearnedonproductsales,andisbaseduponadefinedfeeforeach productsold.
InterestExpense-Interestexpenseisrecognized usingthe effectiveinterestmethod on anynotespayable.
ImpairmentofNon-FinancialAssets-Assetsthathaveanindefinite usefullife are notsubject toamortization andaretestedannuallyforimpairment.Assetsthataresubjecttoamortizationarereviewedforimpairmentwhenever eventsorchangesincircumstancesindicatethatthecarryingamountmaynotberecoverable.If necessary, undiscounted cash flow projections are then compared to the carrying value. If the carrying value is higher than the undiscounted cash flows, then we must determine whether there has been an impairment loss. An impairment loss is recognized for the amount by which theasset’scarryingamountexceedsitsrecoverable amount.Forthe purposes of assessingimpairment, assets are grouped atthelowestlevelsforwhichthere are separatelyidentifiable cashflows.
IncomeTaxes–BecausetheCompanywasestablishedasalimitedliabilitycompany,itistreatedasa partnershipforFederalincometaxpurposeswhereallsuchtax obligationsflowthroughtotheownersofthe Companyduringthe periodinwhichincometaxeswereincurred.
Fair Value of Financial Instruments - The carrying amount of our financial instruments, which principally include cash, accounts receivable, accounts payable and debt, approximates fair value due to the relatively short maturity of such instruments.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
3. CriticalAccounting EstimatesandJudgments
Estimatesandjudgmentsarecontinuallyevaluatedandarebasedonhistoricalexperienceandotherfactors,includingexpectationsoffutureeventsthatarebelievedtobereasonableunderthecircumstances.TheCompanymakesestimates andassumptionsconcerningthefuture. Theresultingaccountingestimateswill,by definition, seldom equaltherelatedactualresults. The estimates and assumptionsthat have a significantrisk of causingamaterialadjustmenttothe carrying amounts ofassetsandliabilitieswithinthe nextfinancial yearinclude:
Accounts Receivable -Allowancefor DoubtfulAccounts-The Company’sallowancefordoubtfulaccountsis estimatedbasedonhistoricalexperience,receivableaging,currenteconomictrendsandspecificidentification ofcertainreceivablesthatareatriskofnotbeingpaid.Inlightoftherecentvolatilityintheglobaleconomies,theCompany’sestimatesandjudgmentswithrespecttothecollectabilityofitsreceivableshavebecomesubjectto greateruncertaintythaninmorestable periods.
Inventory-AllowanceforObsolescence-TheCompany’sallowanceforinventoryobsolescenceis estimatedbasedonhistoricalexperience,product aging, current economictrends andspecificidentificationof certain components ofinventorythatare atrisk ofnotbeingsold.Inlightoftherecentvolatilityinthe global economies,the Company’sestimates andjudgmentswithrespecttothe sale ofitsinventory have become subjectto greateruncertaintythaninmorestable periods.
IntangibleAssets:ValuationandAmortization-TheCompanyisrequiredtoestimatethefairvalueofits acquiredintangibleassets,andreviewthemforimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountmay not berecoverable.Inmakingthisassessment,judgmentisinvolvedinthe determination ofthe potentialimpacts of bothinternaland externalfactors affectingtherecoverability ofthe assetthroughfuturerevenue. Significant estimates and assumptions arerequiredto determinethe expected usefullivesforamortizing anddeterminingtherecoverability ofintangible assets. Estimatesare alsonecessaryin assessingwhetherthereis animpairment oftheirvaluerequiring awrite-down oftheir carrying amount.In orderto ensurethatits assets are carried at nomorethantheirrecoverable amount,the Companyevaluates at eachreporting date certainindicatorsthatwouldresult,if applicable,inthe calculation of animpairmenttest. Therecoverable amount of an asset or group of assetsmayrequirethe Companyto use estimates andmainlyto assessthefuturecashflowsexpectedtoarisefromtheasset or groupofassetsandasuitablediscountrateinorderto calculate presentvalue. Any negative changeinrelationtothe operating performance orthe expectedfuture cashflowsofindividual assetsor group of assetswill changetheexpectedrecoverableamount oftheseassets or group ofassetsandthereforemayrequire awrite-down oftheircarrying amount.
ContingentLiabilities-TheCompanyisrequiredtomakejudgmentsaboutcontingentliabilitiesincludingthe probabilityofpendingandpotentialfuturelitigationoutcomesthat,bytheirnature,aredependentonfuture eventsthatareinherently uncertain.Inmakingitsdetermination ofpossiblescenarios,managementconsidersthe evaluation ofoutside counselknowledgeable abouteachmatter, aswellasknown outcomesin caselaw.
4. FinancialRiskManagementObjectivesandPolicies
TheCompanyhasasystemofcontrolsinplacetocreateanacceptablebalancebetweenthecostofrisks occurringandthecost ofmanagingtherisk.Management continuallymonitorstheCompany'sriskmanagement processto ensurethat an appropriate balance betweenrisk and controlis achieved. Riskmanagement policies and systems arereviewedregularlytoreflect changesinmarket conditions andthe Company's activities. The Companyreviewsand agreespoliciesand procedures forthemanagementoftheserisks.
The Companyisexposedtofinancialrisksarisingfromitsoperationsandtheuseoffinancialinstruments.The keyfinancialrisksincludemarketrisk,creditrisk,andliquidityrisk.ThefollowingsectionprovidesdetailsregardingtheCompany'sexposuretotheserisksandtheobjectives,policiesandprocessesforthemanagement oftheserisks.
MarketRisk-Marketriskistheriskthatchangesinmarketprices,suchasforeignexchangerates,interestrates andequityprices,willaffecttheCompany'sincomeorthevalueofitsholdingsoffinancialinstruments. Managementbelievesthe Companyis notexposedto significantmarketrisk atDecember31,2013 or December 31, 2012.
CreditRisk-Creditriskistheriskoflossthatmayariseonoutstandingfinancialinstrumentsshoulda counterparty defaultonitsobligations.CreditriskarisingfromtheinabilityofacustomertomeetthetermsoftheCompany'sfinancialinstrument contractsisgenerallylimitedtotheamounts,ifany, bywhichthecustomer's obligations exceedtheobligations oftheCompany. TheCompany's exposureto creditrisk arises primarilyfromitscash &cash equivalentsandits accountsreceivableforwhichtheCompanyminimizescredit risk by dealingwithreputable counterpartieswith high credit ratingsandno history ofdefault.
LiquidityRisk-LiquidityriskistheriskthattheCompanywillencounterdifficultyinmeetingfinancial obligationsduetoshortageoffunds.The Company'sexposuretoliquidityriskarisesprimarilyfrommismatches ofthematurities offinancial assets andliabilities. The Company'sliquidityriskmanagement policyistomonitorits netoperating cashflowsandmaintain an adequatelevelofcashandcashequivalentsthroughregular review ofitsworking capitalrequirements. The Companymonitors andmaintains alevel of cash consideredadequatebymanagementtofinancethe Company's operationsandmitigatethe effects of thefluctuationsin cashflows.
CapitalManagement-TheprimaryobjectiveoftheCompany'scapitalmanagementistoensurethatitmaintains astrong credit rating and healthycapital ratiosin ordertosupportits businessandmaximizeshareholdervalue. TheCompanymanagesits capitalstructure andmakes adjustmentstoit,inlight of changesin economic conditions. Tomaintain oradjustthe capital structure,the Companymay adjustthe distributionstomembers. TheCompanyhas compliedwith all externallyimposed capitalrequirements asat December 31, 2013 and December 31, 2012, and no changesweremadetotheCompany’s capitalmanagement objectives, policies or processes duringthe periodthen ended.
5. Accounts receivable
The following is a summary of accounts receivable, net:
| | | December 31, |
| | | 2013 | | 2012 |
| Customer receivables, factored | | $ | 37,874 | | | $ | 271,136 | |
| Customer receivables, unfactored | | | — | | | | 25,476 | |
| Energie Holdings, Inc., unfactored | | | 98,759 | | | | — | |
| Other, unfactored | | | 577,875 | | | | — | |
| | | $ | 714,508 | | | $ | 296,612 | |
Losses from factoring of receivables for the years ended December 31, 2013 and 2012 were $54,206 and $61,220, respectively. These amounts are included in the accompanying statement of operations within “Other income (expense)”. The amounts due from Energie Holdings, Inc. (“EHI”), are for expenses we paid on their behalf. Our CEO is also the CEO of EHI and we completed a share exchange agreement with EHI on July 2, 2014. The Other amounts receivable are additional expenditures we made associated with our efforts to become a public company. While not directly associated with EHI, they have committed to reimbursing us for these costs.
6. Inventory
The following is a summary of inventory:
| | December 31, |
| | 2013 | | | 2012 |
| Raw materials | $ | 418,796 | | $ | 430,895 |
| Less: reserve | | (4,488) | | | (4,488) |
| $ | 414,308 | | $ | 426,407 |
7. Prepaid expenses
The following is a summary of prepaid expenses:
| | December 31, |
| | 2013 | | | 2012 |
| Deposits | $ | 10,022 | | $ | 23,580 |
| Other | | 5,900 | | | 25,387 |
| $ | 15,922 | | $ | 48,967 |
8. IntangibleAssets
The following is a summary of intangible assets:
| | December 31, | Estimated Useful Life |
| | 2013 | | | 2012 | (Years) |
| UL Listings and Trademarks | $ | 1,639,840 | | $ | 1,639,840 | 15 |
| Marketing and design | | 723,795 | | | 723,795 | 3-5 |
| | 2,363,635 | | | 2,363,635 | |
| Less: accumulated amortization | | (1,244,085) | | | (985,069) | |
| $ | 1,119,550 | | $ | 1,378,566 | |
The weighted average remaining life of intangible assets recorded by the Company was 4.3 years and 5.3 years, respectively, at December 31, 2013, and 2012. Amortization expense for the years ended December 31, 2013 and 2012, was $227,267 and $198,522, respectively.
9. Property and equipment
The following is a summary of property and equipment:
| | December 31, | Estimated useful life |
| | 2013 | | | 2012 | (Years) |
| Computers and software | $ | 210,849 | | $ | 210,849 | 5.0 |
| Office furniture and fixtures | | 70,245 | | | 70,245 | 7.0 |
| Leasehold improvements | | 57,025 | | | 57,025 | 5.0 |
| Tooling and equipment | | 23,633 | | | 23,130 | 5.0 |
| | 361,752 | | | 361,249 | |
| Less: accumulated depreciation | | (338,331) | | | (327,042) | |
| $ | 23,421 | | $ | 34,207 | |
Depreciation expense for the years ended December 31, 2013 and 2012 was $10,786 and $18,372, respectively.
10. Debt
Debt iscomprised ofthefollowing:
| | | | December 31, |
| Description | | Note | | 2013 | 2012 |
| Line of credit | | A | | $ 47,000 | $ 47,000 |
| Accounts receivable factoring | | B | | 52,530 | 215,330 |
| Note payable to distribution partner | | C | | 550,347 | 555,347 |
| Related party debt | | D | | 3,110,889 | 1,738,880 |
| Other notes payable | | E | | 221,167 | 115,352 |
| Note payable to office lessor | | F | | - | 46,557 |
| Inventory financing payable | | G | | - | 16,190 |
| | | | | $3,981,932 | $ 2,734,656 |
A–LineofCredit–TheCompanyutilizedthisbanklineofcreditforworkingcapitalpurposes.The outstandingobligationisdueon demand,hasastatedinitialinterestrateof10.5%thatissubjectto adjustment, andis guaranteed bythe Company’smajorityshareholder.
B–AccountsReceivableFactoring–Pursuanttofactoringandsecurityagreement,theCompanysubmits accountsreceivableforsaletoafactoringfirmatanamountequaltotheirfacevalue,less a1.5%commissionandaninitialfactoringfee basedonthe primeinterestrate plus 3%.Thefactor advances apercent ofthe account balancetotheCompany,andtheremainingamountwillbewithheldinanon-interest bearingreserveaccount. Accountspurchased bythefactor arewithfullrecoursewiththe Companywithin 120 daysfromtheinvoices date. Thefactoringtransactionistreated as aloan,withthereceivables used as collateral. The Companyhas grantedthefactoringfirmasecurityinterestin, and a blanketlien upontheCompany’sassets.
C–NotePayabletoDistributionPartner–Representstheoutstandingprincipalbalanceplus5%annualinterest dueona2007promissorynotewith5%annualinterest,betweentheCompany andasignificantEuropeandistribution partner. Althoughthe Companyis past due onrequired payments,theloan holder has notmade any demandfor repaymentofthe principalandinterestdue.
D–Related Parties Debt–Amountsduetolenders havinganinterestinthemembershiprights of Energie,LLC.These loans are not collateralized. All have been renegotiated to have a maturity of December 31, 2014. The following summarizes the terms and balances of the related party notes:
| December 31, 2013 | December 31, 2012 | Interest Rate |
| D1 | $ 2,413,752 | $ 1,242,913 | 6% |
| D2 | 306,946 | 289,753 | 12% |
| D3 | 173,367 | 124,587 | -- |
| D4 | 103,500 | -- | 24% |
| D3 | 81,697 | 50,000 | 24% |
| D3 | 20,000 | 20,000 | 24% |
| D3 | 10,000 | 10,000 | 24% |
| D5 | 1,627 | 1,627 | -- |
| Total | $ 3,110,889 | $ 1,738,880 | |
D1 -- Holds the largest ownership percentage in the Company, and we also incur approximately $150,000 annually for rent expense with them. According to the note agreement, the note holder may, at its option at any time after default, proceed to convert any remaining balance of the notes to equity at a rate equal to the proportion of the remaining balance of the note divided by $4,000,000 enterprise value. The note was considered to be in default as of December 31, 2013; therefore, the note holder has the right to exercise the conversion option, but has not yet elected to do so.
The Company evaluated the agreement for derivatives and determined that it does not qualify for derivative treatment for financial reporting purposes, because the agreement relates to the Company’s own equity and, the debt and the equity are not closely related. The Company also determined this does not qualify as a beneficial conversion feature. Accordingly, the balance is reported at the carrying amount.
D2 -- Holds ownership interest in the Company and is also an executive vice president.
D3 -- All represent holders of ownership interest, without any other involvement in the Company.
D4 -- The spouse of the Company’s CEO.
D5 -- Holds ownership interest in the Company and is also a vice president.
11. Commitments and Contingencies
TheCompanyissubjecttolegalclaimsthatmayariseinthenormalcourseofbusiness.However,managementisunawareofanypendingorthreatenedclaimsthatwouldrequireadjustmentordisclosuretotheaccompanyingfinancialstatements.
Future minimum rental payments required under all leases that have remaining non-cancelable lease terms in excess of one year as of December 31, 2013 are as follows (in thousands):
| 2014 | $ 170,392 |
| 2015 | 165,860 |
| 2016 | 168,153 |
| 2017 | 150,956 |
| 2018 | 28,567 |
| Thereafter | -- |
| $ 683,929 |
12. Subsequent Events
On January 27, 2013, Energie Holdings, Inc. (“Holdings”), a publicly traded company, announced they had entered into a Share Exchange Agreement (the “Agreement”), whereby upon closing, Holdings would acquire a 100% interest in the Company in exchange for 33 million shares of Holdings’ common stock.
