Exhibit 99.1
Energie, LLC
Financial Statements
(Restated)
For the Years Ended December 31, 2013 and 2012
Energie, LLC
IndextoFinancialStatements
FortheYearsEndedDecember31, 2013 and 2012
ReportofIndependent Public Accounting Firm……………...……………………………………………..2
Financial Statements (restated):
BalanceSheets..…………………………………………………………......……………………………...3
Statements ofOperations..…………………………..……………………..……………………………….4
Statements ofChangesinMembers’ Deficit..…………………………..…………………………………..5
Statements ofCashFlows......…………………………………………………..………………...…………6
NotestoFinancial 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
June 11, 2014, except for the effects on the financial statements of the restatement described in Notes 13, as to which the date is September 23, 2014.
Energie,LLC
Balance Sheets
YearsEndedDecember31,2013 and 2012
| | | December 31, 2013
(Restated) | | December 31, 2012 |
| | | | | | | | | |
| Assets | | | | | | | | |
| | | | | | | | | |
| Current Assets | | | | | | | | |
| Cash and cash equivalents | | $ | 37,874 | | | $ | 59,171 | |
| Accounts receivable, net | | | 49,637 | | | | 296,612 | |
| Inventory | | | 414,308 | | | | 426,407 | |
| Prepaid expenses | | | 15,922 | | | | 48,967 | |
| Total Current Assets | | | 517,741 | | | | 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 | | $ | 1,672,407 | | | $ | 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 | | | (2,996,694 | ) | | | (1,267,559 | ) |
| | | | | | | | | |
| Total Liabilities and Members' Deficit | | $ | 1,672,407 | | | $ | 2,255,625 | |
The accompanying notes are an integral part of these financial statements.
Energie,LLC
Statements of Operations
YearsEndedDecember31,2013 and 2012
| | | For the Year Ended December 31, |
| | | 2013 | | |
| | | (Restated) | | 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 | | | 1,074,774 | | | | 460,699 | |
| Total Operating Expenses | | | 2,286,567 | | | | 1,589,346 | |
| | | | | | | | | |
| Loss from Operations | | | (1,311,933 | ) | | | (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 | | $ | (1,619,469 | ) | | $ | (908,219 | ) |
| | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
Energie, LLC
Statements ofChangesin Members’Deficit
YearsEndedDecember 31,2013 and 2012
| | | Members' Deficit
(Restated) |
| | | | | |
| 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 | | | (1,619,469 | ) |
| | | | | |
| Other | | | (109,666 | ) |
| | | | | |
| Balance at December 31, 2013 | | $ | (2,996,694 | ) |
The accompanying notes are an integral part of these financial statements.
Energie, LLC
Statements ofCashFlows
Years Ended December 31, 2013 and 2012
| | For the Year Ended December 31, |
| | | 2013
(Restated) | | 2012 |
| | | | | | | | | |
| Cash flow from operating activities | | | | | | | | |
| Net loss | | $ | (1,619,469 | ) | | $ | (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 | | | 246,975 | | | | (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. Organization andNatureofOperations
Organization andOperations–Energie,LLC(“Energie”or“theCompany”)wasestablished onNovember 29, 2001asalimitedliability companyinthe stateofDelaware andisengagedintheimport andsale ofspecializedinteriorlightingsolutionstothe architecture andinterior designmarketsinNorthAmerica. TheCompanyis headquarteredin Wheat Ridge, Colorado and alsomaintains a productionand assemblyfacilityinZeeland,Michigan.
Energiehasorganically developedanend-to-end production anddistribution platformforimportedlighting productsfeaturing HID,fluorescent, andLEDtechnologies.Longterm contractswithfive Europeanmanufacturers andoneinTaiwan provide Energiewith exclusive North American distributionrightsto over270total productsin37categories. After processing anymodifications 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, andtechnical supportbythe Company.
2. Summary ofSignificant AccountingPolicies
Basis ofPreparation-Thefinancial statements arepresentedinUnited Statesdollars, andare preparedinaccordancewithaccounting principles generally acceptedinthe UnitedStates ofAmerica(“GAAP”)underthe historical cost convention except as otherwise noted. The preparation offinancial statementsin conformitywithGAAPrequiresthe use of certain critical accountingestimates.It alsorequiresmanagementto exerciseits judgmentinthe process ofapplyingthe Company’saccounting policies.The areasinvolving ahigherdegreeofjudgmentorcomplexity, orareaswhereassumptions and estimates aresignificanttothefinancial statements are disclosedinNote 3 –CriticalAccounting Estimates and Judgments.
Going Concern and Managements’ Plan -The Company's financial statements for the years 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 $1,619,469 and $908,219 for the years ended December 31, 2013 and 2012. The Company also has a members’ deficit of $2,996,694 at December 31, 2013 and negative working capital of $4,151,360 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 notyetadoptedbythe Companyduetoafuture effective date:In March2013,theFASBissued guidanceonaparent’s accountingforthe cumulativetranslation adjustment upon de-recognition ofa subsidiary orgroupof assetswithin aforeignentity. This newguidancerequiresthat the parentrelease anyrelated cumulativetranslation adjustmentinto netincome onlyifthe sale ortransferresultsinthe complete or substantially completeliquidation oftheforeign entityinwhichthesubsidiary orgroupof assets hadresided. ThenewguidancewillbeeffectiveforusbeginningJuly 1,2014.The Company does notanticipatematerialimpacts onthefinancial statements uponadoption.
Cash and Cash Equivalents-Inthestatements ofcashflows, cashand cashequivalentsincludescashinhand, deposits heldatcallwithbanks,othershort-term highlyliquidinvestments withoriginalmaturities ofthreemonths orless, andbankoverdrafts.Inthe balancesheets, any bankoverdrafts areshownwithinborrowingsin currentliabilities.
Accounts Receivable-Accountsreceivablerepresent normaltradeobligationsfromcustomersthatare subjecttonormaltradecollectionterms,withoutdiscounts orrebates.Ifcollectionisexpectedinoneyearorlessthey are classified ascurrentassets.Ifnot,theyarepresented asnon-current assets. Accountsreceivable arerecognizedinitiallyatfairvalue and subsequentlymeasured at amortized cost usingthe effectiveinterestmethod,less provisionforimpairment. Notwithstandingthese collections,the Company periodically evaluatesthe collectability of accountsreceivable and considersthe needto establish an allowancefordoubtful debts basedupon historical collectionexperienceandspecificallyidentifiableinformation aboutitscustomers. AsofDecember 31, 2013 and 2012,the Companydeterminedthatno such allowancewasnecessary.
Accounts Receivable 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, consisting ofpurchased goodsforresale, atthelowerofcostormarket. Costisdetermined usingtheweighted averagemethod. TheCompanyreducesinventoriesforthe diminution ofvalue,if any,resultingfrom product obsolescence, damage or otherissues affectingmarketability, equaltothe difference betweenthecost oftheinventory anditsestimatedmarketvalue.Thesemarkdowns are estimates,which couldvary significantlyfrom actualrequirementsiffuture economicconditions,customer demand orcompetition differfromexpectations.
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.
Prepaid Expenses–Prepaymentsmadefor services aredeferred asanasset andrecognized as expense asthe services are performed.
Intangible Assets-Purchasedintangible assets arerecorded atcost,wherecostistheamountofcashorcash equivalents paidorthefair valueofotherconsiderationgiventoacquire anasset atthetime ofitsacquisition. Thecost ofsuch anintangible assetismeasured atfairvalueunlesstheexchangetransactionlackscommercial substanceorthefairvalueofneithertheassetreceived northe assetgivenupisreliablymeasurable.Ifthefairvalue ofeithertheassetreceived ortheasset givenupcanbemeasuredreliably,thenthefairvalue oftheasset given upis usedtomeasure costunlessthefairvalue ofthe assetreceivedismore clearly evident (SeeNote8–Intangible Assets).
Intangible assets withfinite usefullivesthatare acquiredseparately arecarried atcostlessaccumulated amortization andaccumulatedimpairmentlosses. Amortizationisrecognized onastraight-line basisovertheir estimated usefullives. The estimated usefullife andamortizationmethod arereviewed attheend ofeachreporting period,withthe effect of any changesin estimate being accountedfor on a prospective basis.Intangible assetswhich haveindefinitelivesare notamortized, andarestated atcostlessaccumulatedimpairmentlosses.
Our intangible assets consist of the following:
UL Listings -- Energie has over 20 United Laboratories™ (“UL”) files, which include UL Listings for over 14,000 products for sale in the United States and Canada. UL is an independent safety testing laboratory. A UL Listing means that UL has tested representative samples of the product and determined that it meets UL’s requirements. These requirements are based primarily on UL’s published and nationally recognized standards for safety. UL’s testing certifies the design, construction and assembly of the certified products. UL Listings do not expire as long as the product certified is not materially changed. Ownership of a UL Listing may also be transferred between companies. Most customers in the lighting industry will only buy UL listed products.
Trademarks -- Energie is a registered trademark.
Marketing and design – Engineering and marketing materials covering the majority of our product offerings.
Property andEquipment-Property andequipmentisstated athistorical costless depreciation. Historical costincludes expenditurethatis directlyattributabletothe acquisitionoftheitems. Subsequentcosts areincludedintheasset’s carrying amountorrecognized asaseparate asset, as appropriate, onlywhenitis probablethatfuture economic benefitsassociatedwiththeitemwillflowtothe Company,andthe costoftheitem can bemeasuredreliably. Subsequenttorecognition, property andequipmentismeasured atcostlessaccumulated depreciation andimpairmentlosses.
Deposits – Consist of security deposits for leased office space.
Accounts Payable–Accounts payable areobligationstopayforgoodsorservicesthathave beenacquiredintheordinary courseofbusinessfromsuppliers. Accountspayable areclassified ascurrentliabilitiesifpaymentisduewithinoneyearorless(orinthenormal operatingcycle ofthebusinessiflonger).Ifnot,they are presented asnon-currentliabilities.
Unearned Income–Cashcollectedfromcustomers priortodelivery ofproductsisdeferred asaliability until suchtimethesaletransactionmeetstherevenuerecognition criteria described below.
Notes Payable-Borrowings arerecognizedinitially atfairvalue, netoftransaction costsincurred.Borrowings are subsequentlycarried atamortized cost;anydifference betweenthe proceeds(net oftransaction costs)andtheredemptionvalueisrecognizedintheincomestatement overthe period oftheborrowingsusingthe effectiveinterestmethod.
Commissions Payable–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.
Sales RevenueandCostofGoods Sold–TheCompanyrecognizesrevenuewhenitisrealizedorrealizable and earned.The Companyconsidersrevenuerealizedorrealizable andearnedwhenpersuasive evidenceofanarrangement exists,theproduct hasbeenshipped ortheservices havebeenrenderedtothe customer,thesales priceisfixed or determinable, and collectionisreasonably assured. The Companyrecordsrevenue on a gross basis. Gross basisreportingreflectsrevenue atthegrosssales pricereceivedbytheCompanyfromthebuyer oftheproducts, andcost ofgoodssoldrepresentstheCompany’s costtoacquiretheproductsfromthemanufacturersforresale. TheCompanytakestitletothe productstoberesoldonthe datethe productis shippedtotheCompanyfromthemanufacturer. Refunds and returns, which are minimal, are recorded as a reduction of sales revenue.
Operating Expenses-Expenses necessarytogeneraterevenueare expensedinthe periodincurred.Commission expenseisrecognizedatthetimerevenueisearned onproductsales, andisbasedupon adefinedfeefor each productsold.
Interest Expense-Interest expenseisrecognized usingthe effectiveinterestmethod on anynotespayable.
Impairment ofNon-Financial Assets-Assetsthat haveanindefinite usefullife are notsubjecttoamortization andaretested annuallyforimpairment. Assetsthatare subjectto amortization arereviewedforimpairmentwhenever events orchangesin circumstancesindicatethatthe carryingamountmaynotberecoverable. 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’s carryingamountexceedsitsrecoverable amount.Forthe purposesofassessingimpairment, assets aregrouped atthelowestlevelsforwhichthereare separatelyidentifiable cashflows.
Income Taxes–BecausetheCompanywasestablished asalimitedliability company,itistreated asa partnershipforFederalincometaxpurposeswhere allsuchtax obligationsflowthroughtotheownersofthe Company duringthe 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.
Reclassification – Certain expenses that were previously shown separately have been reclassified as General and administrative expense in the statements of operations, as the nature of these expenses are similar and separate disclosure was not deemed necessary.
3. Critical Accounting Estimates andJudgments
Estimates andjudgmentsarecontinually evaluatedandare basedonhistorical experience andotherfactors,including expectations offuture eventsthatare believedtobereasonable underthe circumstances. TheCompanymakes estimates andassumptions concerningthefuture. Theresulting accountingestimateswill, by definition, seldom equaltherelated actualresults. The estimates and assumptionsthat have a significantrisk of causing amaterial adjustmenttothe carrying amounts ofassetsandliabilitieswithinthe nextfinancial yearinclude:
Accounts Receivable -Allowancefor Doubtful Accounts-The Company’sallowancefordoubtful accountsis estimated basedonhistorical experience,receivable aging,current economictrendsandspecificidentification ofcertainreceivablesthatare atrisk ofnotbeing paid.Inlightoftherecentvolatilityinthe globaleconomies,theCompany’s estimates andjudgmentswithrespecttothe collectability ofitsreceivables havebecome subjectto greater uncertaintythaninmorestable periods.
Inventory -AllowanceforObsolescence-TheCompany’s allowanceforinventory obsolescenceis estimated basedonhistorical experience,product aging, current economictrends andspecificidentification of certain components ofinventorythatare atrisk ofnotbeing sold.Inlight oftherecentvolatilityinthe global economies,the Company’sestimates andjudgmentswithrespecttothe sale ofitsinventory have become subjectto greater uncertaintythaninmorestable periods.
Intangible Assets:Valuation andAmortization-TheCompanyisrequiredtoestimatethefairvalueofits acquiredintangible assets, andreviewthemforimpairmentwheneverevents orchangesincircumstancesindicatethatthe carrying amountmay notberecoverable.Inmakingthisassessment,judgmentisinvolvedinthe determination ofthe potentialimpacts of bothinternal and externalfactors affectingtherecoverability ofthe assetthroughfuturerevenue. Significant estimates and assumptions arerequiredto determinethe expected usefullivesforamortizing and determiningtherecoverability ofintangible assets. Estimates are also necessaryin 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 assessthefuture cashflows expectedto arisefromthe assetor groupofassets andasuitablediscountrateinorderto calculate presentvalue. Any negative changeinrelationtothe operating performance orthe expectedfuture cashflows ofindividual assets or group of assetswill changetheexpectedrecoverableamount ofthese assets or group ofassetsandthereforemayrequire awrite-down oftheir carrying amount.
Contingent Liabilities-TheCompanyisrequiredtomakejudgmentsaboutcontingentliabilitiesincludingthe probability ofpendingandpotentialfuturelitigationoutcomesthat,bytheir nature,aredependent onfuture eventsthatareinherently uncertain.Inmakingits determination ofpossible scenarios,managementconsidersthe evaluation ofoutside counselknowledgeable abouteachmatter, aswell asknown outcomesin caselaw.
4. Financial RiskManagementObjectives andPolicies
TheCompany hasasystem ofcontrolsinplacetocreate anacceptable balancebetweenthecost ofrisks occurring andthe cost 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 proceduresforthemanagementoftheserisks.
The Companyisexposedtofinancialrisksarisingfromits operationsandthe useoffinancialinstruments. The keyfinancialrisksincludemarketrisk,creditrisk,andliquidityrisk.Thefollowing sectionprovides detailsregardingtheCompany's exposuretotheserisksandthe objectives, policiesandprocessesforthemanagement oftheserisks.
Market Risk-Marketriskistheriskthatchangesinmarket prices, suchasforeign exchangerates,interestrates andequity prices,willaffecttheCompany'sincomeorthevalueofitsholdingsoffinancialinstruments. Managementbelievesthe Companyis notexposedto significantmarketrisk atDecember31,2013 or December 31, 2012.
Credit Risk-Creditriskistheriskoflossthatmay ariseonoutstandingfinancialinstruments shoulda counterparty defaultonitsobligations. Creditriskarisingfromtheinability ofacustomertomeettheterms oftheCompany'sfinancialinstrument contractsisgenerallylimitedtotheamounts,ifany, bywhichthecustomer's obligations exceedtheobligations oftheCompany. TheCompany's exposureto creditrisk arises primarilyfromitscash &cash equivalents andits accountsreceivableforwhichthe Companyminimizescredit risk by dealingwithreputable counterpartieswith high creditratingsand no history ofdefault.
Liquidity Risk-Liquidityriskistheriskthatthe Company willencounter difficultyinmeetingfinancial obligationsduetoshortageoffunds.The Company's exposuretoliquidityriskarises primarilyfrommismatches ofthematurities offinancial assets andliabilities. The Company'sliquidityriskmanagement policyistomonitorits netoperating cashflowsandmaintain an adequatelevel ofcashandcashequivalentsthroughregular review ofitsworking capitalrequirements. The Companymonitors andmaintains alevel of cash considered adequatebymanagementtofinancethe Company's operationsandmitigatethe effects of thefluctuationsin cashflows.
Capital Management-Theprimary objective oftheCompany's capitalmanagementisto ensurethatitmaintains astrong credit rating and healthy capital ratiosin ordertosupportits businessandmaximize shareholdervalue. 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 orprocesses duringthe periodthen ended.
5. Accounts receivable
The following is a summary of accounts receivable, net:
| | | December 31, |
| | | 2013
(Restated) | | 2012 |
| | | | | | | | | |
| Customer receivables, factored | | $ | 37,874 | | | $ | 271,136 | |
| Customer receivables, unfactored | | | 11,763 | | | | 25,476 | |
| | | $ | 49,637 | | | $ | 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 statements of operations within “Other income (expense).”
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. Intangible Assets
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 | | | | 221,166 | | | | 115,352 | |
| Note payable to office lessor | | | F | | | | — | | | | 46,557 | |
| Inventory financing payable | | | G | | | | — | | | | 16,190 | |
| | | | | | | $ | 3,981,932 | | | $ | 2,734,656 | |
A–LineofCredit–TheCompany utilizedthisbanklineofcreditforworking capitalpurposes. The outstandingobligationisdue on demand,hasastatedinitialinterestrateof10.5%thatis subjectto adjustment, andis guaranteed bythe Company’smajority shareholder.
B–Accounts ReceivableFactoring–Pursuanttofactoring andsecurity agreement,theCompany submits accountsreceivableforsaletoafactoringfirm atanamount equaltotheirfacevalue,less a1.5%commissionandaninitialfactoringfee based onthe primeinterestrate plus 3%.Thefactor advances apercent ofthe account balancetothe Company,andtheremainingamountwillbewithheldinanon-interest bearingreserve account. Accountspurchased bythefactor arewithfullrecoursewiththe Companywithin 120 daysfromtheinvoices date. Thefactoringtransactionistreated as aloan,withthereceivables used as collateral. The Companyhas grantedthefactoringfirm asecurityinterestin, and a blanketlien upontheCompany’sassets.
C–NotePayabletoDistribution Partner–Representstheoutstanding principal balanceplus5%annualinterest dueona2007promissory notewith 5%annualinterest, betweenthe Company andasignificantEuropeandistribution partner. Althoughthe Companyis past due onrequired payments,theloan holder has notmade any demandforrepayment ofthe principal andinterest due.
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
TheCompanyissubjecttolegal claimsthatmay ariseinthe normalcourseofbusiness. However,managementis unawareofanypending orthreatened claimsthatwouldrequire adjustment ordisclosuretothe accompanyingfinancialstatements.
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 | | | | 28,568 | |
| | 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. On July 2, 2014, Holdings issued 33 million unregistered shares of common stock in exchange for 100% ownership interest in Energie. This transaction resulted in the owners of Energie obtaining a majority voting interest in Holdings. The merger of Energie into Holdings results in Energie having control of the combined entity. Accordingly, this is considered to be a capital transaction, rather than a business combination, equivalent to the issuance of ownership interests by Energie for the net assets of Holdings, accompanied by a recapitalization. The accounting is identical to that resulting from a reverse acquisition, except that no goodwill or other intangible is recorded.
13. Restatement of Financial Statements
The audited financial statements as of and for the year ended December 31, 2013, filed with the SEC on July 2, 2014, have been restated. The previously filed financial statements reflected the potential reimbursement of costs to become a publicly-traded company as accounts receivable and a reduction of the corresponding expense. Management has determined that the accounting treatment should have been evaluated as a contingent gain and, as such, the potential reimbursement should not have been recorded. There is no formal reimbursement agreement and no amounts have been received.
The effects of the restatement on our previously issued financial statements as of and for the year ended December 31, 2013, are as follows:
| | | Previously
Reported | | Adjustment | | Restated |
| Balance sheet: | | | | | | | | | | | | |
| Accounts receivable, net | | $ | 714,508 | | | $ | (664,871 | ) | | $ | 49,637 | |
| Total current assets | | | 1,182,612 | | | | (664,871 | ) | | | 517,741 | |
| Total assets | | | 2,337,278 | | | | (664,871 | ) | | | 1,672,407 | |
| | | | | | | | | | | | | |
| Members’ deficit | | $ | (2,331,823 | ) | | $ | (664,871 | ) | | $ | (2,996,694 | ) |
| Total liabilities and members’ deficit | | | 2,337,278 | | | | (664,871 | ) | | | 1,672,407 | |
| | | | | | | | | | | | | |
| Statement of operations: | | | | | | | | | | | | |
| General and administrative expense | | $ | 409,903 | | | $ | 664,871 | | | $ | 1,074,774 | |
| Total operating expenses | | | 1,621,696 | | | | 664,871 | | | | 2,286,567 | |
| Loss from operations | | | (647,062 | ) | | | (664,871 | ) | | | (1,311,933 | ) |
| Net loss and comprehensive income | | | (954,598 | ) | | | (664,871 | ) | | | (1,619,469 | ) |
