ENERGY FOCUS, INC/DE - Quarter Report: 2008 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
Form
10-Q
(Mark
one)
|
ý
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE
ACT
OF 1934
|
For
the quarterly period ended September 30, 2008
OR
|
o
|
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
0-24230
ENERGY
FOCUS, INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
94-3021850
|
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. Employer Identification No.)
|
|
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32000
Aurora Rd., Solon, OH
(Address
of principal executive offices)
|
||
|
44139
(Zip
Code)
|
||
|
(Registrant’s
telephone number, including area code): (440)
715-1300
|
||
|
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
|
||
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 ý
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
One)
Large Accelerated Filer o
Accelerated Filer o
Non-Accelerated Filer ý
Indicate
by check mark whether the registrant is a shell Company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No
ý
The
number of outstanding shares of the registrant’s Common Stock, $0.0001 par
value, as of October 31, 2008 was 14,832,130.
TABLE
OF CONTENTS
Part
I - FINANCIAL INFORMATION
|
Item
1
|
Financial
Statements:
|
||
|
a.
|
Condensed
Consolidated Balance Sheets at September 30, 2008 (unaudited)
and December
31, 2007
|
3
|
|
|
b.
|
Condensed
Consolidated Statements of Operations for the Three Months and
Nine Months
Ended September 30, 2008 and 2007 (unaudited)
|
4
|
|
|
c.
|
Condensed
Consolidated Statements of Comprehensive Income (Loss) for the
Three
Months and Nine Months Ended September 30, 2008 and 2007 (unaudited)
|
5
|
|
|
d.
|
Condensed
Consolidated Statements of Cash Flows for the Nine Months Ended
September
30, 2008 and 2007 (unaudited)
|
6
|
|
|
e.
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
7
|
|
|
Item
2
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
15
|
|
|
Item
3
|
Quantitative
and Qualitative Disclosures About Market Risk
|
20
|
|
|
Item
4
|
Controls
and Procedures
|
20
|
|
|
Part
II - OTHER INFORMATION
|
|||
|
Item
1
|
Legal
Proceedings
|
21
|
|
|
Item
1A
|
Risk
Factors
|
21
|
|
|
Item
6
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Exhibits
|
21
|
|
|
Signatures
|
22
|
||
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Exhibit
Index
|
23
|
||
Item
1. Financial
Statements
ENERGY
FOCUS, INC.
CONSOLIDATED
BALANCE SHEETS
(amounts
in thousands)
|
September 30,
|
December 31,
|
||||||
|
2008
|
2007
|
||||||
|
(unaudited)
|
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
12,443
|
$
|
8,412
|
|||
|
Accounts
receivable trade, net
|
3,724
|
3,698
|
|||||
|
Inventories,
net
|
6,423
|
6,888
|
|||||
|
Prepaid
and other current assets
|
302
|
381
|
|||||
|
Total
current assets
|
22,892
|
19,379
|
|||||
|
Fixed
assets, net
|
4,707
|
5,316
|
|||||
|
Goodwill,
net
|
4,318
|
4,359
|
|||||
|
Other
assets
|
103
|
59
|
|||||
|
Total
assets
|
$
|
32,020
|
$
|
29,113
|
|||
|
LIABILITIES
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
2,319
|
$
|
2,265
|
|||
|
Accrued
liabilities
|
1,843
|
1,473
|
|||||
|
Deferred
revenue
|
244
|
244
|
|||||
|
Credit
line borrowings
|
1,063
|
1,159
|
|||||
|
Current
portion of long-term bank borrowings
|
1,189
|
1,726
|
|||||
|
Total
current liabilities
|
6,658
|
6,867
|
|||||
|
Other
deferred liabilities
|
62
|
62
|
|||||
|
Deferred
tax liabilities
|
372
|
252
|
|||||
|
Long-term
bank borrowings
|
262
|
314
|
|||||
|
Total
liabilities
|
7,354
|
7,495
|
|||||
|
SHAREHOLDERS’
EQUITY
|
|||||||
|
Common
stock
|
1
|
1
|
|||||
|
Additional
paid-in capital
|
65,715
|
55,682
|
|||||
|
Accumulated
other comprehensive income
|
502
|
815
|
|||||
|
Accumulated
deficit
|
(41,552
|
)
|
(34,880
|
)
|
|||
|
Total
shareholders’ equity
|
24,666
|
21,618
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
32,020
|
$
|
29,113
|
|||
The
accompanying notes are an integral part of these financial
statements.
3
ENERGY
FOCUS, INC.
CONDENSED
CONSOLIDATED
STATEMENTS OF OPERATIONS
(amounts
in thousands except per share amounts)
(unaudited)
|
Three
months
|
Nine
months
|
||||||||||||
|
ended
September 30,
|
ended
September 30,
|
||||||||||||
|
2008
|
2007
|
2008
|
2007
|
||||||||||
|
Net
sales
|
$
|
6,357
|
$
|
5,745
|
$
|
18,810
|
$
|
17,458
|
|||||
|
Cost
of sales
|
4,047
|
3,757
|
12,813
|
11,720
|
|||||||||
|
Gross
profit
|
2,310
|
1,988
|
5,997
|
5,738
|
|||||||||
|
Operating
expenses:
|
|||||||||||||
|
Research
and development
|
569
|
805
|
2,170
|
1,963
|
|||||||||
|
Sales
and marketing
|
2,118
|
2,390
|
6,700
|
7,338
|
|||||||||
|
General
and administrative
|
1,198
|
1,668
|
3,750
|
3,813
|
|||||||||
|
Restructure
expense
|
—
|
308
|
—
|
397
|
|||||||||
|
Total
operating expenses
|
3,885
|
5,171
|
12,620
|
13,511
|
|||||||||
|
Loss
from operations
|
(1,575
|
)
|
(3,183
|
)
|
(6,623
|
)
|
(7,773
|
)
|
|||||
|
Other
income (expense):
|
|||||||||||||
|
Other
income/(expense)
|
(14
|
)
|
35
|
18
|
77
|
||||||||
|
Interest
income
|
45
|
51
|
53
|
190
|
|||||||||
|
Loss
before income taxes
|
(1,544
|
)
|
(3,097
|
)
|
(6,552
|
)
|
(7,506
|
)
|
|||||
|
Provision
for income taxes
|
(40
|
)
|
(78
|
)
|
(120
|
)
|
(145
|
)
|
|||||
|
Net
loss
|
$
|
(1,584
|
)
|
$
|
(3,175
|
)
|
$
|
(6,672
|
)
|
$
|
(7,651
|
)
|
|
|
Net
loss per share – basic and diluted
|
$
|
(0.11
|
)
|
$
|
(0.28
|
)
|
$
|
(0.48
|
)
|
$
|
(0.67
|
)
|
|
|
Shares
used in computing net loss per share – basic and
diluted
|
14,832
|
11,501
|
13,950
|
11,467
|
|||||||||
The
accompanying notes are an integral part of these financial
statements.
4
ENERGY
FOCUS, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
(amounts
in thousands)
(unaudited)
|
Three
months
|
Nine
months
|
||||||||||||
|
ended September 30,
|
ended September 30,
|
||||||||||||
|
2008
|
2007
|
2008
|
2007
|
||||||||||
|
Net
loss
|
$
|
(1,584
|
)
|
$
|
(3,175
|
)
|
$
|
(6,672
|
)
|
$
|
(7,651
|
)
|
|
|
Other
comprehensive income (loss)
|
|||||||||||||
|
Foreign
currency translation adjustments
|
(479
|
)
|
223
|
(313
|
)
|
325
|
|||||||
|
Net
unrealized loss on securities
|
—
|
(1
|
)
|
—
|
(10
|
)
|
|||||||
|
|
|
|
|
||||||||||
|
Comprehensive
loss
|
$
|
(2,063
|
)
|
$
|
(2,953
|
)
|
$
|
(6,985
|
)
|
$
|
(7,336
|
)
|
|
The
accompanying notes are an integral part of these financial
statements.
5
ENERGY
FOCUS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(amounts
in thousands)
(unaudited)
|
Nine
months
ended September 30,
|
|||||||
|
2008
|
2007
|
||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
loss
|
$
|
(6,672
|
)
|
$
|
(7,651
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||
|
Depreciation
|
932
|
932
|
|||||
|
Stock-based
compensation
|
568
|
697
|
|||||
|
Unrealized
loss from marketable securities
|
—
|
(10
|
)
|
||||
|
Deferred
taxes
|
120
|
120
|
|||||
|
Gain
on disposal of fixed assets
|
1
|
—
|
|||||
|
Changes
in assets and liabilities:
|
|||||||
|
Accounts
receivable
|
(164
|
)
|
2,460
|
||||
|
Inventories
|
327
|
(127
|
)
|
||||
|
Prepaid
and other current assets
|
74
|
(40
|
)
|
||||
|
Other
assets
|
(51
|
)
|
(3
|
)
|
|||
|
Accounts
payable
|
109
|
(2,221
|
)
|
||||
|
Accrued
liabilities
|
424
|
184
|
|||||
|
Total
adjustments
|
2,340
|
1,992
|
|||||
|
Net
cash used in operating activities
|
(4,332
|
)
|
(5,659
|
)
|
|||
|
Cash
flows from investing activities:
|
|||||||
|
Purchase
of short-term investments
|
—
|
(37,090
|
)
|
||||
|
Sale
of short-term investments
|
—
|
42,626
|
|||||
|
Acquisition
of fixed assets
|
(349
|
)
|
(244
|
)
|
|||
|
Net
cash (used in) provided by investing activities
|
(349
|
)
|
5,292
|
||||
|
Cash
flows from financing activities:
|
|||||||
|
Cash
proceeds from issuances of common stock, net
|
9,335
|
—
|
|||||
|
Cash
proceeds from exercise of stock options
|
130
|
630
|
|||||
|
Proceeds
from credit line borrowings
|
3,712
|
76
|
|||||
|
Payments
of credit line borrowings
|
(3,808
|
)
|
(61
|
)
|
|||
|
Proceeds
from long-term borrowings
|
—
|
160
|
|||||
|
Payments
of long-term bank borrowings
|
(537
|
)
|
(554
|
)
|
|||
|
Net
cash provided by financing activities
|
8,832
|
251
|
|||||
|
Effect
of exchange rate changes on cash
|
(120
|
)
|
92
|
||||
|
Net
increase (decrease) in cash and cash equivalents
|
4,031
|
(24
|
)
|
||||
|
Cash
and cash equivalents, beginning of period
|
8,412
|
3,705
|
|||||
|
Cash
and cash equivalents, end of period
|
$
|
12,443
|
$
|
3,681
|
|||
The
accompanying notes are an integral part of these financial
statements.
6
ENERGY
FOCUS, INC.
September
30, 2008
(Unaudited)
1.
Nature of Operations
Energy
Focus, Inc. (“the company”) develops, manufactures, and markets
lighting-based energy savings solutions to its customer base using its
proprietary fiber optic and LED technologies for commercial lighting and
swimming pool lighting applications. The company markets its products for
worldwide distribution primarily through independent sales representatives,
distributors, and contractors.
2.
Summary of Significant Accounting Policies
Basis
of Presentation
The
consolidated financial statements (“financial statements”) include the accounts
of the company and its subsidiaries, Crescent Lighting Limited located in the
United Kingdom and LBM Lichtleit-Fasertechnik (“LBM”) located in Germany. All
significant inter-company balances and transactions have been
eliminated.
Interim
Financial Statements (unaudited)
Although
unaudited, the interim financial statements in this report reflect all
adjustments, consisting only of all normal recurring adjustments, which are,
in
the opinion of management, necessary for a fair statement of financial position,
results of operations and cash flows for the interim periods covered and of
the
financial condition of the company at the interim balance sheet date. The
results of operations for the interim periods presented are not necessarily
indicative of the results expected for the entire year.
Year-end
Balance Sheet
The
year-end balance sheet information was derived from audited financial statements
but does not include all disclosures required by generally accepted accounting
principles. These financial statements should be read in conjunction with the
company’s audited financial statements and notes thereto for the year ended
December 31, 2007, contained in the company’s 2007 Annual Report on Form 10-K,
as amended (the “Annual Report on Form 10-K for the year ended December 31,
2007”).
Foreign
Currency Translation
The
company’s international subsidiaries use their local currency as their
functional currency. For those subsidiaries, assets and liabilities are
translated at exchange rates in effect at the balance sheet date and income
and
expense accounts at average exchange rates during the year. Resulting
translation adjustments are recorded to accumulated other comprehensive
loss.
Earnings
(Loss) per Share
Basic
loss per share is computed by dividing net loss available to common shareholders
by the weighted average of common shares outstanding for the period. Diluted
loss per share is computed giving effect to all dilutive potential common shares
outstanding during the period. Dilutive potential common shares consist of
incremental shares upon exercise of stock options and warrants, unless the
effect would be antidilutive.
7
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2008
(Unaudited)
A
reconciliation of the numerator and denominator of basic and diluted EPS is
provided as follows (in thousands, except per share amounts):
|
Three
months
|
Nine
months
|
||||||||||||
|
ended September 30,
|
ended September 30,
|
||||||||||||
|
2008
|
2007
|
2008
|
2007
|
||||||||||
|
Numerator
- net loss
|
$
|
(1,584
|
)
|
$
|
(3,175
|
)
|
$
|
(6,672
|
)
|
$
|
(7,651
|
)
|
|
|
Denominator
- basic and diluted weighted average shares outstanding
|
14,832
|
11,501
|
13,950
|
11,467
|
|||||||||
|
Basic
and diluted net loss per share
|
$
|
(0.11
|
)
|
$
|
(0.28
|
)
|
$
|
(0.48
|
)
|
$
|
(0.67
|
)
|
|
At
September 30, 2008, options and warrants to purchase 5,111,000 shares of common
stock were outstanding, but were not included in the calculation of diluted
loss
per share because their inclusion would have been anti-dilutive. Options and
warrants to purchase 1,629,000 shares of common stock were outstanding at
September 30, 2007, but were not included in the calculation of diluted loss
per
share because their inclusion would have been anti-dilutive.
Stock-
Based Compensation
The
company’s stock-based compensation plans are described in detail in the Annual
Report on Form 10-K for the year ended December 31, 2007. On September 30,
2008,
the company’s shareholders approved its 2008 Incentive Stock Plan. Under the
Plan, the maximum aggregate number of stock options awarded shall not exceed
1,000,000 shares, plus any shares remaining available for grant under existing
plans. Under existing plans, only a limited number of shares remain available
for grant.
For
the
three month and nine month periods ended September 30, 2008, the company
recorded stock based compensation expense of $135,000 and $568,000,
respectively, compared to $202,000 and $697,000 for same periods ended September
30, 2007. Total unearned compensation of $1,279,000 remains at September 30,
2008 compared to $1,592,000 at September 30, 2007. These costs will be charged
to expense and amortized on a straight line basis in future periods through
2012. The remaining weighted average life of the outstanding options is
approximately 1.9 years.
The
fair
value of each stock option is estimated on the date of grant using the
Black-Scholes option pricing model. Estimates utilized in the calculation
include the expected life of option, risk-free interest rate, and volatility
and
are further comparatively detailed below. The company granted 20,000 options
during the quarter ended September 30, 2008, and 25,000 options during the
quarter ended September 30, 2007. The company granted 245,000 options during
the
nine months ending September 30, 2008, and 189,000 during the nine months ending
September 30, 2007. The fair value of all stock options granted during the
nine
months ended September 30, 2008 was determined using the following weighted
average assumptions:
|
Nine
months
|
|||||||
|
ended
September 30,
|
|||||||
|
2008
|
2007
|
||||||
|
Expected
life of option
|
4.0
years
|
4.0
years
|
|||||
|
Risk
free interest rate
|
2.83
|
%
|
4.35
|
%
|
|||
|
Expected
volatility
|
66.82
|
%
|
56.29
|
%
|
|||
8
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2008
(Unaudited)
Product
Warranties
The
company warrants finished goods against defects in material and workmanship
under normal use and service for periods of one to three years for illuminators
and fiber. Settlement costs consist of actual amounts expensed for warranty
services which are largely a result of third party service calls, and the costs
of replacement products. A liability for the estimated future costs under
product warranties is maintained for products outstanding under warranty and
is
included in accrued liabilities. The warranty activity for the respective period
is as follows (in thousands):
|
Three
months
|
Nine
months
|
||||||||||||
|
ended September 30,
|
ended September 30,
|
||||||||||||
|
2008
|
2007
|
2008
|
2007
|
||||||||||
|
Balance
at the beginning of the period
|
$
|
190
|
$
|
212
|
$
|
212
|
$
|
230
|
|||||
|
Accruals
for warranties issued during the period
|
59
|
112
|
197
|
281
|
|||||||||
|
Settlements
made during the period (in cash or in kind)
|
(59
|
)
|
(112
|
)
|
(219
|
)
|
(299
|
)
|
|||||
|
Balance
at the end of the period
|
$
|
190
|
$
|
212
|
$
|
190
|
$
|
212
|
|||||
Reclassifications
Certain
prior year information has been reclassified to conform to the current year
presentation.
3.
Equity Financing
On
March
14, 2008, the company received an additional $9,335,000 in equity financing,
net
of expenses. The investment was made by several current Energy Focus
shareholders. These investors agreed to an at-market purchase of approximately
3.1 million units for $3.205 per unit, based on the closing bid price of Energy
Focus common shares on March 13, 2008 of $3.08. Each unit comprised one share
of
the company’s common stock, par value $0.0001 per share, and one warrant to
purchase one share of the company’s common stock at an exercise price of $3.08
per share. The warrants were immediately separable from the units, immediately
exercisable, and will expire on March 14, 2013. This additional financing is
being used to fund working capital requirements and perform additional research
and development.
4.
Inventories
Inventories
are stated at the lower of standard cost (which approximates actual cost
determined using the first-in, first-out cost method) or market and consist
of
the following (in thousands):
|
September 30,
|
December 31,
|
||||||
|
2008
|
2007
|
||||||
|
Raw
materials
|
$
|
4,625
|
$
|
5,965
|
|||
|
Inventory
reserve
|
(779
|
)
|
(713
|
)
|
|||
|
Finished
goods
|
2,577
|
1,636
|
|||||
|
$
|
6,423
|
$
|
6,888
|
||||
9
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2008
(Unaudited)
5.
Fixed Assets
Fixed
assets are stated at cost and are depreciated using the straight-line method
over the estimated useful lives of the related assets and consist of the
following (in thousands):
|
September 30,
|
December 31,
|
||||||
|
2008
|
2007
|
||||||
|
Equipment
(useful life 5 years)
|
$
|
8,707
|
$
|
8,654
|
|||
|
Tooling
(useful life 2-5 years)
|
2,752
|
2,751
|
|||||
|
Furniture
and fixtures (useful life 5 years)
|
213
|
225
|
|||||
|
Computer
software (useful life 3 years)
|
484
|
417
|
|||||
|
Leasehold
improvements (the shorter of useful or lease life)
|
1,654
|
1,576
|
|||||
|
13,810
|
13,623
|
||||||
|
Less
accumulated depreciation and amortization
|
(9,103
|
)
|
(8,307
|
)
|
|||
|
$
|
4,707
|
$
|
5,316
|
||||
6.
Bank Borrowings
The
company’s bank line of credit in the United States is based on an agreement with
Silicon Valley Bank (“SVB”) dated August 15, 2005. It was recently amended on
July 25, 2008, and on September 15, 2008. This most recent amendment extended
the credit agreement through October 15, 2008. The total credit facility is
for
$5,000,000 and incorporates both a revolving line of credit and term loan.
The
interest rate was 7.00% at September 30, 2008, and 7.75% at December 31, 2007.
The rate is the same for both the term loan and line of credit in both periods.
Borrowings under the SVB Agreement are collateralized by the company’s
assets and intellectual property. Specific borrowings under the revolver are
tied to accounts receivable, and the company is required to comply with certain
covenants with respect to effective net worth and financial ratios. As of
September 30, 2008, the company was not in compliance with all covenant
requirements, but it obtained a waiver of compliance from SVB on October 15,
2008, retroactive to September 30, 2008. The company had borrowings under the
revolving line of credit of $960,000 at September 30, 2008, and $973,000 at
December 31, 2007. The revolving line of credit is recorded as a current
liability. The company had total borrowings of $1,135,000 under the term loan
portion of the agreement as of September 30, 2008, and $1,672,000 at December
31, 2007, which has been classified as a current liability. The company pays
an
unused line fee of 0.25% against any unused daily balance during the
year.
Effective
October 15, 2008, the company entered into a one year credit agreement with
SVB
incorporating a $4,000,000 revolving line of credit which replaced all existing
facilities including the USA term loans. This new line of credit includes a
$1,500,000 sub-limit for cash management products, letters of credit, and
foreign exchange. Under this new agreement, all domestic existing term loans
and
revolving credit lines were repaid and funded by this new borrowing arrangement.
Borrowings under this agreement are collateralized by the company’s assets,
including intellectual property, at an interest rate of SVB’s Prime Rate plus
1.00%. If the company terminates the facility prior to maturity, it will be
required to pay a 1.00% termination fee. The company is required to maintain
85%
of its cash and cash equivalents in operating and investment accounts with
SVB
and its affiliates. The company will be required to comply with certain
covenants with respect to effective tangible net worth. A complete copy of
the
signed credit agreement is attached as an exhibit to this Quarterly report.
Through
the company’s U.K. subsidiary, it maintains a bank overdraft facility of
$445,000 (in U.K. pounds sterling, based on the exchange rate at September
30,
2008) under an agreement with Lloyds Bank Plc. There were no borrowings against
this facility as of September 30, 2008, or December 31, 2007. The facility
is
renewed annually on January 1. The rate on the facility was 7.50% at September
30, 2008, and 7.75% at December 31, 2007.
10
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2008
(Unaudited)
Through
the company’s German subsidiary, it maintains a credit facility under an
agreement with Sparkasse Neumarkt Bank. This credit facility was put in place
to
finance the building of offices in Berching, Germany, which are owned and
occupied by the company’s German subsidiary. As of September 30, 2008, the
company had borrowings of $316,000 (in Euros, based on the exchange rate at
September 30, 2008) and $368,000 as of December 31, 2007 (in Euros, based on
the
exchange rate at December 31, 2007) against this credit facility. The interest
rate was 5.49% at September 30, 2008 and December 31, 2007. In addition, the
company’s German subsidiary has a revolving line of credit for $211,000 (in
Euros, based on the exchange rate at September 30, 2008) with Sparkasse Neumarkt
Bank. As of September 30, 2008, there were borrowings against this facility
of
$103,000 (in Euros, based on the exchange rate at September 30, 2008), compared
to $186,000 at December 31, 2007 (in Euros, based on the exchange rate at
December 31, 2007). The revolving facility is renewed annually on January 1.
Interest rates on this line of credit were 10.75% at September 30, 2008 and
December 31, 2007. The $103,000 revolving line of credit is a current
liability.
Future
maturities of remaining borrowings are (in thousands):
|
Through
September 30,
|
U.S.A.
|
Germany
|
Total
|
|||||||
|
2009
|
$
|
2,095
|
$
|
157
|
$
|
2,252
|
||||
|
2010
|
—
|
58
|
58
|
|||||||
|
2011
|
—
|
61
|
61
|
|||||||
|
2012
|
—
|
64
|
64
|
|||||||
|
2013
|
—
|
67
|
67
|
|||||||
|
2014
and thereafter
|
—
|
12
|
12
|
|||||||
|
Total
commitment
|
$
|
2,095
|
$
|
419
|
$
|
2,514
|
||||
7.
Comprehensive Operations
Comprehensive
income (loss) is defined as net income (loss) plus sales, expenses, gains and
losses that, under generally accepted accounting principles, are included in
comprehensive income (loss) but excluded from net income (loss). A separate
statement of comprehensive income (loss) has been presented with this
report.
8.
Segments and Geographic Information
The
company has two primary product lines: the pool lighting product line and the
commercial lighting product line, each of which markets and sells fiber
optic lighting products. The company markets its products for worldwide
distribution primarily through independent sales representatives, distributors
and contractors in North America, Europe and the Far East.
A
summary
of sales by geographic area is as follows (in thousands):
|
Three
months
|
Nine
months
|
||||||||||||
|
ended September 30,
|
ended September 30,
|
||||||||||||
|
2008
|
2007
|
2008
|
2007
|
||||||||||
|
United
States Domestic
|
$
|
3,355
|
$
|
3,336
|
$
|
10,382
|
$
|
11,115
|
|||||
|
Other
Countries
|
3,002
|
2,409
|
8,428
|
6,343
|
|||||||||
|
$
|
6,357
|
$
|
5,745
|
$
|
18,810
|
$
|
17,458
|
||||||
11
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2008
(Unaudited)
Geographic
sales are categorized based on the location of the customer to whom the sales
are made. A summary of sales by product line is as follows (in
thousands):
|
Three
months
|
Nine
months
|
||||||||||||
|
ended September 30,
|
ended September 30,
|
||||||||||||
|
2008
|
2007
|
2008
|
2007
|
||||||||||
|
Pool
Lighting
|
$
|
1,715
|
$
|
2,519
|
$
|
6,062
|
$
|
8,621
|
|||||
|
Commercial
Lighting
|
4,642
|
3,226
|
12,748
|
8,837
|
|||||||||
|
$
|
6,357
|
$
|
5,745
|
$
|
18,810
|
$
|
17,458
|
||||||
A
summary
of long-lived geographic assets (fixed assets and goodwill) is as follows (in
thousands):
|
September 30,
|
December 31,
|
||||||
|
2008
|
2007
|
||||||
|
United
States Domestic
|
$
|
7,106
|
$
|
7,791
|
|||
|
Germany
|
1,688
|
1,773
|
|||||
|
Other
Countries
|
231
|
111
|
|||||
|
$
|
9,025
|
$
|
9,675
|
||||
In
September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (FAS
157), which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. This guidance
applies only when other guidance requires or permits assets or liabilities
to be
measured at fair value; it does not expand the use of fair value in any new
circumstances. FAS 157 will be effective for fiscal years beginning after
November 15, 2007 (effective January 1, 2008, for the company). In February
2008, the FASB issued Staff Position FAS 157-1, which provides that FAS 157
does
not apply under FAS 13, “Accounting for Leases,” and other accounting
pronouncements that address fair value measurements for leases. In February
2008, the FASB also issued Staff Position FAS 157-2, which delays the effective
date of FAS 157 for all nonfinancial assets and liabilities, except those
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). For items within the scope of Staff Position FAS
157-2, the effective date will be for fiscal years beginning after November
15,
2008. Early adoption of FAS 157 for nonfinancial assets and liabilities within
the scope of the new guidance is permitted. The adoption for financial assets
did not have a material effect. Management is evaluating the potential effect
that this guidance may have on the company’s financial position or results of
operations as it relates to non-financial assets.
In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (FAS 159). This guidance provides an option to
selectively report financial assets and liabilities at fair value and
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. FAS No. 159 will be effective for
fiscal years beginning after November 15, 2007 (effective January 1, 2008,
for
the company). The company has elected to not apply this fair value option to
any
of its existing assets or liabilities. However, the company may adopt this
guidance for assets or liabilities in the future as permitted under FAS No.
159.
12
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2008
(Unaudited)
In
December 2007, the FASB issued FAS No. 141(R), “Business Combinations” (FAS
141(R)).The new pronouncement requires the acquiring entity in a business
combination to recognize only the assets acquired and liabilities assumed in
a
transaction (e.g., acquisition costs must be expensed when incurred),
establishes the fair value at the date of acquisition as the initial measurement
for all assets acquired and liabilities assumed, and requires expanded
disclosures. FAS 141(R) will be effective for fiscal years beginning after
December 15, 2008 (January 1, 2009, for the company). Early adoption is
prohibited. Management is evaluating the potential effect that this guidance
may
have on the company’s overall financial position or results of
operations.
In
December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51” (FAS 160). The
new pronouncement requires all entities to report noncontrolling (minority)
interests in subsidiaries as a component of shareholders’ equity. FAS No. 160
will be effective for fiscal years beginning after December 15, 2008 (January
1,
2009, for the company). Early adoption is prohibited. Management is evaluating
the potential effect that this guidance may have on the company’s overall
financial position or results of operations.
10.
Goodwill
Goodwill
represents the excess of acquisition cost over the fair value of tangible and
identified intangible net assets of the businesses acquired. The company has
$4,318,000 in goodwill on its consolidated balance sheets as of September 30,
2008 and $4,359,000 at December 31, 2007. The change in value is based
solely upon the change in exchange rates between the two periods under
review. Goodwill is not amortized, but is subject to an annual impairment
test. When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed comparing the market capitalization of
the
company business to the carrying value to determine if the intangible assets
are
impaired. During the period ending September 30, 2008, no instances or
events required any valuation or update. However, the recent disruptions
in the global economy and the financial markets may adversely impact the
business’s market value which may require further detailed evaluation to
determine if there is an impairment issue associated with these assets in
subsequent periods.
11.
Income Taxes
A
full
valuation allowance is recorded against the company’s United States and German
deferred tax assets as management cannot conclude, based on available objective
evidence, when the gross value of its deferred tax assets will be realized.
The
company accrues foreign tax expenses or benefits as these are
incurred.
12.
Commitments and Contingencies
At
September 30, 2008, a letter of credit in the amount of $310,000 (in Euros,
based on the exchange rate at September 30, 2008) was held by the company on
behalf of Sparkasse Neumarkt Bank. The letter of credit would be drawn against
the company’s line of credit facility with Silicon Valley Bank in the event of a
default by the company’s German subsidiary, LBM, on its outstanding loan with
Sparkasse Neumarkt Bank.
13
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2008
(Unaudited)
13.
Related Party Transactions
The
company entered into a consulting agreement with Jeffrey H. Brite, a member
of
its Board of Directors, with an effective date of November 1, 2004. This
agreement ended upon the effective date of Jeffrey H. Brite’s resignation as a
member of the Board of Directors, March 7, 2007. As a consultant under this
agreement, Mr. Brite assisted the company’s President and Vice President of
Sales in identifying, contacting and making introductions to key building
project personnel in a position to facilitate the purchase of the company’s
products. In return, the company compensated Mr. Brite with the award of an
option for the acquisition of up to 40,000 shares of its common stock at a
per
share exercise price of $7.23 and with annual aggregate cash payments of $50,000
paid in quarterly installments during each of the years 2005, 2006, and 2007.
No
expenses were recorded during the three and nine months ended September 30,
2008, nor were any payments made to Mr. Brite. Payments in the first quarter
of
2007 to Mr. Brite totaled $14,000, with no payments being made in the second
or
third quarters of 2007.
Gensler
Architecture, Design & Planning, P.C., a New York Professional Corporation
(“Gensler”), provides contract services to the company in the areas of fixture
design and marketing, targeted at expanding the market for the company’s EFO™
products. Mr. Jeffrey Brite, an employee of Gensler, was a member of the
company’s Board of Directors through March 7, 2007. The company entered into a
three year consulting agreement with Gensler, effective December 15, 2004.
Gensler agreed to assist the company’s marketing group with matters of
structure, procedure and practices as they relate to the design, real estate
and
procurement communities, and advise the company on strategies to enhance its
visibility and image within the design and construction community as a
manufacturer of preferred technology. In return, the company compensated Gensler
with a one-time cash payment in 2005 of $61,000 for services delivered in
advance of the completion of the negotiation of the Consulting Agreement,
$50,000 annual cash payments paid in quarterly installments of approximately
$13,000 in arrears for each of the calendar years 2005, 2006 and 2007, and
a
one-time option award to acquire up to 75,000 shares of the company’s common
stock at a per share exercise price of $6.57. The company accrued $13,000 in
the
three months ending September 30, 2007, and paid Gensler $25,000 in the nine
months ending September 30, 2007. No payments were made to Gensler in the three
and nine months ending September 30, 2008.
On
February 3, 2006, the company had entered into a consulting agreement with
David
Ruckert, a member of its Board of Directors. This agreement was terminated
on
June 30, 2007. Under this agreement the Company paid Mr. Ruckert $13,000 and
$79,000 in the quarter and the nine months ending September 30, 2007,
respectively. No payments were made to Mr. Ruckert during the three and nine
months ending September 30, 2008. Additionally, Mr. Ruckert was granted options
to purchase 32,000 shares of the company’s common stock. Stock expense incurred
under FAS 123(R) related to these options was $7,000 and $22,000 for the three
and nine months ending September 30, 2008, respectively, and $7,000 and $22,000
for the three and nine months ending September 30, 2007, respectively.
On
October 19, 2007, the company entered into a management agreement with Barry
Greenwald, General Manager of its Pool Lighting Division. Per this agreement,
the company shall pay Mr. Greenwald nonrefundable amounts totaling $309,000
of
additional compensation, of which $77,000 was paid on November 1, 2007. Upon
Mr.
Greenwald’s termination on January 17, 2008, the company incurred an expense of
$232,000, of which $77,000 was paid on March 14, 2008. The balance of $155,000
would have been paid in 36 monthly installments commencing on January 1, 2009,
subject to certain conditions being met by Mr. Greenwald. Mr. Greenwald failed
to meet these certain conditions, so the accrued expense of $155,000 was
reversed during the three months ending September 30, 2008.
14
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the Condensed Consolidated
Financial Statements and related notes included elsewhere in this report and
the
section entitled “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” in our Annual Report on Form 10-K for the year ended
December 31, 2007.
When
used in this discussion, the words "expects," "anticipates," "estimates,"
“plan,” and similar expressions are intended to identify forward-looking
statements. These statements, which include statements as to our expected sales
and gross profit margins, expected operating expenses and capital expenditure
levels, our sales and marketing expenses, our general and administrative
expenses, expected expenses related to compliance with the Sarbanes-Oxley Act
of
2002, the adequacy of capital resources and necessity to raise additional funds,
our critical accounting policies, expected restructuring costs related to our
consolidation in Solon, Ohio, expected benefits from our consolidation and
statements regarding pending litigation are subject to risks and uncertainties
that could cause actual results to differ materially from those projected.
These
risks and uncertainties include, but are not limited to, those risks discussed
below, as well as our ability to manage expenses, our ability to reduce
manufacturing overhead and general and administrative expenses as a percentage
of sales, our ability to collect on doubtful accounts receivable, our ability
to
increase cash balances in future quarters, the cost of enforcing or defending
intellectual property, unforeseen adverse competitive, economic or other factors
that may impact our cash position, risks associated with raising additional
funds, and risks associated with our pending litigation. These forward-looking
statements speak only as of the date hereof. We expressly disclaim any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in our
expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
RESULTS
OF OPERATIONS
Net
sales
increased 11% to $6,357,000 for the quarter ended September 30, 2008, compared
to $5,745,000 for the quarter ended September 30, 2007. The increase was
primarily a result of an $840,000 increase in net sales by our European
subsidiaries overcoming an $804,000 decrease in pool lighting sales. Net sales
increased 8% to $18,810,000 for the nine months ended September 30, 2008,
compared $17,458,000 for the nine months ended September 30, 2007. The increase
was primarily a result of a $2,528,000 increase in net sales by our European
subsidiaries, as well as a $975,000 increase in government sales. These
increases were offset by a $2,559,000 decline in pool lighting sales. Management
is actively working to offset poor housing and construction markets by
penetrating new pool lighting channels.
EFO
sales
were $2,709,000 for the quarter ended September 30, 2008, or 43% of total net
sales, compared to $2,035,000 for the quarter ended September 30, 2007. EFO
sales for the nine months ending September 30, 2008 were $8,593,000, or 46%
of
total net sales, compared to $4,932,000 for the nine months ended September
30,
2007. EFO sales in 2008 and 2007 include sales from EFO fiber optic lighting,
EFO LED, EFO Controls, and EFO Government products. In 2008, international
sales
are projected to significantly exceed comparable 2007 levels resulting from
improved penetration of EFO in the Middle East and India construction markets.
However, deteriorating global economic conditions in the construction and
housing markets may have an adverse impact on continued
improvements.
During
the three and nine months ended September 30, 2008, $450,000 and $865,000,
respectively, of revenue was recognized resulting from the delivery of certain
milestones to E.I. DuPont de Nemours and Company as a part of the Very High
Efficiency Solar Cell (“VHESC”) Consortium being funded by the Defense Advanced
Research Project Agency (“DARPA”).
15
Gross
profit was $2,310,000 for the quarter ended September 30, 2008, a 16% increase
as compared to the same quarter a year ago. Gross profit was $5,997,000 for
the
nine months ended September 30, 2008, a 5% increase as compared to the nine
months ended September 30, 2007. The gross profit margin as a percentage of
sales increased from 35% for the quarter ended September 30, 2007 to 36% for
the
quarter ended September 30, 2008, and decreased from 33% for the nine months
ended September 30, 2007 to 32% for the nine months ended September 30, 2008.
We
expect gross profit margins to remain flat over the remainder of 2008 due to
the
severe global economic conditions offset by increased sales in new market
channels, price increases in existing market channels, the introduction of
new,
higher margin products, and ongoing cost reduction initiatives being enacted
on
a global basis.
Gross
research and development expenses decreased 21% to $788,000 for the quarter
ended September 30, 2008, as compared to the same quarter a year ago. This
decrease was primarily due to a decrease in salaries and wages, project related
costs, and professional fees. Gross research and development expenses for the
nine months ended September 30, 2008 increased by 10% as compared to the nine
months ended September 30, 2007. This increase was primarily due to increased
salaries and wages and project related costs, as well as a decrease in costs
reclassified to cost of sales for sales to the government. Our research and
development expenses are reduced on a percentage-of-completion basis under
development contracts with the Department of Energy (“DOE”). These contracts
were signed in 2007, for a total of $1,500,000 to be reimbursed over the
two-year life of the contracts. The gross and net research and development
spending along with credits from government contracts is shown in the following
table (in thousands):
|
Three
months
|
Nine
months
|
||||||||||||
|
ended
September 30,
|
ended
September 30,
|
||||||||||||
|
2008
|
2007
|
2008
|
2007
|
||||||||||
|
Gross
expenses for research and development
|
$
|
788
|
$
|
997
|
$
|
2,789
|
$
|
2,531
|
|||||
|
Deduct:
credits from DOE contracts
|
(219
|
)
|
(192
|
)
|
(619
|
)
|
(568
|
)
|
|||||
|
Net
research and development expense
|
$
|
569
|
$
|
805
|
$
|
2,170
|
$
|
1,963
|
|||||
Sales
and
marketing expenses decreased by 11% to $2,118,000 for the quarter ended
September 30, 2008, as compared to the same quarter a year ago. During the
three
months ended September 30, 2008, $155,000 of severance, which was accrued during
the first quarter of 2008, was reversed. This severance was related to a
management contract signed October 19, 2007 with Barry Greenwald, General
Manager of our Pool Lighting Division, in which we would pay $232,000 upon
termination. Of this amount, $77,000 was paid during the first quarter of 2008,
and the balance to be paid in 36 monthly installments commencing January 1,
2009, subject to certain conditions being met by Mr. Greenwald. Mr. Greenwald
failed to meet these certain conditions. Sales and marketing expenses decreased
by 9% to $6,700,000 for the nine months ended September 30, 2008, as compared
to
the nine months ended September 30, 2007. These decreases are a result of lower
salaries and wages, and are associated with the realignment of the sales
organization.
General
and administrative expenses decreased 28% to $1,198,000 for the quarter ended
September 30, 2008, as compared to the same quarter a year ago. This decrease
is
a result of decreased salaries and wages, as well as a reduction in the
allowance for doubtful accounts and other operating efficiencies. General and
administrative expenses decreased 2% to $3,750,000 for the nine months ended
September 30, 2008, as compared to the nine months ended September 30, 2007.
This decrease is a result of decreased salaries and wages, as well as other
operating efficiencies.
Our
net
loss decreased 50% to $1,584,000 for the quarter ended September 30, 2008,
as
compared to the same quarter a year ago. Our net loss decreased 13% to $6,672
for the nine months ending September 30, 2008, as compared to the nine months
ended September 30, 2007.
16
LIQUIDITY
AND CAPITAL RESOURCES
Cash
and cash equivalents
At
September 30, 2008, our cash and cash equivalents were $12,443,000 as compared
to $8,412,000 at December 31, 2007, a net cash increase of $4,031,000 during
the
nine months ending September 30, 2008. The following paragraphs discuss the
factors of this increase.
On
March
14, 2008, we received an additional $9,335,000 in equity financing, net of
expenses. The investment was made by several current Energy Focus shareholders.
These investors agreed to an at-market purchase of approximately 3.1 million
units for $3.205 per unit, based on the closing bid price of Energy Focus common
shares on March 13, 2008 of $3.08. Each unit comprised one share of our common
stock, par value $0.0001 per share, and one warrant to purchase one share of
our
common stock at an exercise price of $3.08 per share. The warrants were
immediately separable from the units, immediately exercisable, and will expire
March 14, 2013. This additional financing is being used to fund working capital
requirements and perform additional research and development.
Cash
used in Operating Activities
Operating
activities primarily consist of net loss adjusted for non-cash items
including depreciation, amortization, stock-based compensation, and the effect
of changes in working capital. Operating cash flow decreased during the nine
months ending September 30, 2008 by a net loss of $6,672,000, as compared to
a
net loss of $7,651,000 for the nine months ending September 30, 2007. Net cash
used by operating activities decreased 23% to $4,332,000 for the nine months
ending September 30, 2008, as compared to the nine months ending September
30,
2007.
Cash
provided by (used in) Investing Activities
Investing
activities used cash of $349,000 during the nine months ending September 30,
2008, compared to providing cash of $5,292,000 for the nine months ending
September 30, 2007. During both periods, cash was used for the acquisition
of
fixed assets. The sale of short-term securities in 2007 provided cash to fund
fixed asset purchases and operations.
Cash
provided by Financing Activities
Financing
activities provided $8,832,000 during the nine months ending September 30,
2008,
as compared to $251,000 for the nine months ending September 30, 2007. This
net
contribution was due primarily to cash proceeds from issuances of common stock
and warrants to purchase common stock for $9,335,000, proceeds of credit line
borrowings of $3,712,000, and the exercise of warrants and employee stock
options for $130,000. For the nine months ending September 30, 2007, financing
activities from the exercise of warrants and employee stock options were
$630,000. $4,345,000 of cash was used to pay short and long-term borrowings
during the nine months ending September 30, 2008, as compared to $615,000 during
the nine months ending September 30, 2007.
Our
bank
line of credit in the United States is based on an agreement with Silicon Valley
Bank dated August 15, 2005. It was recently amended on January 29, 2008, March
14, 2008, April 30, 2008, July 25, 2008, and again on September 15, 2008. This
most recent amendment extended the credit agreement through October 15, 2008.
The total credit facility is for $5,000,000 and incorporates both a revolving
line of credit and term loan. The interest rate was 7.00% at September 30,
2008,
and 7.75% at December 31, 2007. The rate is the same for both the term loan
and
line of credit in both periods. Borrowings under the Silicon Valley Agreement
are collateralized by our assets and intellectual property. Specific borrowings
under the revolver are tied to accounts receivable, and we are required to
comply with certain covenants with respect to effective net worth and financial
ratios. As of September 30, 2008, we were not in compliance with all covenant
requirements, but we obtained a waiver of compliance from Silicon Valley Bank
on
October 15, 2008, retroactive to September 30, 2008. We had borrowings under
the
revolving line of credit of $960,000 at September 30, 2008, and $973,000 at
December 31, 2007. The revolving line of credit is recorded as a current
liability. We had total borrowings of $1,135,000 under the term loan portion
of
the agreement as of September 30, 2008, and $1,672,000 at December 31, 2007,
which, according to a recent amendment, has been classified as a current
liability. We pay an unused line fee of 0.25% against any unused daily balance
during the year.
17
Effective
October 15, 2008, we entered into a one year credit agreement with SVB
incorporating a $4,000,000 revolving line of credit which replaced all existing
facilities including the USA term loans. This new line of credit includes a
$1,500,000 sub-limit for cash management products, letters of credit, and
foreign exchange. Under this new agreement, all domestic existing term loans
and
revolving credit lines were repaid and funded by this new borrowing arrangement.
Borrowings under this agreement are collateralized by our assets, including
intellectual property, at an interest rate of SVB’s Prime Rate plus 1.00%. If we
terminate the facility prior to maturity, we will be required to pay a 1.00%
termination fee. We are required to maintain 85% of our cash and cash
equivalents in operating and investment accounts with SVB and its affiliates.
We
will be required to comply with certain covenants with respect to effective
net
worth. A complete copy of the signed credit agreement is attached as an exhibit
to this Quarterly report.
Through
our U.K. subsidiary, we maintain a bank overdraft facility of $445,000 (in
U.K.
pounds sterling, based on the exchange rate at September 30, 2008) under an
agreement with Lloyds Bank Plc. There were no borrowings against this facility
as of September 30, 2008, or December 31, 2007. The facility is renewed annually
on January 1. The rate on the facility was 7.50% at September 30, 2008, and
7.75% at December 31, 2007.
Through
our German subsidiary, we maintain a credit facility under an agreement with
Sparkasse Neumarkt Bank. This credit facility was put in place to finance the
building of new offices in Berching, Germany, which are owned and occupied
by
our German subsidiary. As of September 30, 2008, we had borrowings of $316,000
(in Euros, based on the exchange rate at September 30, 2008) and $368,000 as
of
December 31, 2007 (in Euros, based on the exchange rate at December 31, 2007)
against this credit facility. The interest rate was 5.49% at September 30,
2008
and December 31, 2007. In addition, our German subsidiary has a revolving line
of credit for $211,000 (in Euros, based on the exchange rate at September 30,
2008) with Sparkasse Neumarkt Bank. As of September 30, 2008, there were
borrowings against this facility of $103,000 (in Euros, based on the exchange
rate at September 30, 2008), compared to $186,000 at December 31, 2007 (in
Euros, based on the exchange rate at December 31, 2007). The revolving facility
is renewed annually on January 1. Interest rates on this line of credit were
10.75% at September 30, 2008 and December 31, 2007. The $103,000 revolving
line
of credit is a current liability.
We
believe that our existing cash balances, and funds available to us through
our
bank lines of credit, together with funds that we anticipate to generate from
our operations, will be sufficient to finance our currently anticipated working
capital requirements and capital expenditure requirements for the next twelve
months. However, a sudden increase in product demand requiring a
significant increase in manufacturing capability, or unforeseen adverse
competitive, economic or other factors may impact our cash position, and thereby
affect operations. From time to time, we may be required to raise
additional funds through public or private financing, strategic relationships
or
other arrangements. There can be no assurance that such funding, if
needed, will be available on terms acceptable to us, or at all.
Furthermore, any additional equity financing may be dilutive to shareholders,
and debt financing, if available, may involve restrictive covenants. Strategic
arrangements, if necessary to raise additional funds, may require that we
relinquish rights to certain of our technologies or products. Failure to
generate sufficient revenues or to raise capital when needed could have a
diverse impact on our business, operating results, and financial condition,
as
well as our ability to achieve intended business objectives.
CRITICAL
ACCOUNTING POLICIES
The
preparation of our financial statements require that we make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingencies and the reported amounts of revenue and expenses
in
the financial statements. Material differences may result in the amount and
timing of revenue and expenses if different judgments or different estimates
were utilized. Critical accounting policies, judgments and estimates which
we
believe have the most significant impact on our financial statements include
allowances for doubtful accounts, returns, warranties, valuation of inventories,
and stock based compensation. For a detailed discussion of the application
of policies critical to our business operations, see our Annual Report on Form
10-K for the year ended December 31, 2007.
18
RECENT
ACCOUNTING PRONOUNCEMENTS
In
September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (FAS
157), which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. This guidance
applies only when other guidance requires or permits assets or liabilities
to be
measured at fair value; it does not expand the use of fair value in any new
circumstances. FAS 157 will be effective for fiscal years beginning after
November 15, 2007 (effective January 1, 2008, for the company). In February
2008, the FASB issued Staff Position FAS 157-1, which provides that FAS 157
does
not apply under FAS 13, “Accounting for Leases,” and other accounting
pronouncements that address fair value measurements for leases. In February
2008, the FASB also issued Staff Position FAS 157-2, which delays the effective
date of FAS 157 for all nonfinancial assets and liabilities, except those
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). For items within the scope of Staff Position FAS
157-2, the effective date will be for fiscal years beginning after November
15,
2008. Early adoption of FAS 157 for nonfinancial assets and liabilities within
the scope of the new guidance is permitted. The adoption for financial assets
did not have a material effect. Management is evaluating the potential effect
that this guidance may have on the company’s financial position or results of
operations as it relates to non-financial assets.
In
February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial
Assets and Financial Liabilities” (FAS 159). This guidance provides an option to
selectively report financial assets and liabilities at fair value and
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. FAS No. 159 will be effective for
fiscal years beginning after November 15, 2007 (effective January 1, 2008,
for
the company). We have elected to not apply this fair value option to any of
its
existing assets or liabilities. However, we may adopt this guidance for assets
or liabilities in the future as permitted under FAS No. 159.
In
December 2007, the FASB issued FAS No. 141(R), “Business Combinations” (FAS
141(R)).The new pronouncement requires the acquiring entity in a business
combination to recognize only the assets acquired and liabilities assumed in
a
transaction (e.g., acquisition costs must be expensed when incurred),
establishes the fair value at the date of acquisition as the initial measurement
for all assets acquired and liabilities assumed, and requires expanded
disclosures. FAS 141(R) will be effective for fiscal years beginning after
December 15, 2008 (January 1, 2009, for us). Management is evaluating the
potential effect that this guidance may have our overall financial position
or
results of operations.
In
December 2007, the FASB issued FAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an Amendment of ARB No. 51” (FAS 160). The
new pronouncement requires all entities to report noncontrolling (minority)
interests in subsidiaries as a component of shareholders’ equity. FAS No. 160
will be effective for fiscal years beginning after December 15, 2008 (January
1,
2009, for the company). Early adoption is prohibited. Management is evaluating
the potential effect that this guidance may have on our overall financial
position or results of operations.
19
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
As
of
September 30, 2008, we had $711,000 in cash held in foreign currencies based
on
the exchange rates at September 30, 2008. The balances for cash held overseas
in
foreign currencies are subject to exchange rate risk. We have a policy of
maintaining cash balances in local currencies unless an amount of cash is
occasionally transferred in order to repay inter-company debts.
As
of
September 30, 2008, we had borrowings of $103,000 (in Euros, based on the
exchange rate at September 30, 2008) against a credit facility secured by real
property owned by our German subsidiary. As of December 31, 2007, we had
$186,000 (in Euros, based on the exchange rate at December 31, 2007) borrowed
against this credit facility.
Item
4. Controls
and Procedures
| (a) |
Evaluation
of disclosure controls and procedures.
|
We
maintain “disclosure controls and procedures,” as such term is defined in Rule
13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that
are designed to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating our disclosure controls and
procedures, management has recognized that disclosure controls and procedures,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the disclosure controls and
procedures are met. Our disclosure controls and procedures have been designed
to
meet, and management believes they meet, reasonable assurance standards.
Additionally, in designing disclosure controls and procedures, our management
necessarily has been required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and procedures. Any
design of disclosure controls and procedures also 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.
Based
on
their evaluation as of the end of the period covered by this Quarterly Report
on
Form 10-Q, our Chief Executive Officer and Chief Financial Officer have
concluded that, subject to the limitations noted above, our disclosure controls
and procedures have been effective to ensure that material information relating
to us, including our consolidated subsidiaries, has been made known to them
by
others within those entities.
|
(b)
|
Changes
in internal control over financial
reporting.
|
There
were no known changes within our financial reporting internal control
environment (as defined in Rule 13a-15(f) under the Exchange Act) identified
during the third quarter which materially affected, or is reasonably likely
to
materially affect, our internal controls over financial
reporting.
20
PART
II - OTHER INFORMATION
Item
1. Legal
Proceedings
From
time
to time, we become involved in ordinary routine litigation incidental to our
business. Currently, we are not involved in any material litigation, and we
do
not anticipate becoming involved in any in the foreseeable future.
Item
1A. Risk Factors
There
are
no significant changes in risk factors from our Annual Report Form 10-K for
the
year ended December 31, 2007 other than that the recent disruptions in the
global economy, the financial markets, as well as government responses to these
disruptions, may adversely impact our business and results of operations.
Item
6. Exhibits
|
Exhibit
Number
|
Description
of Documents
|
|
|
10.1
|
The
Energy Focus, Inc. 2008 Incentive Stock Plan, dated May 6, 2008,
filed as
Appendix D to the Company's Definitive Proxy Statement filed on August
8,
2008.
|
|
|
10.2
|
Second
Amended And Restated Loan And Security Agreement between Energy Focus,
Inc. and Silicon Valley Bank dated as of October 15,
2008.
|
|
|
31.1
|
Rule
13a-14(a) Certification of Chief Executive Officer.
|
|
|
31.2
|
Rule
13a-14(a) Certification of Chief Financial Officer.
|
|
|
32.1
|
Statement
of Chief Executive Officer under Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. §1350).
|
|
|
32.2
|
Statement
of Chief Financial Officer under Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. §1350).
|
21
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
ENERGY
FOCUS, INC.
|
|||||
|
Date:
November 7, 2008
|
By:
|
/s/
Joseph G. Kaveski
|
|||
|
Joseph
G. Kaveski
|
|||||
|
Chief
Executive Officer
|
|||||
|
By:
|
/s/
Nicholas G. Berchtold
|
||||
|
Nicholas
G. Berchtold
|
|||||
|
Chief
Financial Officer
|
|||||
|
(Principal
Financial and Accounting Officer)
|
|||||
22
Exhibit
Index
|
Exhibit
Number
|
Description
of Documents
|
|
|
10.1
|
The
Energy Focus, Inc. 2008 Incentive Stock Plan, dated May 6, 2008,
filed as
Appendix D to the Company's Definitive Proxy Statement filed on August
8,
2008.
|
|
|
10.2
|
Second
Amended And Restated Loan And Security Agreement between Energy Focus,
Inc. and Silicon Valley Bank dated as of October 15,
2008.
|
|
|
31.1
|
Rule
13a-14(a) Certification of Chief Executive Officer.
|
|
|
31.2
|
Rule
13a-14(a) Certification of Chief Financial Officer.
|
|
|
32.1
|
Statement
of Chief Executive Officer under Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. §1350).
|
|
|
32.2
|
Statement
of Chief Financial Officer under Section 906 of the Sarbanes-Oxley
Act of 2002 (18 U.S.C. §1350).
|
23