ENERGY FOCUS, INC/DE - Quarter Report: 2008 June (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 June 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.)
|
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 June 30, 2008 was 14,832,130.
TABLE
OF CONTENTS
|
Part
I - FINANCIAL INFORMATION
|
|||
|
Item
1
|
Financial
Statements:
|
||
|
a.
|
Condensed
Consolidated Balance Sheets at June 30, 2008 (unaudited) and December
31,
2007
|
3
|
|
|
b.
|
Condensed
Consolidated Statements of Operations for the Three Months and Six
Months
Ended June 30, 2008 and 2007 (unaudited)
|
4
|
|
|
c.
|
Condensed
Consolidated Statements of Comprehensive Income (Loss) for the Three
Months and Six Months Ended June 30, 2008 and 2007 (unaudited)
|
5
|
|
|
d.
|
Condensed
Consolidated Statements of Cash Flows for the Six Months Ended June
30,
2008 and 2007 (unaudited)
|
6
|
|
|
e.
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
7
|
|
|
Item
2
|
Management’s
Discussion and Analysis of Results of Operations and Financial Condition
|
15
|
|
|
Item
3
|
Quantitative
and Qualitative Disclosures About Market Risk
|
19
|
|
|
Item
4
|
Controls
and Procedures
|
19
|
|
|
Part
II - OTHER INFORMATION
|
|||
|
Item
1
|
Legal
Proceedings
|
21
|
|
|
Item
1A
|
Risk
Factors
|
21
|
|
|
Item
6
|
Exhibits
|
21
|
|
|
Signatures
|
22
|
||
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Exhibit
Index
|
23
|
||
Item
1. Financial
Statements
ENERGY
FOCUS, INC.
CONSOLIDATED
BALANCE SHEETS
(amounts
in thousands)
|
June 30,
2008
|
December 31,
2007
|
||||||
|
(unaudited)
|
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
12,249
|
$
|
8,412
|
|||
|
Accounts
receivable trade, net
|
4,588
|
3,698
|
|||||
|
Inventories,
net
|
6,510
|
6,888
|
|||||
|
Prepaid
and other current assets
|
395
|
381
|
|||||
|
Total
current assets
|
23,742
|
19,379
|
|||||
|
Fixed
assets, net
|
5,040
|
5,316
|
|||||
|
Goodwill,
net
|
4,451
|
4,359
|
|||||
|
Other
assets
|
120
|
59
|
|||||
|
Total
assets
|
$
|
33,353
|
$
|
29,113
|
|||
|
LIABILITIES
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
2,456
|
$
|
2,265
|
|||
|
Accrued
liabilities
|
1,577
|
1,473
|
|||||
|
Deferred
revenue
|
202
|
244
|
|||||
|
Credit
line borrowings
|
328
|
1,159
|
|||||
|
Short-term
bank borrowings
|
1,374
|
1,726
|
|||||
|
Total
current liabilities
|
5,937
|
6,867
|
|||||
|
Other
deferred liabilities
|
182
|
62
|
|||||
|
Deferred
tax liabilities
|
332
|
252
|
|||||
|
Long-term
bank borrowings
|
308
|
314
|
|||||
|
Total
liabilities
|
6,759
|
7,495
|
|||||
|
SHAREHOLDERS’
EQUITY
|
|||||||
|
Common
stock
|
1
|
1
|
|||||
|
Additional
paid-in capital
|
65,580
|
55,682
|
|||||
|
Accumulated
other comprehensive income
|
981
|
815
|
|||||
|
Accumulated
deficit
|
(39,968
|
)
|
(34,880
|
)
|
|||
|
Total
shareholders’ equity
|
26,594
|
21,618
|
|||||
|
Total
liabilities and shareholders’ equity
|
$
|
33,353
|
$
|
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
ended June 30,
|
|
Six months
ended June 30,
|
|
|||||||||
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
||||
|
Net
sales
|
$
|
7,616
|
$
|
6,704
|
$
|
12,453
|
$
|
11,713
|
|||||
|
Cost
of sales
|
5,173
|
4,424
|
8,766
|
7,963
|
|||||||||
|
Gross
profit
|
2,443
|
2,280
|
3,687
|
3,750
|
|||||||||
|
Operating
expenses:
|
|||||||||||||
|
Research
and development
|
684
|
675
|
1,601
|
1,158
|
|||||||||
|
Sales
and marketing
|
2,220
|
2,328
|
4,582
|
4,948
|
|||||||||
|
General
and administrative
|
1,182
|
1,067
|
2,552
|
2,145
|
|||||||||
|
Restructure
expense
|
—
|
89
|
—
|
89
|
|||||||||
|
Total
operating expenses
|
4,086
|
4,159
|
8,735
|
8,340
|
|||||||||
|
Loss
from operations
|
(1,643
|
)
|
(1,879
|
)
|
(5,048
|
)
|
(4,590
|
)
|
|||||
|
Other
income (expense):
|
|||||||||||||
|
Other
income/(expense)
|
30
|
35
|
32
|
42
|
|||||||||
|
Interest
income/(expense)
|
14
|
40
|
8
|
139
|
|||||||||
|
Loss
before income taxes
|
(1,599
|
)
|
(1,804
|
)
|
(5,008
|
)
|
(4,409
|
)
|
|||||
|
Provision
for income taxes
|
(40
|
)
|
(66
|
)
|
(80
|
)
|
(67
|
)
|
|||||
|
Net
loss
|
$
|
(1,639
|
)
|
$
|
(1,870
|
)
|
$
|
(5,088
|
)
|
$
|
(4,476
|
)
|
|
|
Net
loss per share – basic and diluted
|
$
|
(0.11
|
)
|
$
|
(0.16
|
)
|
$
|
(0.38
|
)
|
$
|
(0.39
|
)
|
|
|
Shares
used in computing net loss per share – basic and
diluted
|
14,830
|
11,489
|
13,521
|
11,484
|
|||||||||
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
ended June 30,
|
|
Six months
ended June 30,
|
|
||||||||||
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
||||
|
Net loss
|
$
|
(1,639
|
)
|
$
|
(1,870
|
)
|
$
|
(5,088
|
)
|
$
|
(4,476
|
)
|
|
|
Other
comprehensive income (loss)
|
|||||||||||||
|
Foreign
currency translation adjustments
|
7
|
46
|
166
|
102
|
|||||||||
|
Net
unrealized gain (loss) on securities
|
—
|
12
|
—
|
(9
|
)
|
||||||||
|
Comprehensive
loss
|
$
|
(1,632
|
)
|
$
|
(1,812
|
)
|
$
|
(4,922
|
)
|
$
|
(4,383
|
)
|
|
The
accompanying notes are an integral part of these financial
statements.
5
ENERGY
FOCUS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(amounts
in thousands)
(unaudited)
|
Six Months Ended June 30,
|
|||||||
|
2008
|
2007
|
||||||
|
Cash
flows from operating activities:
|
|||||||
|
Net
loss
|
$
|
(5,088
|
)
|
$
|
(4,476
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||
|
Depreciation
|
621
|
642
|
|||||
|
Stock-based
compensation
|
433
|
495
|
|||||
|
Unrealized
gain (loss) from marketable securities
|
—
|
(9
|
)
|
||||
|
Provision
for doubtful accounts receivable
|
(266
|
)
|
17
|
||||
|
Deferred
taxes
|
80
|
96
|
|||||
|
Gain
on disposal of fixed assets
|
1
|
—
|
|||||
|
Changes
in assets and liabilities:
|
|||||||
|
Accounts
receivable
|
(583
|
)
|
1,357
|
||||
|
Inventories
|
466
|
(385
|
)
|
||||
|
Prepaid
and other current assets
|
(13
|
)
|
(301
|
)
|
|||
|
Other
assets
|
(58
|
)
|
20
|
||||
|
Accounts
payable
|
177
|
(1,595
|
)
|
||||
|
Deferred
revenue
|
(41
|
)
|
—
|
||||
|
Accrued
liabilities
|
213
|
54
|
|||||
|
Total
adjustments
|
1,030
|
391
|
|||||
|
Net
cash used in operating activities
|
(4,058
|
)
|
(4,085
|
)
|
|||
|
Cash
flows from investing activities:
|
|||||||
|
Purchase
of short-term investments
|
—
|
(37,090
|
)
|
||||
|
Sale
of short-term investments
|
—
|
42,648
|
|||||
|
Acquisition
of fixed assets
|
(298
|
)
|
(281
|
)
|
|||
|
Net
cash provided by (used in) investing activities
|
(298
|
)
|
5,277
|
||||
|
Cash
flows from financing activities:
|
|||||||
|
Cash
proceeds from issuances of common stock, net
|
9,335
|
—
|
|||||
|
Cash
proceeds from exercise of stock options
|
130
|
385
|
|||||
|
Proceeds
from credit line borrowings
|
1,968
|
63
|
|||||
|
Payments
of credit line borrowings
|
(2,813
|
)
|
(58
|
)
|
|||
|
Proceeds
from long-term borrowings
|
—
|
160
|
|||||
|
Payments
of long-term bank borrowings
|
(358
|
)
|
(360
|
)
|
|||
|
Net
cash provided by financing activities
|
8,262
|
190
|
|||||
|
Effect
of exchange rate changes on cash
|
(69
|
)
|
(113
|
)
|
|||
|
Net
increase in cash and cash equivalents
|
3,837
|
1,269
|
|||||
|
Cash
and cash equivalents, beginning of period
|
8,412
|
3,705
|
|||||
|
Cash
and cash equivalents, end of period
|
$
|
12,249
|
$
|
4,974
|
|||
The
accompanying notes are an integral part of these financial
statements.
6
ENERGY
FOCUS, INC.
June
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 swimming pool builders.
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 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 a separate component of shareholders’
equity.
Earnings
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.
7
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
A
reconciliation of the numerator and denominator of basic and diluted loss per
share is provided as follows (in thousands, except per share
amounts):
|
Three months
ended June 30,
|
|
Six months
ended June 30,
|
|
||||||||||
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
||||
|
Numerator
- net loss
|
$
|
(1,639
|
)
|
$
|
(1,870
|
)
|
$
|
(5,088
|
)
|
$
|
(4,476
|
)
|
|
|
Denominator
- basic and diluted weighted
|
|||||||||||||
|
average
shares outstanding
|
14,830
|
11,489
|
13,521
|
11,484
|
|||||||||
|
Basic
and diluted net loss per share
|
$
|
(0.11
|
)
|
$
|
(0.16
|
)
|
$
|
(0.38
|
)
|
$
|
(0.39
|
)
|
|
At
June
30, 2008, options and warrants to purchase 5,106,000 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 1,723,000 shares of common stock were outstanding at June 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.
For
the
three month and six month periods ended June 30, 2008, the company recorded
stock based compensation expense of $214,000 and $433,000, respectively,
compared to $243,000 and $495,000 for same periods ended June 30, 2007. Total
unearned compensation of $1,363,000 remains at June 30, 2008 compared to
$1,820,000 at June 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 2.0 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 200,000 options
during the quarter ended June 30, 2008, and 100,000 options during the quarter
ended June 30, 2007. The fair value of all stock options granted during the
six
months ended June 30, 2008 was determined using the following weighted average
assumptions:
|
Six
months
ended
June 30,
|
|||||||
|
2008
|
2007
|
||||||
|
Expected
life of option
|
4.0
years
|
4.0
years
|
|||||
|
Risk
free interest rate
|
2.83
|
%
|
4.75
|
%
|
|||
|
Expected
volatility
|
66
|
%
|
56
|
%
|
|||
8
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
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
ended
June 30,
|
Six
months
ended
June 30,
|
||||||||||||
|
2008
|
2007
|
2008
|
2007
|
||||||||||
|
Balance
at the beginning of the period
|
$
|
190
|
$
|
200
|
$
|
212
|
$
|
230
|
|||||
|
Accruals
for warranties issued during the period
|
85
|
136
|
138
|
169
|
|||||||||
|
Settlements
made during the period (in cash or in kind)
|
(85
|
)
|
(124
|
)
|
(160
|
)
|
(187
|
)
|
|||||
|
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, including four members of the Board of Directors. 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.
The company received 100% of the funds from escrow on March 17, 2008. Among
the
investors were Ronald A. Casentini, John M. Davenport, John B. Stuppin and
Philip Wolfson, all of whom were members of the company’s Board of Directors at
the time, and who invested approximately $100,000 in the aggregate.
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):
|
June 30,
|
December 31,
|
||||||
|
2008
|
2007
|
||||||
|
Raw
materials
|
$
|
4,899
|
$
|
5,965
|
|||
|
Inventory
reserve
|
(776
|
)
|
(713
|
)
|
|||
|
Finished
goods
|
2,387
|
1,636
|
|||||
|
$
|
6,510
|
$
|
6,888
|
||||
9
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
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):
|
June 30,
|
December 31,
|
||||||
|
2008
|
2007
|
||||||
|
Equipment (useful
life 5 years)
|
$
|
8,827
|
$
|
8,654
|
|||
|
Tooling
(useful life 2-5 years)
|
2,752
|
2,751
|
|||||
|
Furniture
and fixtures (useful life 5 years)
|
226
|
225
|
|||||
|
Computer
software (useful life 3 years)
|
472
|
417
|
|||||
|
Leasehold
improvements (the shorter of useful or lease life)
|
1,726
|
1,576
|
|||||
|
14,003
|
13,623
|
||||||
|
Less
accumulated depreciation and amortization
|
(8,963
|
)
|
(8,307
|
)
|
|||
|
$
|
5,040
|
$
|
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 dated August 15, 2005. It was recently amended on January
29, 2008, March 14, 2008, April 30, 2008, and again on July 25, 2008. This
most
recent amendment has extended the credit agreement through September 15, 2008.
The company will use this extension to evaluate its cash reserves and determine
a future course of action in regards to payment of its Silicon Valley Bank
obligation. 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 June
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 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 June 30, 2008, the company was in
compliance with all covenant requirements. The company had borrowings under
the
revolving line of credit of $160,000 at June 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 $1,314,000 under the term loan portion of the
agreement as of June 30, 2008, and $1,672,000 at December 31, 2007, which,
according to a recent amendment, 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.
Through
the company’s U.K. subsidiary, it maintains a bank overdraft facility of
$498,000 (in U.K. pounds sterling, based on the exchange rate at June 30, 2008)
under an agreement with Lloyds Bank Plc. There were no borrowings against this
facility as of June 30, 2008, or December 31, 2007. The facility is renewed
annually on January 1. The rate on the facility was 7.50% at June 30, 2008,
and
7.75% at December 31, 2007.
10
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
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 new offices in Berching, Germany, which are owned and
occupied by the company’s German subsidiary. As of June 30, 2008, the company
had borrowings of $368,000 (in Euros, based on the exchange rate at June 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 June 30, 2008, and 5.49% as of December 31, 2007. In addition, the company’s
German subsidiary has a revolving line of credit for $236,000 (in Euros, based
on the exchange rate at June 30, 2008) with Sparkasse Neumarkt Bank. As of
June
30, 2008, there were borrowings against this facility of $168,000 (in Euros,
based on the exchange rate at June 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 June 30, 2008, and 10.75% at December 31, 2007. The
$168,000 revolving line of credit is a current liability.
Future
maturities of remaining borrowings are (in thousands):
|
Through
June 30,
|
U.S.A.
|
|
Germany
|
|
Total
|
|||||
|
2009
|
$
|
1,474
|
$
|
228
|
$
|
1,702
|
||||
|
2010
|
—
|
63
|
63
|
|||||||
|
2011
|
—
|
68
|
68
|
|||||||
|
2012
|
—
|
70
|
70
|
|||||||
|
2013
|
—
|
74
|
74
|
|||||||
|
2014
and Thereafter
|
—
|
33
|
33
|
|||||||
|
Total
Commitment
|
$
|
1,474
|
$
|
536
|
$
|
2,010
|
||||
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 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 swimming pool
builders in North America, Europe and the Far East.
A
summary
of sales by geographic area is as follows (in thousands):
|
|
Three months
ended June 30,
|
|
Six months
ended June 30,
|
|
|||||||||
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
||||
|
United
States Domestic
|
$
|
4,447
|
$
|
4,491
|
$
|
7,027
|
$
|
7,779
|
|||||
|
Other
Countries
|
3,169
|
2,213
|
5,426
|
3,934
|
|||||||||
|
$
|
7,616
|
$
|
6,704
|
$
|
12,453
|
$
|
11,713
|
||||||
11
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
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
ended
June 30,
|
Six
months
ended
June 30,
|
|||||||||||
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|||||||
|
Pool
Lighting
|
$
|
2,740
|
$
|
3,621
|
$
|
4,347
|
$
|
6,102
|
|||||
|
Commercial
Lighting
|
4,876
|
3,083
|
8,106
|
5,611
|
|||||||||
|
$
|
7,616
|
$
|
6,704
|
$
|
12,453
|
$
|
11,713
|
||||||
A
summary
of long-lived geographic assets (fixed assets and goodwill) is as follows
(in
thousands):
|
June 30,
|
December 31,
|
||||||
|
2008
|
2007
|
||||||
|
United
States Domestic
|
$
|
7,320
|
$
|
7,791
|
|||
|
Germany
|
1,903
|
1,773
|
|||||
|
Other
Countries
|
268
|
111
|
|||||
|
$
|
9,491
|
$
|
9,675
|
||||
9.
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 non-financial 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
June
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
$4,451,000 in goodwill on its consolidated balance sheet as of June 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 estimated future
undiscounted cash flows associated with the asset to the asset’s carrying amount
to determine if a write-down to market value or discounted cash flow is
required. During
the period ending June 30, 2008, no instances or events required any valuation
or update.
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
June
30, 2008, a letter of credit in the amount of $346,000 (in Euros, based on
the
exchange rate at June 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.
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 six months ended June 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 quarter
of
2007.
13
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2008
(Unaudited)
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 paid Gensler $13,000
in the first quarter of both 2008 and 2007, and $13,000 in the second quarter
of
2007. No payments were made to Gensler in the second quarter of
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, Mr. Ruckert was paid $23,000 and $69,000
for the three and six months ending June 30, 2007, respectively. 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 $15,000 for the three and six months ending June 30, 2008,
respectively, and $7,000 and $15,000 for the three and six months ending June
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
will be paid in 36 monthly installments commencing on January 1, 2009 subject
to
certain conditions being met by Mr. Greenwald. In the event those conditions
are
not met by Mr. Greenwald, the remaining payments due Mr. Greenwald will be
forfeited.
14
Item
2. Management’s
Discussion and Analysis of Results of Operations and Financial
Condition
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 14% to $7,616,000 for the quarter ended June 30, 2008, as compared
to
the same quarter a year ago. The increase was primarily a result of a $1,105,000
increase in net sales by our European subsidiaries overcoming a $881,000
decrease in pool lighting sales. Additionally, government sales were $534,000
for the quarter ended June 30, 2008, as compared to $14,000 for the same quarter
a year ago. Net sales increased 6% to $12,453,000 for the six months ended
June
30, 2008, as compared to the six months ended June 30, 2007. The increase was
primarily a result of a $1,688,000 increase in nets sales by our European
subsidiaries, as well as a $525,000 increase in government sales. These
increases were offset by continued declines in pool lighting sales. Management
is actively engaged in penetrating new pool lighting market
channels.
EFO
sales
were $4,027,000 in the second quarter of 2008, or 53% of total net sales,
compared to $1,477,000, or 22% of total net sales, in the second quarter of
2007. Through June 30, 2008, EFO sales were $6,112,000, or 49% of total net
sales, compared to $2,609,000, or 22% of total net sales, through June 30,
2007.
EFO sales in 2008 and 2007 include sales from EFO fiber optic lighting, EFO
LED,
EFO Controls, and EFO Government products. EFO fiber optic lighting sales in
the
second quarter of 2008 were $2,054,000 and $3,591,000 through the six months
ended June 30, 2008. 2008 global sales are projected to increase significantly
over 2007 primarily due to the projected doubling of EFO sales compared to
2007.
However, the market for our products is highly dependent upon general economic
conditions.
During
the quarter ended June 30, 2008, $415,000 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”). Also during the
quarter, $105,000 of revenue was recognized for statements of work as a
contractor to Science Applications International Corporation (“SAIC”) to provide
technical services and analysis tools in support of SAIC’s internal research and
development program to create and understand new methods for the design and
analysis of solar cell concentrators.
15
Gross
profit was $2,443,000 in the second quarter of 2008, a 7% increase compared
to
the same period in the prior year. Gross profit was $3,687,000 for the six
months ended June 30, 2008, a 2% decrease as compared to the six months ended
June 30, 2007. The gross profit margin as a percentage of sales decreased from
34% for the second quarter of 2007 to 32% for the second quarter of 2008, and
decreased from 32% for the six months ended June 30, 2007 to 30% for the six
months ended June 30, 2008. We expect gross profit margins to improve over
the
remainder of 2008 due to 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.
Research
and development expenses were $684,000 in the second quarter of fiscal 2008,
an
increase of $9,000 compared with the second quarter of fiscal 2007. Gross
research and development expenses for the second quarter of 2008 increased
by
14%, as compared to the same period in the prior year. Gross research and
development expenses for the six months ended June 30, 2008 increased by 30%
as
compared to the six months ended June 30, 2007. These increases were due to
increased salaries and wages, project related expense, and legal fees related
to
intellectual property. Our research and development expenses are reduced on
a
percentage-of-completion basis under development contracts with the Department
of Energy (“DOE”) that were signed in 2007, for a total of $1,500,000. Through
June 30, 2008, net research and development expenses are $1,601,000 compared
to
$1,158,000 through June 30, 2007. The gross and net research and development
spending along with credits from government contracts is shown in the following
table (in thousands):
|
Three months
|
|
Six months
|
|
||||||||||
|
|
|
ended June 30,
|
|
ended June 30,
|
|
||||||||
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
||||
|
Gross
expenses for research and development
|
$
|
981
|
$
|
864
|
$
|
2,001
|
$
|
1,534
|
|||||
|
Deduct:
credits from DOE contracts
|
(297
|
)
|
(189
|
)
|
(400
|
)
|
(376
|
)
|
|||||
|
Net
research and development expense
|
$
|
684
|
$
|
675
|
$
|
1,601
|
$
|
1,158
|
|||||
Sales
and
marketing expenses decreased by 5% to $2,220,000 in the second quarter of fiscal
2008 as compared to $2,328,000 for the same period in fiscal 2007. Sales and
marketing expenses decreased by 7% to $4,582,000 in the first six months of
2008
as compared to the same period in 2007. These decreases are a result of lower
salaries and wages and associated with reorganization within the sales and
marketing organization designed to increase sales effectiveness and
efficiencies.
General
and administrative expenses were $1,182,000 in the second quarter of fiscal
2008, an increase of $115,000 or 11% from 2007. General and administrative
expenses were $2,552,000 for the first six months of 2008 compared to $2,145,000
for the same period in 2007. These increases are a result of higher professional
and consulting fees related to audit, legal, and Sarbanes-Oxley compliance,
as
well as an increase in salaries and benefits.
We
recorded a net loss of $1,639,000 in the second quarter of fiscal 2008 as
compared to a net loss of $1,870,000 in the second quarter of fiscal 2007,
a
decrease of 12%. Net losses for the six months ending June 30, 2008 were
$5,088,000 compared to losses of $4,476,000 for the first six months of 2007,
an
increase of 14%.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
and cash equivalents
At
June
30, 2008, our cash and cash equivalents were $12,249,000 as compared to
$8,412,000 at December 31, 2007, a net cash increase of $3,837,000 during the
first six months of 2008. This compares to a net cash increase of $1,269,000
for
the same period in 2007.
16
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,
including four members of our Board of Directors. 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. The company received 100% of the funds
from
escrow on March 17, 2008. Among the investors were Ronald A. Casentini, John
M.
Davenport, John B. Stuppin and Philip Wolfson, all of whom were members of
our
Board of Directors at the time, and who invested approximately $100,000 in
the
aggregate.
Cash
used in Operating Activities
Operating
activities primarily consist of net loss adjusted by non-cash items including
depreciation, amortization, stock-based compensation, and the effect of changes
in working capital. Cash decreased during the six month ended June 30, 2008
by a
net loss of $5,088,000, compared to a net loss of $4,476,000 for the comparable
period in 2007. Net cash used by operating activities was $4,058,000 for the
six
months ended June 30, 2008, as compared to $4,085,000 in six months ended June
30, 2007.
Cash
provided by (used in) Investing Activities
Investing
activities used cash of $298,000 during the first six months of 2008, compared
providing cash of $5,277,000 for the same period of 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 (used in) Financing Activities
Financing
activities contributed $8,262,000 to cash during the first six months of 2008.
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 $1,968,000, and the exercise of warrants and employee
stock options for $130,000. For the same period in 2007, financing activities
from the exercise of warrants and employee stock options were $385,000.
$3,171,000 of cash was used to pay short and long-term borrowings in the six
month period ended June 30, 2008, compared to $418,000 during the same period
in
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 amended recently on January 29, 2008, March
14, 2008, April 30, 2008, and again on July 25, 2008. This most recent amendment
has extended the credit agreement through September 15, 2008. We will use this
extension to evaluate our cash reserves and determine a future course of action
in regards to payment of our Silicon Valley Bank obligation. The total credit
facility is for $5,000,000 and incorporates both a revolving line of credit
and
term loan component. The interest rate was 7.00% at June 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 June 30, 2008, we were in compliance with all covenant
requirements. We had borrowings under the revolving line of credit of $160,000
at June 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 $1,314,000
under the term loan portion of the agreement as of June 30, 2008, and $1,672,000
at December 31, 2007, which, according to the most 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.
Through
our U.K. subsidiary, we maintain a bank overdraft facility of $498,000 (in
U.K.
pounds sterling, based on the exchange rate at June 30, 2008) under an agreement
with Lloyds Bank Plc. There were no borrowings against this facility as of
June
30, 2008, or December 31, 2007. The facility is renewed annually on January
1.
The rate on the facility was 7.50% at June 30, 2008, and 7.75% at December
31,
2007.
17
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 June 30, 2008, we had borrowings of $368,000 (in
Euros, based on the exchange rate at June 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 June 30, 2008, and 5.49%
as
of December 31, 2007. In addition, our German subsidiary has a revolving line
of
credit for $236,000 (in Euros, based on the exchange rate at June 30, 2008)
with
Sparkasse Neumarkt Bank. As of June 30, 2008, there were borrowings against
this
facility of $168,000 (in Euros, based on the exchange rate at June 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 June 30, 2008, and 10.75%
at December 31, 2007. The $168,000 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 requires 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 the 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.
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 our financial
position or results of operations as
it
relates to non-financial assets.
18
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.
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
As
of
June 30, 2008, we had $356,000 in cash held in foreign currencies based on
the
exchange rates at June 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
June 30, 2008, we had borrowings of $168,000 (in Euros, based on the exchange
rate at June 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.
19
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 second 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.
Item
6. Exhibits
|
Exhibit
Number
|
Description
of Documents
|
|
|
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:
July 31, 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
|
|
|
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