ENERGY FOCUS, INC/DE - Quarter Report: 2009 March (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
Form
10-Q
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x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES AND EXCHANGE ACT
OF 1934
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For
the quarterly period ended March 31, 2009
OR
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¨
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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
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ENERGY
FOCUS, INC.
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(Exact
name of registrant as specified in its
charter)
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Delaware
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94-3021850
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification
No.)
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32000
Aurora Rd., Solon, OH
(Address
of principal executive offices)
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44139
(Zip
Code)
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(Registrant’s
telephone number, including area code): (440)
715-1300
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(Former
Name, Former Address and Former Fiscal Year, If Changed Since Last
Report)
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Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See
definitions of ”large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer ¨
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Accelerated
filer ¨
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Non-accelerated
filer þ
(do not check if a smaller reporting company)
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Smaller
reporting company ¨
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Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No x
The
number of outstanding shares of the registrants’ Common Stock, $0.0001 par
value, as of April 30, 2009 was 14,834,920.
TABLE
OF CONTENTS
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PART
I - FINANCIAL INFORMATION
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Item
1.
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Financial
Statements:
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||
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a.
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Condensed
Consolidated Balance Sheets at March 31, 2009 (unaudited) and December 31,
2008
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3
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b.
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Condensed
Consolidated Statements of Operations for the Three Months Ended March 31,
2009 and
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||
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2008
(unaudited)
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4
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c.
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Condensed
Consolidated Statements of Comprehensive Income (Loss) for the Three
Months Ended
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March
31, 2009 and 2008 (unaudited)
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5
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d.
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Condensed
Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2009 and
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2008
(unaudited)
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6
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e.
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Notes
to Condensed Consolidated Financial Statements
(unaudited)
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7
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Item
2.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations
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15
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Item
3.
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Quantitative
and Qualitative Disclosures About Market
Risk
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19
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Item
4.
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Controls
and Procedures
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19
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PART
II - OTHER INFORMATION
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Item
1.
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Legal
Proceedings
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20
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Item
1A.
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Risk
Factors
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20
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Item
6.
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Exhibits
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20
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Signatures
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21
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Exhibit
Index
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22
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Item
1. Financial
Statements
ENERGY
FOCUS, INC.
CONDENSED
CONSOLIDATED
BALANCE SHEETS
(amounts
in thousands)
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March 31,
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December 31,
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|||||||
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2009
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2008
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|||||||
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(unaudited)
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||||||||
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ASSETS
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||||||||
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Current
assets:
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||||||||
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Cash and cash
equivalents
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$ | 6,800 | $ | 10,568 | ||||
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Accounts receivable trade,
net
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2,183 | 2,668 | ||||||
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Inventories,
net
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5,337 | 5,539 | ||||||
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Prepaid and other current
assets
|
597 | 639 | ||||||
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Total current
assets
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14,917 | 19,414 | ||||||
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Fixed assets
net
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3,891 | 4,096 | ||||||
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Other
assets
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104 | 142 | ||||||
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Total
assets
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$ | 18,912 | $ | 23,652 | ||||
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LIABILITIES
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||||||||
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Current
liabilities:
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||||||||
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Accounts
payable
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$ | 1,490 | $ | 2,767 | ||||
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Accrued
liabilities
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1,329 | 1,621 | ||||||
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Deferred
revenue
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74 | 191 | ||||||
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Credit line
borrowings
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1,776 | 1,904 | ||||||
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Current portion of long-term bank
borrowings
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53 | 54 | ||||||
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Total current
liabilities
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4,722 | 6,537 | ||||||
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Other deferred
liabilities
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71 | 81 | ||||||
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Long-term bank
borrowings
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219 | 245 | ||||||
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Total
liabilities
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5,012 | 6,863 | ||||||
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SHAREHOLDERS'
EQUITY
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||||||||
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Common
stock
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1 | 1 | ||||||
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Additional paid-in
capital
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66,061 | 65,865 | ||||||
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Accumulated other comprehensive
income
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207 | 251 | ||||||
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Accumulated
deficit
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(52,369 | ) | (49,328 | ) | ||||
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Total shareholders'
equity
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13,900 | 16,789 | ||||||
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Total liabilities and
shareholders' equity
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$ | 18,912 | $ | 23,652 | ||||
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
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||||||||
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March 31,
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||||||||
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2009
|
2008
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|||||||
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Net sales
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$ | 2,805 | $ | 4,837 | ||||
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Cost of
sales
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2,487 | 3,593 | ||||||
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Gross
profit
|
318 | 1,244 | ||||||
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Operating
expenses:
|
||||||||
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Research and
development
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230 | 401 | ||||||
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Sales and
marketing
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1,880 | 2,878 | ||||||
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General and
administrative
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1,224 | 1,370 | ||||||
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Total operating
expenses
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3,334 | 4,649 | ||||||
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Loss from
operations
|
(3,016 | ) | (3,405 | ) | ||||
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Other income
(expense):
|
||||||||
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Other
income
|
1 | 2 | ||||||
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Interest
expense
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(26 | ) | (6 | ) | ||||
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Loss before income
taxes
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(3,041 | ) | (3,409 | ) | ||||
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Provision for income
taxes
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— | (40 | ) | |||||
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Net loss
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$ | (3,041 | ) | $ | (3,449 | ) | ||
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Net loss per share - basic and
diluted
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$ | (0.21 | ) | $ | (0.28 | ) | ||
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Shares used in computing net loss
per share - basic and diluted
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14,835 | 12,227 | ||||||
The
accompanying notes are an integral part of these financial
statements.
4
ENERGY
FOCUS, INC.
CONDENSED
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(amounts
in thousands)
(unaudited)
|
Three months ended
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||||||||
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March 31,
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||||||||
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2009
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2008
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|||||||
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Net loss
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$ | (3,041 | ) | $ | (3,449 | ) | ||
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Other comprehensive income
(loss):
|
||||||||
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Foreign currency translation
adjustments
|
(44 | ) | 159 | |||||
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Comprehensive
loss
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$ | (3,085 | ) | $ | (3,290 | ) | ||
The
accompanying notes are an integral part of these financial
statements.
5
ENERGY FOCUS, INC.
CONDENSED
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(amounts
in thousands)
(unaudited)
|
Three months ended
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||||||||
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March 31,
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||||||||
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2009
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2008
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|||||||
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Cash flows from operating
activities:
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||||||||
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Net loss
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$ | (3,041 | ) | $ | (3,449 | ) | ||
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Adjustments to reconcile net loss
to net cash used in operating
activities:
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||||||||
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Depreciation
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276 | 311 | ||||||
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Stock-based
compensation
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196 | 219 | ||||||
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Provision for doubtful accounts
receivable
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(72 | ) | (189 | ) | ||||
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Deferred
taxes
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— | 40 | ||||||
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Deferred
revenue
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(118 | ) | 105 | |||||
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Gain on disposal of fixed
assets
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4 | 1 | ||||||
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Changes in assets and
liabilities:
|
||||||||
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Accounts
receivable
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529 | (260 | ) | |||||
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Inventories
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137 | (228 | ) | |||||
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Prepaid and other current
assets
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23 | (34 | ) | |||||
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Other
assets
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30 | (32 | ) | |||||
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Accounts
payable
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(1,271 | ) | 546 | |||||
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Accrued
liabilities
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(290 | ) | 159 | |||||
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Total
adjustments
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(556 | ) | 638 | |||||
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Net cash used in operating
activities
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(3,597 | ) | (2,811 | ) | ||||
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Cash flows from investing
activities:
|
||||||||
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Acquisition of fixed
assets
|
(83 | ) | (121 | ) | ||||
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Net cash used in investing
activities
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(83 | ) | (121 | ) | ||||
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Cash flows from financing
activities:
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||||||||
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Cash proceeds from issuances of
common stock, net
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— | 9,436 | ||||||
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Cash proceeds from exercise of
stock options
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— | 126 | ||||||
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Proceeds from credit line
borrowings
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— | 923 | ||||||
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Payments of credit line
borrowings
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(119 | ) | (901 | ) | ||||
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Payments of short and long-term
bank borrowings
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(13 | ) | (179 | ) | ||||
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Net cash (used in) provided by
financing activities
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(132 | ) | 9,405 | |||||
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Effect of exchange rate changes on
cash
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44 | (47 | ) | |||||
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Net (decrease) increase in cash
and cash equivalents
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(3,768 | ) | 6,426 | |||||
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Cash and cash equivalents,
beginning of period
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10,568 | 8,412 | ||||||
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Cash and cash equivalents, end of
period
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$ | 6,800 | $ | 14,838 | ||||
The
accompanying notes are an integral part of these financial
statements.
6
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2009
(Unaudited)
1. Nature
of Operations
Energy
Focus Inc. and subsidiaries (“the company”) design, develop, manufacture, and
market lighting systems and customer specific energy efficient lighting
solutions for a wide-range of use in both the general commercial market and the
pool market. The company’s lighting technology offers significant
energy savings, heat dissipation, and maintenance cost benefits over
conventional lighting for multiple applications. The company’s
solutions include fiber optic (“EFO”), light-emitting diode (“LED”), ceramic
metal halide (“CMH”), high-intensity discharge (“HID”), and other highly energy
efficient lighting technologies. The company’s strategy also
incorporates continued investment in research into new and emerging energy
sources including, but not limited to, solar energy. Typical savings
of current technology averages 80% in electricity costs, while providing
full-spectrum light closely simulating daylight colours.
2. Summary
of Significant Accounting Policies
The
significant accounting policies of the company, which are summarized below, are
consistent with generally accepted accounting principles and reflect practices
appropriate to the business in which it operates.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Estimates include, but are not limited to, the establishment
of reserves for accounts receivable, sales returns, inventory obsolescence, and
warranty claims; the useful lives for property, equipment, and intangible
assets; and stock-based compensation. Actual results could differ
from those estimates.
Reclassifications
Certain
prior year amounts have been reclassified to be consistent with the current year
presentation.
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, 2008, which are contained in the company’s 2008 Annual Report
on Form 10-K.
Foreign
Currency Translation
The
company’s international subsidiaries use their local currencies as their
functional currencies. 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 directly to
accumulated comprehensive income within the statement of shareholders’
equity. Foreign currency transaction gains and losses are included as
a component of other income and expense. Gains and losses from
foreign currency translation are included as a separate component of
comprehensive income (expense) within the consolidated statement of
comprehensive income (loss).
7
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2009
(Unaudited)
Liquidity
The
company has incurred losses which have been attributable to operational
performance, restructuring, and other charges such as the impairment of
goodwill, which has led to negative cash flows, and violations of bank debt
compliance. Further, the company has not historically met management
budgetary forecasts. The company has managed its liquidity during
this time through a series of cost reduction initiatives, bank lines of credit
borrowings, and capital market transactions. However, the global
credit market crisis has had a dramatic effect on its industry and customer
base. The recession in the United States and Western Europe, and the
slowdown of economic growth in the rest of the world, has created a business
environment where it is substantially more difficult to obtain equity funding
and additional non-equity financing. Furthermore, this environment
has resulted in an increased risk of customer payment defaults. The
company’s liquidity position, as well as its operating performance, was
negatively affected by these economic and industry conditions and by other
financial and business factors, many of which are beyond its
control.
Management
acknowledges that the level of cash utilization during the quarter ended March
31, 2009 is not sustainable for continuing as a viable entity on a long-term
basis. Management continues to aggressively reduce costs, as
evidenced in the $1,315,000 decrease in operating expenses for the quarter ended
March 31, 2009, as compared to the quarter ended March 31,
2008. Management is executing further cost reductions and
organizational realignments designed to sustain our viability.
Although
the company is committed to managing cash utilization internally as the means of
remaining a viable entity throughout 2009, there can be no assurances that this
objective will be successful without obtaining external
funding. Therefore, the company is aggressively pursuing one or more
of the following sources for external funding:
|
|
·
|
obtain
loans and/or grants available through federal, state, and/or local
governmental agencies,
|
|
|
·
|
obtain
loans from various financial
institutions,
|
|
|
·
|
obtain
loans from non-traditional investment capital
organizations,
|
|
|
·
|
sale
and/or disposition of one or more operating units,
and
|
|
|
·
|
obtain
funding from the sale of our common stock or other equity
instruments.
|
Obtaining
financing through the above mentioned mechanisms contain risks,
including:
|
|
·
|
government
stimulus and/or grant money is not allocated to us despite our focus on
the design, development, and manufacturing of energy efficient lighting
systems,
|
|
|
·
|
loans
or other debt instruments may have terms and/or conditions, such as
interest rate, restrictive covenants, and control or revocation
provisions, which are not acceptable to management or our Board of
Directors,
|
|
|
·
|
the
current global economic crisis combined with our current financial
condition may prevent us from being able to obtain any debt
financing,
|
|
|
·
|
financing
may not be available for parties interested in pursuing the acquisition of
one or more of our operating units,
and
|
|
|
·
|
additional
equity financing may not be available to us in the current economic
environment and could lead to further dilution of shareholder value for
current shareholders of record.
|
Failure
to effectively generate required operating cash through the above measures or
through internally generated means could result in the company becoming
insolvent in 2009.
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
anti-dilutive.
8
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2009
(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
|
||||||||
|
March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Numerator - basic and diluted loss
per share
|
||||||||
|
Net loss
|
$ | (3,041 | ) | $ | (3,449 | ) | ||
|
Denominator - basic and diluted
loss per share
|
||||||||
|
Weighted average shares
outstanding
|
14,835 | 12,227 | ||||||
|
Basic and diluted net loss per
share
|
$ | (0.21 | ) | $ | (0.28 | ) | ||
At March
31, 2009, options and warrants to purchase 5,665,000 shares of common stock were
outstanding, but were not included in the calculation of diluted net loss per
share because their inclusion would have been anti-dilutive. Options
and warrants to purchase 5,226,000 shares of common stock were outstanding at
March 31, 2008, but were not included in the calculation of diluted net 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 its Annual
Report on Form 10-K for the year ended December 31, 2008.
For the
quarter ended March 31, 2009, the company recorded compensation expense of
$196,000 compared to $219,000 for the quarter ended March 31,
2008. Total unearned compensation of $1,279,000 remains at
March 31, 2009 compared to $1,792,000 at March 31, 2008. These costs
will be charged to expense, amortized on a straight line basis, in future
periods through 2013. 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. We granted
360,000 stock options during the quarter ended March 31, 2009, and 125,000
during the quarter ended March 31, 2008.
The fair
value of each option grant and stock purchase plan grant combined is estimated
on the date of grant using the Black-Scholes option pricing model with the
following weighted-average assumptions used for grants in the quarters ended
March 31, 2009 and 2008:
|
Three months ended
|
||||||||
|
March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Fair value of options
issued
|
$ | 0.50 | $ | 2.32 | ||||
|
Exercise
price
|
$ | 0.84 | $ | 4.91 | ||||
|
Expected life of
option
|
4.0 years
|
4.0 years
|
||||||
|
Risk-free interest
rate
|
1.53 | % | 2.38 | % | ||||
|
Expected
volatility
|
82.39 | % | 59.20 | % | ||||
|
Dividend
yield
|
0 | % | 0 | % | ||||
9
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2009
(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. Settlement costs consist of actual amounts expensed for
warranty service, which are largely a result of third party service calls, and
costs of replacement products. A liability for the estimated future
costs under product warranties is maintained for products outstanding under
warranty (in thousands):
|
Three months ended
|
||||||||
|
March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Balance at the beginning of the
period
|
$ | 292 | $ | 212 | ||||
|
Accruals for warranties
issued
|
24 | 52 | ||||||
|
Settlements made during the period
(in cash or in kind)
|
(27 | ) | (74 | ) | ||||
|
Balance at the end of the
period
|
$ | 289 | $ | 190 | ||||
3. 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):
|
March 31,
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Raw
materials
|
$ | 4,090 | $ | 4,738 | ||||
|
Inventory
reserve
|
(1,597 | ) | (1,795 | ) | ||||
|
Finished
goods
|
2,844 | 2,596 | ||||||
| $ | 5,337 | $ | 5,539 | |||||
4. 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):
|
March 31,
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Equipment (useful life 3 - 15
years)
|
$ | 8,658 | $ | 8,632 | ||||
|
Tooling (useful life 2 - 5
years)
|
2,758 | 2,752 | ||||||
|
Furniture and fixtures (useful
life 5 years)
|
217 | 200 | ||||||
|
Computer software (useful life 3
years)
|
480 | 483 | ||||||
|
Leasehold improvements (the
shorter of useful life or lease life)
|
991 | 1,276 | ||||||
|
Construction in
progress
|
2 | 60 | ||||||
| 13,106 | 13,403 | |||||||
|
Less: accumulated
depreciation
|
(9,215 | ) | (9,307 | ) | ||||
| $ | 3,891 | $ | 4,096 | |||||
10
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2009
(Unaudited)
5. Bank
Borrowings
The
company’s bank line of credit in the United States is based on an agreement with
Silicon Valley Bank (“SVB”) dated October 15, 2008, incorporating a $4,000,000
revolving line of credit that includes a $1,500,000 sub-limit for cash
management products, letters of credit, and foreign exchange. The
amount of borrowing available to the company is the lesser of $4,000,000 or the
sum of the following:
|
|
·
|
up
to a 75% advance rate against eligible accounts receivable, as defined by
the agreement,
|
|
|
·
|
up
to 50% of our cash balance in deposit at SVB, capped at $1,500,000,
and
|
|
|
·
|
up
to a 75% advance rate against eligible Early Buy accounts receivable, as
defined by the agreement, capped at
$500,000.
|
Borrowings
under this agreement are collateralized by the company’s assets, including
intellectual property, and bears interest at the SVB 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 is
required to comply with certain covenant requirements, including a tangible net
worth covenant. As of March 31, 2009, the company is still
negotiating with SVB to revise its tangible net worth covenant. The
interest rate at March 31, 2009 was 5.50% and 5.00% at December 31,
2008. Borrowings under the revolving line of credit were $1,776,000
at March 31, 2009 and December 31, 2008. Available borrowings under
this revolving line of credit were $242,000 at March 31, 2009 and $263,000 at
December 31, 2008.
Effective
January 31, 2009, the company entered into a First Loan Modification and
Forbearance Agreement with SVB which modified the one year credit agreement
entered into on October 15, 2008. This modification to the terms of
the 2008 credit agreement states that borrowings are collateralized by our
assets, including intellectual property and bears interest at the SVB Prime Rate
plus 1.50%. SVB also agreed to forebear from exercising its rights
and remedies against the company as a result of violating its tangible net worth
covenant as of December 31, 2008. This forbearance expired on
February 15, 2009, but the company is still negotiating with SVB to revise its
tangible net worth covenant.
Through
the company’s United Kingdom subsidiary, the company maintains a bank overdraft
facility of $357,000 (in British pounds sterling, based on the exchange rate at
March 31, 2009) under an agreement with Lloyds Bank Plc. There were
no borrowings against this facility as of March 31, 2009 or December 31, 2008.
The facility is renewed annually on January 1. The interest rate on
the facility was 2.75% at March 31, 2009, and 7.25% at December 31,
2008.
Through
the company’s German subsidiary, the company 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. In November,
2008, the company began discussions with Sparkasse Neumarkt Bank related to the
restructuring of the current credit facility. It was agreed that an
additional investment in its German subsidiary would be made in 2009 as a
precondition to maintaining the current facility structure. As of
March 31, 2009, the company had borrowings of $272,000 (in Euros, based on the
exchange rate at March 31, 2009) and $299,000 as of December 31, 2008 (in Euros,
based on the exchange rate at December 31, 2008) against this credit facility,
due December, 2013. The interest rate was 6.20% at March 31, 2009 and
5.49% at December 31, 2008. In addition, the company’s German
subsidiary has a revolving line of credit for $106,000 (in Euros, based on the
exchange rate at March 31, 2009) with Sparkasse Neumarkt Bank. As of
March 31, 2009, there were no borrowings against this facility, and borrowings
of $128,000 at December 31, 2008 (in Euros, based on the exchange rate at
December 31, 2008). The revolving facility is renewed annually on
January 1. Interest rates on this line of credit were 16.00% at March
31, 2009 and 11.00% at December 31, 2008.
Future
maturities of remaining borrowings are (in thousands):
|
Year ending March 31,
|
United States
|
Germany
|
Total
|
|||||||||
|
2010
|
$ | 1,776 | $ | 53 | $ | 1,829 | ||||||
|
2011
|
— | 55 | 55 | |||||||||
|
2012
|
— | 59 | 59 | |||||||||
|
2013
|
— | 62 | 62 | |||||||||
|
2014
|
— | 43 | 43 | |||||||||
|
Total
commitment
|
$ | 1,776 | $ | 272 | $ | 2,048 | ||||||
11
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2009
(Unaudited)
6. 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 loss has been presented with this
report.
7. Segments
and Geographic Information
The
company has two primary product lines: pool lighting and general commercial
lighting, each of which markets and sells lighting systems and customer specific
energy efficient lighting solutions. The company markets its products
and solutions for worldwide distribution through a combination of direct sales
employees, independent sales representatives, and various distributors in
different geographic markets throughout the world.
A summary
of sales by geographic area is as follows (in thousands):
|
Three months ended
|
||||||||
|
March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
United States
Domestic
|
$ | 1,594 | $ | 2,580 | ||||
|
Other
Countries
|
1,211 | 2,257 | ||||||
| $ | 2,805 | $ | 4,837 | |||||
A summary
of sales by product line is as follows (in thousands):
|
Three months ended
|
||||||||
|
March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Pool
Lighting
|
$ | 668 | $ | 1,607 | ||||
|
Commercial
Lighting
|
2,137 | 3,230 | ||||||
| $ | 2,805 | $ | 4,837 | |||||
A summary
of long-lived geographic assets (fixed assets) is as follows (in
thousands):
|
March 31,
|
December 31,
|
|||||||
|
2009
|
2008
|
|||||||
|
United States
Domestic
|
$ | 3,561 | $ | 3,726 | ||||
|
Germany
|
158 | 177 | ||||||
|
Other
Countries
|
172 | 193 | ||||||
| $ | 3,891 | $ | 4,096 | |||||
12
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2009
(Unaudited)
8. 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 went into effect 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. The company adopted the financial assets and
liabilities portion of this FASB and it had no effect. 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 (January 1, 2009, for the company). Management is evaluating the
effect that this guidance may have on the company’s overall financial position
or results of operations and the company does not anticipate that it will have a
significant impact.
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 159 was 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
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) is effective for fiscal
years beginning after December 15, 2008 (January 1, 2009, for the
company). Management is evaluating the effect that this guidance may
have on the company’s overall financial position or results of operations and
the company does not anticipate that it will have a significant
impact.
In
December 2007, the FASB issued FAS
No. 160, “Non-controlling Interests in Consolidated Financial Statements,
an Amendment of ARB No. 51” (FAS 160). The new pronouncement requires all
entities to report non-controlling (minority) interests in subsidiaries as a
component of shareholders’ equity. FAS 160 is effective for fiscal
years beginning after December 15, 2008 (January 1, 2009, for the
company). Management is evaluating the effect that this guidance may
have on the company’s overall financial position or results of operations and
the company does not anticipate that it will have a significant
impact.
9. Income
Taxes
At
March 31, 2009, we have recorded a full valuation allowance against the
company’s deferred tax assets in the United States and Germany, due to
uncertainties related to its ability to utilize its deferred tax assets,
primarily consisting of certain net operating losses carried
forward. The valuation allowance is based upon the company’s
estimates of taxable income by jurisdiction and the period over which its
deferred tax assets will be recoverable.
10. Commitments and
Contingencies
At
March 31, 2009, a letter of credit in the amount of $293,000 (in Euros,
based on the exchange rate at March 31, 2009) 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 on its outstanding loan
with Sparkasse Neumarkt Bank.
11. Related
Party Transactions
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. No payments were made during the three months ending
March 31, 2009 or March 31, 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 for the quarter ending March 31, 2009 and $7,000 for the
quarter ending March 31, 2008.
13
ENERGY
FOCUS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2009
(Unaudited)
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 was to 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 21, 2008, the
company incurred an expense of $232,000, of which $77,000 was paid on March 14,
2008.
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,
Inc. 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 the company’s common shares on March 13, 2008 of $3.08. Each
unit comprises 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 and immediately exercisable, and will expire five years
after the date of their issuance. This additional financing was to be
used to fund working capital, pay debt 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 E. Wolfson, all of whom were members of
its Board of Directors at the time of the transaction, and who invested
approximately $100,000 in the aggregate.
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, 2008.
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.
OVERVIEW
We are
engaged in the design, development, manufacturing, marketing, and installation
of energy-efficient lighting systems where we serve two principal markets;
commercial/industrial lighting and pool lighting. Our business
strategy evolved into providing our customers with turnkey, comprehensive
energy-efficient lighting solutions which included, but were not limited to, our
patented and proprietary technology. Our solutions included fiber
optic (“EFO”), light-emitting diode (“LED”), ceramic metal halide (“CMH”),
high-intensity discharge (“HID”), and other highly energy efficient lighting
technologies. Our strategy also incorporated continued investment in
research into new and emerging energy sources including, but not limited to,
solar energy. Typical savings of current technology averages 80% in
electricity costs, while providing full-spectrum light closely simulating
daylight colors.
We expect
to continue our on-going leadership role in the United States government’s Very
High Efficiency Solar Cell (“VHESC”) Consortium sponsored by the Defense
Advanced Research Projects Agency (“DARPA”), where we expect to be able to
commercialize a solar cell technology that will significantly surpass current
solar efficiencies ranging from 6% - 20%. Our proven optics
technology has already shown the ability to achieve approximately 40% efficiency
in a laboratory environment and we believe that this efficiency, or greater, can
be achieved on a cost-effective, commercially-viable scale.
RESULTS
OF OPERATIONS
Net sales
were $2,805,000 for the quarter ended March 31, 2009; a decrease of 42.0%
compared to the quarter ended March 31, 2008. The decrease primarily
resulted from decreased pool lighting sales, $939,000, and decreased sales by
our European subsidiaries, $928,000, from first quarter 2008
levels. EFO sales were $1,543,000 for the quarter ended March 31,
2009; a decrease of $541,000, or 26.0%, from the quarter ended March 31,
2008. EFO sales in 2009 and 2008 include sales from EFO fiber optic
lighting, EFO LED, EFO Controls, and EFO Government products.
Gross
profit was $318,000 for the quarter ended March 31, 2009, a 74.4% decrease
compared to the same period in the prior year. The gross profit
margin as a percentage of sales decreased to 11.3% for the first quarter of 2009
as compared to 25.7% for the first quarter of 2008.
Cash
utilization was $3,768,000 for the quarter ended March 31, 2009; a 19.1%
increase compared to the quarter ended March 31, 2008. Cash
utilization for the quarter ended March 31, 2008 was $3,164,000, net of proceeds
from issuances of common stock and warrants to purchase shares of our common
stock of $9,436,000.
Deteriorating
global economic conditions within the housing and construction industries had an
adverse impact not only on our ability to expand within current markets, but
also to penetrate new markets. For 2009, we intend to continue to
combat these global economic pressures by focusing sales resources in new and
existing market channels including food retailers, cold storage, and government
facilities. Further, we will continue to implement strategic sourcing
and operational cost reductions on a global basis. Selected price
increases will also be implemented.
15
Net
research and development expenses were $230,000 for the quarter ended March 31,
2009; a decrease of $171,000, or 42.6%, as compared to the quarter ended March
31, 2008. Gross expenses for research and development decreased by
19.8% primarily due to lower project costs in the United States. Our
gross research and development expenses are reduced on a proportional
performance basis under DARPA Small Business Innovation Research (“SBIR”)
development contracts. These contracts were signed in 2007, for a
total of $1,500,000 to be reimbursed over the two-year life of the
contracts. At March 31, 2009, $371,000 remained as unrecognized
reductions of gross research and development expenses. The gross
research and development spending along with credits from government contracts
is shown in the table:
|
Three months ended
|
||||||||
|
March 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Gross expenses for research and
development
|
$ | 404 | $ | 504 | ||||
|
Deduct: credits from DARPA
contracts
|
(174 | ) | (103 | ) | ||||
| $ | 230 | $ | 401 | |||||
Sales and
marketing expenses decreased 34.7% to $1,880,000 for the quarter ended March 31,
2009 as compared to $2,878,000 for the quarter ended March 31,
2008. The decrease is primarily due to lower salaries and benefits in
the United States and United Kingdom, lower advertising expenses on a global
basis, and management’s efforts to reduce costs.
General
and administrative expenses decreased 10.7% to $1,224,000 for the quarter ended
March 31, 2009 as compared to $1,370,000 quarter ended March 31,
2008. The decrease is primarily due to lower professional fees in the
United States, as well as management’s efforts to reduce costs.
We
recorded a net loss of $3,041,000 for the quarter ended March 31, 2009, an 11.8%
decrease from the net loss of $3,449,000 for the quarter ended March 31,
2008.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
and Cash Equivalents
At March
31, 2009, our cash and cash equivalents were $6,800,000 as compared to
$10,568,000 at December 31, 2008, a net cash decrease of $3,768,000 for the
quarter ended March 31, 2009. This compares to a net cash increase of
$6,426,000 for quarter ended March 31, 2008.
Cash Used in Operating
Activities
Net cash
used in operating activities primarily consists 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 quarter ended March 31, 2009, by a net loss of $3,041,000, compared to a net
loss of $3,449,000 for the quarter ended March 31, 2008. After
adjustments, net cash used in operating activities was $3,597,000 for the
quarter ended March 31, 2009, an increase of 28.9% compared to a net cash usage
of $2,811,000 for the quarter ended March 31, 2008.
Cash
Used in Investing Activities
Net cash
used in investing activities was $83,000 for the quarter ended March 31,
2009; a decrease of 31.4% compared to a net cash usage of $121,000 for the
quarter ended March 31, 2008. During both periods, cash was used for
the acquisition of fixed assets.
Cash
(Used in) Provided by Financing Activities
Net cash
used in financing activities was $132,000 for the quarter ended March 31,
2009. This cash usage was due to payment on our lines of credit,
$119,000, and long-term bank borrowing, $13,000. For the quarter
ended March 31, 2008, financing activities contributed
$9,405,000. This net contribution was due primarily to cash proceeds
from issuances of common stock and warrants to purchase shares of our common
stock for $9,436,000.
16
Our bank
line of credit in the United States is based on an agreement with Silicon Valley
Bank (“SVB”) dated October 15, 2008, incorporating a $4,000,000 revolving line
of credit that includes a $1,500,000 sub-limit for cash management products,
letters of credit, and foreign exchange. Borrowings under this
agreement are collateralized by our assets, including intellectual property, and
bears interest at the SVB 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
are also required to comply with certain covenant requirements, including a
tangible net worth covenant. As of March 31, 2009, we are still
negotiating with SVB to revise our tangible net worth covenant. The
interest rate at March 31, 2009 was 5.50% and 5.00% at December 31,
2008. Borrowings under the revolving line of credit were $1,776,000
at March 31, 2009 and December 31, 2008. Available borrowings under
this revolving line of credit were $242,000 at March 31, 2009 and $263,000 at
December 31, 2008.
Effective
January 31, 2009, we entered into a First Loan Modification and Forbearance
Agreement with SVB which modified the one year credit agreement entered into on
October 15, 2008. This modification to the terms of the 2008 credit
agreement states that borrowings are collateralized by our assets, including
intellectual property, and bears interest at the SVB Prime Rate plus
1.50%. SVB also agreed to forebear from exercising its rights and
remedies against us as a result of violating our tangible net worth covenant as
of December 31, 2008.
Through
our United Kingdom subsidiary, we maintain a bank overdraft facility of $357,000
(in British pounds sterling, based on the exchange rate at March 31, 2009) under
an agreement with Lloyds Bank Plc. There were no borrowings against
this facility as of March 31, 2009 or December 31, 2008. The facility
is renewed annually on January 1. The interest rate on the facility
was 2.75% at March 31, 2009, and 7.25% at December 31, 2008.
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 offices in Berching, Germany, which are owned and
occupied by our German subsidiary. In November, 2008, we began
discussions with Sparkasse Neumarkt Bank related to the restructuring of the
current credit facility. It was agreed that an additional investment
in its German subsidiary would be made in 2009 as a precondition to maintaining
the current facility structure. As of March 31, 2009, we had
borrowings of $272,000 (in Euros, based on the exchange rate at March 31, 2009)
and $299,000 as of December 31, 2008 (in Euros, based on the exchange rate at
December 31, 2008) against this credit facility, due December,
2013. The interest rate was 6.20% at March 31, 2009 and 5.49% at
December 31, 2008. In addition, our German subsidiary has a revolving
line of credit for $106,000 (in Euros, based on the exchange rate at March 31,
2009) with Sparkasse Neumarkt Bank. As of March 31, 2009, there were
no borrowings against this facility, and borrowings of $128,000 at December 31,
2008 (in Euros, based on the exchange rate at December 31, 2008). The
revolving facility is renewed annually on January 1. Interest rates
on this line of credit were 16.00% at March 31, 2009 and 11.00% at December 31,
2008.
We have
incurred losses which have been attributable to operational performance,
restructuring, and other charges such as the impairment of goodwill, which has
led to negative cash flows, and violations of bank debt
compliance. Further, we have not historically met management
budgetary forecasts. We have managed our liquidity during this time
through a series of cost reduction initiatives, bank lines of credit borrowings,
and capital market transactions. However, the global credit market
crisis has had a dramatic effect on our industry and customer
base. The recession in the United States and Western Europe, and the
slowdown of economic growth in the rest of the world, has created a business
environment where it is substantially more difficult to obtain equity funding
and additional non-equity financing. Furthermore, this environment
has resulted in an increased risk of customer payment defaults. Our
liquidity position, as well as our operating performance, was negatively
affected by these economic and industry conditions and by other financial and
business factors, many of which are beyond our control.
Management
acknowledges that the level of cash utilization during the quarter ended March
31, 2009 is not sustainable for continuing as a viable entity on a long-term
basis. Management continues to aggressively reduce costs, as
evidenced in the $1,315,000 decrease in operating expenses for the quarter ended
March 31, 2009, as compared to the quarter ended March 31,
2008. Further, management is executing further cost reductions and
organizational realignments designed to sustain our solvency.
Although
we are committed to managing cash utilization internally as the means of
remaining a viable entity throughout 2009, there can be no assurances that this
objective will be successful without obtaining external
funding. Therefore, we are aggressively pursuing one or more of the
following sources for external funding:
|
|
·
|
obtain
loans and/or grants available through federal, state, and/or local
governmental agencies,
|
|
|
·
|
obtain
loans from various financial
institutions,
|
|
|
·
|
obtain
loans from non-traditional investment capital
organizations,
|
|
|
·
|
sale
and/or disposition of one or more operating units,
and
|
|
|
·
|
obtain
funding from the sale of our common stock or other equity
instruments.
|
17
Obtaining
financing through the above mentioned mechanisms contain risks,
including:
|
|
·
|
government
stimulus and/or grant money is not allocated to us despite our focus on
the design, development, and manufacturing of energy efficient lighting
systems,
|
|
|
·
|
loans
or other debt instruments may have terms and/or conditions, such as
interest rate, restrictive covenants, and control or revocation
provisions, which are not acceptable to management or our Board of
Directors,
|
|
|
·
|
the
current global economic crisis combined with our current financial
condition may prevent us from being able to obtain any debt
financing,
|
|
|
·
|
financing
may not be available for parties interested in pursuing the acquisition of
one or more of our operating units,
and
|
|
|
·
|
additional
equity financing may not be available to us in the current economic
environment and could lead to further dilution of shareholder value for
current shareholders of record.
|
Failure
to effectively generate required operating cash through the above measures or
through internally generated means could result in the company becoming
insolvent in 2009.
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,
2008.
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 went into effect for fiscal
years beginning after November 15, 2007 (effective January 1, 2008, for our
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. We adopted the financial assets and
liabilities portion of this FASB and it had no effect. 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 (January 1, 2009, for our company). Management is
evaluating the effect that this guidance may have on our overall financial
position or results of operations and we do not anticipate that it will have a
significant impact.
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 159 is in effect for
fiscal years beginning after November 15, 2007 (effective January 1, 2008, for
our company). We have elected to not apply this fair value option to
any of our existing assets or liabilities. However, we may adopt this
guidance for assets or liabilities in the future as permitted under FAS
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) is in effect
for fiscal years beginning after December 15, 2008 (January 1, 2009, for our
company). Management is evaluating the effect that this guidance may
have on our overall financial position or results of operations and we do not
anticipate that it will have a significant impact.
In
December 2007, the FASB issued FAS
No. 160, “Non-controlling Interests in Consolidated Financial Statements,
an Amendment of ARB No. 51” (FAS 160). The new pronouncement requires
all entities to report non-controlling (minority) interests in subsidiaries as a
component of shareholders’ equity. FAS 160 is in effect for fiscal
years beginning after December 15, 2008 (January 1, 2009, for our
company). Management is evaluating the effect that this guidance may
have on our overall financial position or results of operations and we do not
anticipate that it will have a significant impact.
18
Item
3. Quantitative and Qualitative Disclosures About Market Risk
As of
March 31, 2009, we had $913,000 in cash held in foreign currencies based on the
exchange rates at March 31, 2009. 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
March 31, 2009, we had no borrowings against a credit facility secured by real
property owned by our German subsidiary. As of December 31, 2008, we
had $128,000 (in Euros, based on the exchange rate at December 31, 2008)
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 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 was required to apply its
judgment in evaluating the cost-benefit relationship of possible disclosure
controls and procedures. The design of any 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 were effective to ensure that material information relating to
us, including our consolidated subsidiaries, is made known to them by others
within those entities, particularly during the period in which this Quarterly
Report on Form 10-Q was being prepared.
(b)
Changes in internal control over financial reporting.
There was
no change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) identified in connection with the evaluation
during our last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
19
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 on Form 10-K for
the year ended December 31, 2008.
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 2003 (18 U.S.C. §1350).
|
|
|
32.2
|
Statement
of Chief Financial Officer under Section 906 of the Sarbanes-Oxley
Act of 2003 (18 U.S.C.
§1350).
|
20
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: May
6, 2009
|
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)
|
21
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 2003 (18 U.S.C. §1350).
|
|
|
32.2
|
Statement
of Chief Financial Officer under Section 906 of the Sarbanes-Oxley
Act of 2003 (18 U.S.C. §1350).
|
22