ENERGY FOCUS, INC/DE - Annual Report: 2010 (Form 10-K)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2010
| 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 (State of incorporation) |
94-3021850 (I.R.S. Employer Identification No.) |
32000 Aurora Road
Solon, Ohio 44139
(Address of principal executive offices, including zip code)
Solon, Ohio 44139
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: 440.715.1300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of Each Class
Common Stock, Par Value $0.0001
Series A Participating Preferred Stock Purchase Rights
Common Stock, Par Value $0.0001
Series A Participating Preferred Stock Purchase Rights
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule
405 of the Securities Act of 1933. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Exchange Act. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Date File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to
submit and post such files). Yes
o No
þ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company.
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Approximate aggregate market value (on basis of closing bid price) of voting stock held by
non-affiliates as of June 30, 2010: $19,918,936
Number of the registrant’s shares of common stock outstanding as of February 28, 2011: 24,200,617
Documents Incorporated by Reference
Portions of the proxy statement for the 2011 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission are incorporated by reference into Part III of this report.
TABLE OF CONTENTS
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PART I
Item 1. Business
Energy Focus, Inc. and subsidiaries (“Energy Focus”) design, develop, manufacture, and market
energy-efficient lighting products, and is a leading provider of turnkey, energy-efficient,
lighting solutions in the governmental and public sector market, general commercial market, and the
pool market. Energy Focus’ lighting technology offers significant energy savings, heat dissipation
and maintenance cost benefits over conventional lighting for multiple applications.
Overview
We engage in the design, development, manufacturing, marketing, and installation of
energy-efficient lighting systems and solutions where we serve two segments:
| • | solutions-based sales providing turnkey, high-quality, energy-efficient lighting application alternatives primarily to the existing public-sector building market; and | ||
| • | product-based sales providing military, general commercial and industrial lighting and pool lighting offerings, each of which markets and sells energy-efficient lighting systems. |
We continue to evolve our business strategy to include providing our customers with turnkey,
comprehensive energy-efficient lighting solutions, which use, but are not limited to, its patented
and proprietary technology. Our product-based solutions include light-emitting diode (“LED”),
fiber optic, high-intensity discharge (“HID”), fluorescent tube and other highly energy-efficient
lighting technologies. Typical savings related to current technology of the Company approximates
80% in electricity costs, while providing full-spectrum light closely simulating daylight colors.
Our strategy also incorporates continued investment into the research of new and emerging energy
sources including, but not limited to, LED and solar energy applications.
Our long-term strategy is to penetrate the $100 billion existing building and $300 million US
military lighting markets by providing turnkey, comprehensive energy-efficient lighting solutions,
which utilize our proprietary energy-efficient lighting products. We will continue to focus on
markets where the benefits of our lighting solutions offerings, combined with our technology, are
most compelling. These markets include: schools, universities, hospitals, office buildings,
parking garages, supermarkets, museums, cold storage facilities and manufacturing environments.
The passage of the Energy Savings Performance Contracts legislation in nearly all the States and
the Energy Independence and Security Act of 2007 by Congress created a natural market for our
energy-efficient products. Under this Act, all incandescent light bulbs are mandated by federal
law to utilize 25% to 30% less energy than today’s products by the years 2012 through 2014. Since
many of our products are already 80% more efficient than incandescent bulbs, our focus is to
increase the public’s awareness and knowledge of our technology and to establish comprehensive
distribution channels so that demand can be fulfilled quickly.
Our development of solar technology is continuing through our leadership role in the United States
government’s Very High Efficiency Solar Cell (“VHESC”) Consortium sponsored by the Defense Advanced
Research Projects Agency (“DARPA”). The goal of the VHESC project is to develop a 40% or greater
efficient solar cell for United States military applications, which would ultimately be available
to the public for commercial application.
During 2010, we made major progress in our restructuring plan focused on repositioning the Company
for growth and profitability. This plan involves three major areas of focus which include:
| • | Dramatic reduction of unabsorbed manufacturing and fixed overhead costs. | ||
| • | Leveraging our fundamental intellectual property and government research to create extremely energy-efficient illumination products for existing buildings. We are currently developing Intellitube™, an intelligent LED lamp to replace linear fluorescent lamps for general illumination. The LED replacement lamp is designed to reduce energy consumption by more than 80% while delivering superior lighting qualities. | ||
| • | Establishing a national sales and delivery vehicle into the existing building market through the acquisition of lighting retrofit companies: We completed our first full year with Stones River Companies, LLC (“SRC”), a well established lighting retrofit company, which we acquired on December 31, 2009, that primarily services the Southeastern region of the United States. We anticipate further growth through expansion of SRC’s geographical coverage and, possibly, through one or more subsequent acquisitions across the United States. |
We market our products and services through multiple sales channels and subsidiaries. The following
is a brief summary of each unit:
| Business Unit: Stones River Companies, LLC | |||
| Offerings: Application design, engineering, project management, and turnkey lighting and solar retrofits. | |||
| Target Market: Energy Services Companies (“ESCO’s”) selling into Fortune 100 corporate clients and public sector existing buildings such as: schools, universities, hospitals, and public office buildings at the federal, state and local level. |
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| Business Unit: Energy Focus Government Contracts and Sales | |||
| Offerings: Solid state lighting technologies and products to the United States Military. | |||
| Target Market: United States Navy, United States Army and any other Federal Military unit. | |||
| Business Unit: US Products which include: |
| Fiberstars Pool and Spa | |||
| Offerings: Decorative lighting and related products to the United States pool market. | |||
| Target Market: United States pool new construction market and existing market upgrades. |
| Fiberstars Commercial | |||
| Offerings: Premier energy-efficient lighting products; decorative architectural lighting products including LED and fiber optic technologies. | |||
| Target Market: Corporate accounts including, distribution centers, warehouses, manufacturing, food and clothing retail, and cold storage; decorative lighting for new commercial buildings. |
| Business Unit: Crescent Lighting Limited | |||
| Offerings: Decorative and specialty lighting products including LED and fiber optic technologies. | |||
| Target Market: New commercial building decorative lighting market in Europe, Asia, and the Middle East. |
Products
In 2010, we produced, sourced, and/or marketed a wide variety of lighting technologies to serve two
general markets: commercial buildings and pool lighting. Our offerings include the following
products:
| • | LED docklights, | ||
| • | LED parking garage lamps and fixtures, | ||
| • | LED cold storage globe lamps and LED fiber optic lighting systems, | ||
| • | LED landscape fixtures, | ||
| • | LED replacements for linear fluorescent lamps, | ||
| • | LED lamps and fixtures (e.g. pool “PAL” lights), and | ||
| • | 7 Families of LED fixtures to serve the US Navy. |
In addition, we also produced customized components such as underwater lenses, color-changing LED
lighting fixtures, and lighted water features, including waterfalls and laminar-flow water
fountains. Furthermore, we continue to aggressively penetrate the government and military lighting
markets. In this regard, we have many products being actively marketed to the United States
federal government agencies through the General Services Administration website,
https://www.GSAAdvantage.gov.
The key features of our products are as follows:
| • | Many of our products meet the lighting efficiency standards mandated for the year 2020. | ||
| • | Our products qualify for federal and state tax incentives for commercial and residential consumers in certain states. | ||
| • | Many of our products make use of proprietary optical and electronics delivery systems which enable high efficiencies with superior lighting qualities. |
Long-Term Strategy
Our
long-term strategy is to substantially penetrate the
$100 billion existing building and $300 million US Military lighting
markets by providing turnkey, comprehensive energy-efficient lighting solutions which utilize our
proprietary energy-efficient lighting products. We will continue to focus on markets where the
benefits of our lighting solutions offerings, combined with our technology, are most compelling.
Our strengths, which provide a strategic competitive advantage, include the following:
| • | fundamental intellectual property and trade secrets in non-imaging optics and coatings, | ||
| • | a broad and intimate understanding of lighting technologies, | ||
| • | proven ability to develop systems which efficiently create, transport, and display light, | ||
| • | a superior understanding of the existing building market drivers and the evolution towards “green” lighting products and energy-efficient lighting systems that maximize customer ROI, | ||
| • | core competencies in execution of all facets of solutions sales, and | ||
| • | strong relationships with the federal government for research and development. |
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Our tactical approach to implement our long term strategy includes:
| • | Intensifying our focus on the existing building market. On December 31, 2009, we completed our acquisition of SRC to obtain a sales and delivery vehicle into the public sector existing building market. In 2010, our SRC business accounted for approximately 56% of our revenues. | ||
| • | Developing mainstream lighting technologies that directly compete against linear fluorescent general illumination lamps and | ||
| • | Continuing to reduce our operating expenses. |
We expect that these actions will result in the following outcomes:
| • | A continued positive impact to our cash flow and sales growth due to the SRC business unit, | ||
| • | Our sales growth, cost reduction initiatives and additional selected financing facilities, will provide adequate operating funds for organic growth, | ||
| • | The formation of a streamlined organization that is focused on creating economic value through turnkey energy-efficient lighting system and solutions for existing building owners, | ||
| • | Development of military grade LED lighting products for the US Armed Forces, | ||
| • | Development of mainstream lighting products for the existing building market that are not currently available and are differentiated by their performance, energy consumption, longevity, and controllability, and | ||
| • | A platform for continued growth within the public building sector through the acquisition of SRC. This will allow us to take advantage of the opportunity created by Energy Savings Performance Contracts legislation at the State and Federal level, and state and federal utility stimulus packages available in public sector markets. |
Sales, Marketing, and Distribution of our Offerings Portfolio
Products
Our products are sold through a combination of direct sales employees, independent sales
representatives, and various distributors in different geographic markets throughout the world.
Our distributors’ obligation to us is not contingent upon the resale of our products and as such
does not prohibit revenue recognition. We also distribute our products through our SRC subsidiary.
Within the commercial and pool lighting business units, we continue to focus on general contractors
and specifiers especially in the retail, hospitality, museum and health care markets. Our lighting
retrofit subsidiary, SRC, is heavily targeting the existing public building market and will
generate enormous benefits by utilizing our products for quick, energy-efficient upgrades.
Solutions
Our solutions-based sales are designed to enhance total value by providing turnkey, high-quality,
energy-efficient lighting application alternatives that positively impact customers’ profitability,
the environment, and the communities we serve. These solutions are sold through our SRC subsidiary
and include not only our proprietary energy-efficient lighting solutions, but also sourced lighting
systems, energy audits, and service agreements.
Through SRC, we target the existing public building market, particularly health care and hospitals,
schools and universities, governments and municipalities, museums, hospitality and casinos, as well
as industry and manufacturing. SRC’s direct customers are large national ESCO’s that provide
energy-efficient upgrades around the country. Also within the solutions business unit, we serve
multi-location food retailers, cold storage facilities, retailers, and industrial/commercial real
estate companies.
As of December 31, 2010, we had approximately 90 sales and independent sales representatives
throughout the United States and United Kingdom.
Our ten largest customers accounted for approximately 64.2% of our net sales from continuing
operations for the twelve months ended December 31, 2010. In 2009, our ten largest customers
accounted for approximately 33.4% of our net sales from continuing operations.
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Manufacturing and Suppliers
In 2010, we produced our lighting systems through a combination of internal and outsourced
manufacturing and assembly operations. Our internal lighting system manufacturing consisted
primarily of fiber processing, final assembly, testing, and quality control. We used independent
contractors to manufacture some components and sub-assemblies and have worked with a number of our
vendors to design custom components to meet our specific needs. We manage inventories of
domestically produced component parts on a just-in-time basis when practicable. Our quality
assurance program provides for testing of all sub-assemblies at key stages in the assembly process
as well as testing of finished products.
Many of our products are manufactured by third-party suppliers resulting in significant cost
savings. Under a Production Share Agreement initiated in 2003 and renewed in August 2007, we
conduct contract manufacturing and assembly in Mexico through North American Production Sharing,
Inc. and Industrias Unidas de BC, SA de CV (“NAPS”). Under this agreement, NAPS provides
administrative and manufacturing services, including labor services and the use of manufacturing
facilities in Mexico, for the manufacturing and assembly of certain fiber optics and LED lighting
systems, equipment, and related components. We also perform final assembly of products acquired
from Australia, India, Japan, and Taiwan. These suppliers generally supply products on a purchase
order basis.
Research and Development
Research and development has remained a key focus of our Company; accordingly, we have committed
substantial resources to this endeavor. Our research and development team is dedicated to
continuous improvement and innovation of our current lighting technologies, including LED, fiber
optics and HID systems. Furthermore, our research and development team plays a leading role in the
United States government’s VHESC Consortium sponsored by DARPA. The purpose of the VHESC project
is to develop an extremely high-efficiency solar cell for United States military applications,
which would ultimately be available for commercial application.
Research and development income, net of expenses, for the year ended December 31, 2010 was
$202,000. Research and development expense, net of credits from the government, for the years
ended December 31, 2009 and 2008 was $319,000 and $237,000, respectively.
Our recent achievements include:
2010: We were awarded $3.0 million in new research contracts and grants in 2010. These included
three awards totaling $1.6 million announced January 26, 2010. Two of these awards,
“Explosion-Proof Solid State Lighting for Extreme Environments” and “A Spectrally Dynamic Berth
Light for Active Circadian Cycle Management” are Phase 2 Small Business Innovation Research
(“SBIR”) grants from DARPA. The third award, “Innovative Solid State Lighting Replacements for
Industrial and Test Facility Locations,” is a Phase 1 Small Business Technology Transfer (“STTR”)
program grant received from the National Aeronautics and Space Administration (“NASA”). A
Department of Energy (“DoE”) for $1.0 million award to develop high performance Sol-Gel coatings
for lighting and solar applications was announced August 10, 2010. Finally, an additional $0.4
million in Department of Defense (“DoD”) funding to advance Energy Focus’ LED Intellitube™
technology and applications was announced August 31, 2010. In addition, we completed qualification
of seven families of solid state lighting fixtures developed under Naval Sea Systems Command
(“NAVSEA”) and DARPA contracts. The Company is currently shipping these products to the United
States Navy.
2009: In March, 2009, the DoD selected Energy Focus to receive a Phase I SBIR grant to begin the
development of a “Solid State Infrared Replacement for the M-278 Flare” for the United States
Army’s Hydra Rocket System. In July, 2009, the Naval Research Warfare Center awarded us a
$1,400,000 contract to develop and produce solid state lighting fixtures for use on Virginia Class
attack submarines. In August, 2009, DARPA awarded us a $500,000 SBIR extension grant to develop
and produce solid state lighting fixtures for general use on United States Navy ships. In
September, 2009, we entered into a $3,100,000 contract with the VHESC Consortium to deliver
advanced optics research to enable development of high-efficiency, low-cost photovoltaic-based
solar cells. Also in September, we entered into a $100,000 Agreement with the Department of Energy
for a Phase I SBIR project to investigate methods of using coatings to improve color consistency
for Metal Halide lamps. In October, 2009, we entered into an additional $100,000, twelve-month
contract with the VHESC Consortium to continue advanced solar research on low-cost energy-efficient
spectrum splitting technologies.
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2008: In November, 2008, the United States DoE named Energy Focus an Energy Star Partner. Energy
Star is a joint program of the United States’ Environmental Protection Agency and DoE helping
Americans save money and protect the environment through energy-efficient products and practices.
Also in November, DARPA, through their SBIR Program, awarded us a contract to develop Explosion
Proof LED fixtures. In December, 2008, the DARPA SBIR Program awarded us a contract to develop
berth lighting systems that will effectively reset a sailor’s body clock for environments where the
natural circadian rhythm is frequently disrupted. The two DARPA SBIR contracts are for a total of
$198,000. Also in December, we installed high-efficiency lighting fixtures to retrofit 100% of the
high-bay lighting in a hangar deck on board an Arleigh Burke class Naval Destroyer. This
installation followed a year-long demonstration on board naval vessels that replaced existing
fluorescent, incandescent, and halogen lighting with various LED lighting solutions.
Intellectual Property
We have a policy of seeking to protect our intellectual property through patents, license
agreements, trademark registrations, confidential disclosure agreements and trade secrets, as
management deems appropriate. As of December 31, 2010, our intellectual property portfolio
consisted of 74 issued United States and foreign patents, various pending United States patent
applications, and various pending Patent Cooperation Treaty patent applications filed with the
World Intellectual Property Organization that serves as the basis of national patent filings in
countries of interest. Our issued patents expire at various times between January, 2013 and June,
2030. Generally, the term of patent protection is twenty years from the earliest effective filing
date of the patent application. There can be no assurance, however, that our issued patents are
valid or that any patents applied for will be issued. There can be no assurance that our
competitors or customers will not copy aspects of our lighting systems or obtain information that
we regard as proprietary. There can also be no assurance that others will not independently
develop products similar to ours. The laws of some foreign countries in which we sell or may sell
our products do not protect proprietary rights to products to the same extent as do the laws of the
United States.
We are aware that a large number of patents and pending patent applications exist in the field of
fiber optic technology and LED lighting. We are also aware that certain competitors hold and have
applied for patents related to fiber optic lighting and LED lighting. Although, to date, we have
not been involved in litigation challenging our intellectual property rights, we have, in the past,
received communications from third parties asserting rights over our patents or that our technology
infringes upon intellectual property held by such third parties. On January 29, 2010, a competitor
and former supplier filed a complaint against our Company in the Court of Chancery of the State of
Delaware, alleging that we misused proprietary trade secrets, breached a contract, and engaged in
deceptive trade practices relating to one of our lighting products. The complaint seeks injunctive
relief and damages. We have answered the complaint and filed a counterclaim for breach of
contract. The parties currently are involved in discovery. We strongly deny any impropriety,
believe that the complaint is without merit, and have been vigorously
defending ourselves. We have reached an oral settlement of this case
and are negotiating a written settlement agreement. The defense of
this lawsuit has not had, and in the opinion of management, the
implementation of the settlement will not have, an adverse effect on
our financial condition, cash flows or results of operations.
We are not currently engaged in any other litigation, and do not anticipate becoming involved in
any in the foreseeable future. However, we may be required to engage in litigation to protect our
patent rights or to defend against the claims of others. There can be no assurance that third
parties will not assert additional claims that our products infringe upon third-party patents or
other intellectual property rights or that, in case of a dispute, licenses to such technology will
be available, if at all, on reasonable terms. In addition, we may need to take further legal
action to enforce our intellectual property rights in the future. In the event of litigation to
determine the validity of any third-party claims or claims by us against third parties, such
litigation, whether or not determined in our favor could result in significant expense to us and
divert the efforts of our technical and management personnel from productive tasks. Also, in the
event of an adverse ruling in such litigation, we might be required to expend significant resources
to develop non-infringing technology or to obtain licenses to the infringing technology, and the
licenses may not be available on acceptable terms. In the event of a successful claim against us
and our failure to develop or license a substitute technology, our operating results could be
adversely affected.
Backlog
We typically ship standard products within a few days after receipt of order. Custom products are
shipped within 30-60 days of receipt of order. Generally, there is not a significant backlog of
orders except at year-end. Our products-based backlog at the end of 2010 was $1,540,000, compared
to $859,000 at the end of 2009. Our solutions-based backlog on awarded contracts totaled
approximately $3,523,000. Recognized revenues from these contracts occur over the course of 2011
and are recognized as the services are being performed or the materials are delivered.
Historically, materials have accounted for 50% of the total recognized project revenues and
auditing and engineering costs have accounted for 10% of the total recognized project revenues.
The remaining project revenues are recognized on a percentage of completion basis as installation
occurs.
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Competition
Our commercial lighting products compete against a variety of lighting products, including
conventional light sources such as: incandescent light bulbs, metal halide lamps, LEDs, compact
fluorescent lamps, other fiber optic lighting systems and decorative lighting technologies. Our
ability to compete depends substantially upon the superior performance and lower lifecycle cost of
our products and services. Principal competitors in our markets include: large lamp manufacturers,
lighting fixture companies, distributors, lighting retrofit companies, and ESCO’s whose financial
resources may substantially exceed ours. These competitors may introduce new or improved products
that may reduce or eliminate some of the competitive advantage of our products. We anticipate that
the primary competition to our systems will come from new technologies that offer increased energy
efficiency, lower maintenance costs and/or lower heat radiation. In certain applications, we
compete with LED systems produced by large lighting companies such as Philips and General Electric.
In traditional commercial lighting applications, we compete primarily with local and regional
lighting manufacturers that, in many cases, are more established in their local markets than our
Company. In traditional commercial lighting, fiber optic lighting products are offered by a number
of smaller companies, some of which compete aggressively on price. Some of these competitors offer
products with performance characteristics similar to those of our products. Additionally, some
conventional lighting companies now manufacture or license fiber optic lighting systems that
compete with our products. Selected companies that compete with us in Asia include Phillips,
Mitsubishi, Bridgestone, and Toray.
Our pool lighting products compete with other sources of in-pool lighting, including colored and
color-changing underwater lighting, and pool accent lighting. Principal competitive factors
include: price, performance, ease of installation, and maintenance requirements. In the pool
lighting market, we face competition from suppliers and distributors who bundle lighting and
non-lighting products and sell these packages to pool builders and installers. In addition, we
face competition directly from manufacturers who produce their own lighting systems and components.
For example, in this market, competitive products are offered by Pentair’s American Products
Division, a major manufacturer of pool equipment and supplies, as well as the Pool and Spa division
of Nexxus Lighting, Inc. In the spa lighting business, spa manufacturers install LED lighting
systems during the manufacturing process. We intend to develop new lighting products that are
complementary to traditional pool lights currently sold by pool equipment suppliers. To maximize
the sales of these new products, we continue to leverage our well-established presence in the
domestic pool lighting market and are expanding into the international pool lighting market.
The market for lighting energy solutions is fragmented and differs in the public and private sector
markets. Serving the private sector markets, our National Accounts solutions business competes
against in-house resources, electrical contractors, traditional lighting fixture manufacturers and
non-traditional ESCO’s that are focused on commercial and industrial customers. In the public
sector, our SRC solutions business competes against other lighting retrofit companies, as well as
some traditional ESCO’s that self-perform the lighting component of their projects. In both
markets, we compete primarily on the basis of financial impact, technology, light quality and
design, client relationships, lighting application knowledge, energy efficiency, customer service,
and marketing support.
Insurance and Bonding
All of our properties and equipment are covered by insurance and we believe that such insurance is
adequate. In addition, we maintain general liability and workers compensation insurance in amounts
that we believe are consistent with our risk of loss and industry practice. In regards to our
lighting solutions-based business, we are often required to provide various types of surety bonds
as an additional level of security of our performance. We have a surety arrangement with one
surety for which we provide cash collateral relating to our surety bonding program. We believe
that this cash collateral is sufficient to support our current bonding requirements.
Employees
As of December 31, 2010, we had 68 associates, 17 of whom are located in the United Kingdom and 51
in the United States.
None of our associates are subject to any collective bargaining agreement.
Business Segments
We have two reportable segments: product-based sales featuring pool lighting and general commercial
lighting, each of which markets and sells lighting systems, and solutions-based sales providing
turnkey, high-quality, energy-efficient lighting application alternatives. Our products are sold
primarily in North America, Europe, and the Far East through a combination of direct sales
employees, independent sales representatives and various distributors. Our solutions-based sales
are designed to enhance total value by positively impacting customers’ profitability, the
environment, and the communities it serves. These solutions are sold primarily in North America
through our direct sales employees as well as our SRC subsidiary, and include not only our
proprietary energy-efficient lighting solutions, but also sourced lighting systems, energy audits,
and service agreements.
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Available Information
Our Web site is located at http://www.efoi.com. We make available free of charge, on or through
our Web site, our annual, quarterly, and current reports, as well as any amendments to those
reports, as soon as reasonably practicable after electronically filing such reports with the
Securities and Exchange Commission (“SEC”). Information contained on our Web site is not part of
this report.
Forward-looking Statements
When used in this report, the words “expects,” “anticipates,” “estimates,” “plans,” “intends,” and
similar expressions are intended to identify forward-looking statements. These statements include,
but are not limited to, statements as to our competitive position; future operating results; net
sales growth; expected operating expenses and capital expenditures; gross product margin
improvement; sources of net sales; anticipated credits from government contracts; product
development and enhancements; liquidity and cash reserves; our reliance upon a limited number of
customers; our accounting policies; the effect of recent accounting announcements; the development
and marketing of new products; relationships with customers and distributors; relationships with,
dependence upon, and the ability to obtain components from suppliers; as well as our remarks
concerning our ability to compete in certain markets; the evolution and future size of those
markets; seasonal fluctuations; plans for and expected benefits of outsourcing and offshore
manufacturing; trends in the price and performance of fiber optic lighting products; the benefits
and performance of our lighting products; the adequacy of our current facilities; our strategy with
regard to protecting our proprietary technology; our ability to retain qualified employees; and the
risks set forth below under Item 1A, “Risk Factors.” 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.
Energy Focus ®, EFO®, Fiberstars®, BritePak®, and EFO-Ice® are our registered trademarks. We may
also refer to trademarks of other corporations and organizations in this document.
All references to “Energy Focus,” “we,” “us,” “our,” or “the Company” means Energy Focus, Inc. and
its subsidiaries, except where it is made clear that the term means only the parent company.
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Item 1A. Risk Factors
We have a history of operating losses and may incur losses in the future.
We have experienced net losses of $8,517,000 and $11,015,000 for the years ended December 31, 2010
and 2009, respectively. As of December 31, 2010, we had an accumulated deficit of $68,860,000.
Although management continues to address many of the legacy issues that have historically burdened
our financial performance, we still face challenges in order to reach profitability. In order for
us to attain profitability and growth, we will need to successfully address these challenges,
including the continuation of cost reductions throughout our organization, execution of our
marketing and sales plans for our turnkey energy-efficient lighting solutions business, the
development of new technologies into sustainable product lines and continued improvements in our
supply chain performance.
Although we are optimistic about reaching profitability, there is a risk that our business may not
be as successful as we envision. Our independent public accounting firm has issued an opinion in
connection with our 2010 Annual Report on Form 10-K raising substantial doubt as to our ability to
continue as a going concern. This opinion stems from our historically poor operating performance,
the current economic environment, and our historical inability to generate sufficient cash flow to
meet obligations and sustain operations without obtaining additional external financing. Although
we are optimistic about obtaining the funding necessary for us to continue as a going concern,
there can be no assurances that this objective will be successful. As such, we will continue to
review and pursue selected external funding sources, if necessary, to execute these objectives
including, but not limited to, the following:
| • | obtain financing from traditional or non-traditional investment capital organizations or individuals, | ||
| • | potential sale or divestiture of one or more operating units, and | ||
| • | obtain funding from the sale of our common stock or other equity or debt instruments. |
Obtaining financing through the above-mentioned mechanisms contains risks, including:
| • | 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 economic environment combined with our capital constraints 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. |
Downturns in general economic conditions and construction trends could continue to materially and
adversely affect our business.
Downturns in general economic and market conditions, both nationally and internationally, could
have a material adverse effect on our business. In most areas, sales of new and existing homes
have slowed as well as adverse changes in employment levels, job growth, consumer confidence and
interest rates, in addition to an oversupply of commercial and residential buildings for sale. In
our legacy businesses, sales of our lighting products depend significantly upon the level of new
building construction, which are affected by housing market trends, interest rates and the weather.
Sales of our pool and spa lighting products depend substantially upon the level of new pool
construction, which is also affected by housing market and construction trends. In addition, due to
the seasonality of construction, sales of swimming pool and lighting products, and thus our revenue
and income, have tended to be significantly lower in the first quarter of each year. Our future
results of operations may experience substantial fluctuations from period to period as a
consequence of these factors, and such conditions and other factors affecting capital spending may
affect the timing of orders. An economic downturn coupled with a decline in our net sales could
adversely affect our ability to meet our working capital requirements, support our capital
requirements and growth objectives, or could otherwise adversely affect our business financial
condition, and results of operations. As a result, any general or market-specific economic
downturns, particularly those affecting new building construction and renovation, or that cause
end-users to reduce or delay their purchases of lighting products, services, or retrofit
activities, would have a material adverse effect on our business, cash flows, financial condition,
and results of operations.
An inability to obtain bonding could limit the number of projects we are able to pursue.
As is customary in the construction business, we are often required to provide surety bonds to
secure our performance under construction contracts. Our ability to obtain surety bonds primarily
depends upon our capitalization, working capital, past performance, management expertise and other
external factors, including the overall capacity of the surety market. Surety companies consider
such factors in relation to the amount of our backlog and their underwriting standards, which may
change from time to time. Since 2001, the surety industry has undergone significant changes with
several companies withdrawing completely from the industry or significantly reducing their bonding
commitment. In addition, certain reinsures of security risk have limited their participation in
this market. Therefore, we could be unable to obtain surety bonds, when required, which could
adversely affect our future results of operations and revenues.
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We may not fully recognize the anticipated revenue reported in our solutions-based backlog.
The contracts we enter into related to our solutions-based business can be relatively large and
typically range in the amount of $100,000 to as much as $4,000,000. As of December 31, 2010, our
solutions-based backlog of uncompleted work was $3,523,000. We include a project in our backlog
when a contract is awarded or a letter of intent is obtained. The revenue projected in our backlog
may not be realized or, if realized, may not result in the revenue or profits expected. If a
project included in our backlog is canceled, suspended or the scope of work is reduced, it would
result in a reduction to our backlog which could materially affect the revenues and profits
realized. If a customer should cancel a project, we may be reimbursed for costs expended to date
but would have no contractual right to the total projected revenues included in our backlog.
Cancellations or delay of significant projects could have a material adverse effect on future
revenues, profits and cash flows.
If we are unable to accurately estimate the risks, revenues or costs associated with a project, we
may achieve a lower than expected profit or incur a loss on that project.
For the solutions-based segment of our business, we generally enter into fixed price contracts.
Fixed price contracts require us to perform a contract for a specified price regardless of our
actual costs. As a result, the profit that we realize on a contract is dependent on the extent to
which we successfully manage our costs and overruns. Cost overruns, whether due to inefficiency,
inaccurate estimates or other factors, result in lower profit or a loss on a project. A majority
of our contracts are based on cost estimates that are subject to a number of assumptions. If our
estimates of the risks, revenues or costs prove inaccurate or circumstances change, we may incur a
lower profit or a loss on that project.
In addition to the above and in conjunction with the acquisition of SRC, we entered into an
agreement with the seller, TLC Investments, LLC., whereby, SRC would be guaranteed a profit
percentage of 25% on certain projects which were begun prior to the acquisition or were out for bid
at the time the acquisition occurred on December 31, 2009. During 2010, a significant portion of
our projects were subject to this guarantee. As these projects are completed and bids for new
projects not in this “pipeline” are awarded, we cannot be assured that we will continue to earn the
same profit margin as we had earned historically. As a result, we could incur lower profits, cash
flows or a loss on these projects.
The percentage-of-completion method of accounting for contract revenues may result in material
adjustments, which could result in a charge against earnings.
Our solutions-based segment recognizes contract revenues using the percentage-of-completion method.
Under this method, percentage-of-completion is determined by relating the actual cost of the work
performed to date to the current estimated total cost of the respective contracts. When the
estimate on a contract indicates a loss, we record the entire loss during the accounting period in
which it is estimable. In the ordinary course of business, at a minimum on a quarterly basis, we
prepare updated estimates of the total forecasted revenue, cost and profit or loss for each
contract. The cumulative effect of revisions in estimates of the total forecasted revenue and
costs during the course of the work is reflected in the accounting period in which the facts that
caused the revision become known. To the extent that these revisions result in an increase, a
reduction or elimination of previously reported contract profit, we recognize a credit or a charge
against current earnings, which could be material.
We have significant international sales and are subject to risks associated with operating in
international markets.
For the years ending December 31, 2010 and 2009, net sales of our products outside of the United
States represented approximately 10.9% and 36.5%, respectively, of our total net sales from
continuing operations. We generally provide technical expertise and limited marketing support,
while our independent international distributors generally provide sales staff, local marketing,
and product services. We believe our international distributors are better able to service
international markets due to their understanding of local market conditions and best business
practices. International business operations are subject to inherent risks, including, among
others:
| • | unexpected changes in regulatory requirements, tariffs and other trade barriers or restrictions, | ||
| • | longer accounts receivable payment cycles and the difficulty of enforcing contracts and collecting receivables through certain foreign legal systems, | ||
| • | difficulties in managing and staffing international operations, | ||
| • | potentially adverse tax consequences, | ||
| • | the burdens of compliance with a wide variety of foreign laws, | ||
| • | import and export license requirements and restrictions of the United States and each other country in which we operate, | ||
| • | exposure to different legal standards and reduced protection for intellectual property rights in some countries, | ||
| • | currency fluctuations and restrictions, | ||
| • | political, social and economic instability, including war and the threat of war, acts of terrorism, pandemics, boycotts, curtailment of trade or other business restrictions, | ||
| • | periodic foreign economic downturns, and | ||
| • | sales variability as a result of fluctuations in foreign currency exchange rates. |
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If we are unable to respond effectively as new lighting technologies and market trends emerge, our
competitive position and our ability to generate revenue and profits may be harmed.
To be successful, we will need to keep pace with rapid changes in light-emitting diode (“LED”) and
fiber optics lighting technology, changing customer requirements, new product introductions by
competitors and evolving industry standards, any of which could render our existing products
obsolete if we fail to respond in a timely manner. Development of new products incorporating
advanced technology is a complex process subject to numerous uncertainties. We have previously
experienced, and could in the future, experience delays in introduction of new products. If
effective new sources of light other than LED and fiber optics are discovered, our current products
and technologies could become less competitive or obsolete. If others develop innovative
proprietary lighting technology that is superior to ours, or if we fail to accurately anticipate
technology and market trends, respond on a timely basis with our own development of new products
and enhancements to existing products, and achieve broad market acceptance of these products and
enhancements, our competitive position may be harmed and we may not achieve sufficient growth in
our net sales to attain or sustain profitability.
If we are not able to compete effectively against companies with greater resources, our prospects
for future success will be jeopardized.
The lighting industry is highly competitive. In the high performance lighting markets in which we
sell our advanced lighting systems, our products compete with lighting products utilizing
traditional lighting technology provided by many vendors. Additionally, in the advanced lighting
markets in which we have primarily competed to date, competition has largely been fragmented among
a number of small manufacturers. However, some of our competitors, particularly those that offer
traditional lighting products, are larger companies with greater resources to devote to research
and development, manufacturing and marketing.
Moreover, in the general lighting market, we expect to encounter competition from an even greater
number of companies. Our competitors are expected to include the large, established companies in
the general lighting industry, such as General Electric, Osram Sylvania and Royal Philips
Electronics. Each of these competitors has undertaken initiatives to develop LED technology.
These companies have global marketing capabilities and substantially greater resources to devote to
research and development and other aspects of the development, manufacture and marketing of LED
lighting products than we possess. We may also face competition from traditional lighting fixture
companies, such as Acuity Brands Lighting, Cooper Lighting, Hubbell Lighting, Lithonia Lighting,
and Royal Philips Electronics. The relatively low barriers to entry into the lighting industry and
the limited proprietary nature of many lighting products also permit new competitors to enter the
industry easily.
In each of our markets, we also anticipate the possibility that LED manufacturers, including those
that currently supply us with LEDs, may seek to compete with us. Our competitors’ lighting
technologies and products may be more readily accepted by customers than our products.
Additionally, to the extent that competition in our markets intensifies, we may be required to
reduce our prices in order to remain competitive. If we do not compete effectively, or if we
reduce our prices without making commensurate reductions in our costs, our net sales and
profitability, and our future prospects for success, may be harmed.
We have made strategic acquisitions in the past and intend to do so in the future, which may
adversely affect our operating results, financial condition, and existing business.
We seek to grow through strategic acquisitions in order to transition our Company into a
nationwide, turnkey, energy-efficient lighting systems and solutions company. On December 31,
2009, we acquired Stones River Companies, LLC (“SRC”), and we anticipate making additional
acquisitions in the future. The success of our acquisition strategy will depend on, among other
things:
| • | the availability of suitable candidates, | ||
| • | competition from other companies for the purchase of available candidates, | ||
| • | our ability to value those candidates accurately and negotiate favorable terms for those acquisitions, | ||
| • | the availability of funds to finance acquisitions, | ||
| • | the ability to establish new informational, operational and financial systems to meet the needs of our business, | ||
| • | the ability to achieve anticipated synergies, including with respect to complementary products or services, and | ||
| • | the availability of management resources to oversee the integration and operation of the acquired businesses. |
If we are not successful in integrating acquired businesses and completing acquisitions in the
future, we may be required to reevaluate our acquisition strategy. We also may incur substantial
expenses and devote significant management time and resources to completing these acquisitions.
Furthermore, acquired businesses may fail to meet our performance expectations. If we do not
achieve the anticipated benefits of an acquisition as rapidly as expected, or at all, investors or
analysts may not perceive the same benefits of the acquisition as we do. If these risks
materialize, our performance and stock price could be materially affected.
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Our inability to successfully integrate businesses we acquire could have adverse consequences
on our business.
Acquisitions may result in greater administrative burdens and operating costs and, to the extent
financed with debt, additional interest costs. We cannot assure you that we will be able to manage
or integrate acquired companies or businesses successfully. The process of integrating acquired
businesses may be disruptive to our business and may cause an interruption of, or a loss of momentum
in, our business as a result of the following factors, among others:
| • | loss of key employees or customers, | ||
| • | possible inconsistencies in standards, controls, procedures and policies among the combined companies and the need to implement company-wide financial, accounting, information and other systems, | ||
| • | failure to maintain the quality of services that the companies have historically provided, | ||
| • | coordinating sales, distribution, and marketing functions, | ||
| • | the need to coordinate geographically diverse organizations, and | ||
| • | the diversion of management’s attention from our day-to-day business as a result of the need to deal with any disruptions and difficulties and the need to add management resources to do so. |
These disruptions and difficulties, if they occur, may cause us to fail to realize the cost
savings, revenue enhancements and other benefits that we may expect from such acquisitions and may
cause material adverse short- and long-term effects on our operating results and financial
condition.
If we are unable to obtain and adequately protect our intellectual property rights, our ability to
commercialize our products could be substantially limited.
We consider our technology and processes proprietary. If we are not able to adequately protect or
enforce the proprietary aspects of our technology, competitors may utilize our proprietary
technology and our business, financial condition and results of operations could be adversely
affected. We protect our technology through a combination of patent, copyright, trademark and
trade secret laws, employee and third-party nondisclosure agreements and similar means. Despite
our efforts, other parties may attempt to disclose, obtain or use our technologies. Our
competitors may also be able to independently develop products that are substantially equivalent or
superior to our products or slightly modify our patents. In addition, the laws of some foreign
countries do not protect our proprietary rights as fully as do the laws of the United States. As a
result, we may not be able to protect our proprietary rights adequately in the United States or
abroad.
As of December 31, 2010 our intellectual property portfolio consisted of 74 issued United States
and foreign patents, various pending United States patent applications, and various pending Patent
Cooperation Treaty patent applications filed with the World Intellectual Property Organization that
serves as the basis of national patent filings in countries of interest. Because our patent
position involves complex legal, scientific, and factual questions, the issuance, scope, validity
and enforceability of our patents cannot be predicted with certainty. Our issued patents may be
invalidated or their enforceability challenged, and they may not provide us with competitive
advantages against others with similar products and technology. Furthermore, others may
independently develop similar products or technology or duplicate or design around any technologies
that we have developed. We may receive notices that claim we have infringed upon the intellectual
property of others. Even if these claims are not valid, they could subject us to significant
costs. We have engaged in litigation and litigation may be necessary in the future to enforce our
intellectual property rights or to determine the validity and scope of the proprietary rights of
others. Litigation may also be necessary to defend against claims of infringement or invalidity by
others. An adverse outcome in litigation or any similar proceedings could subject us to
significant liabilities to third parties, require us to license disputed rights from others or
require us to cease marketing or using certain products or technologies. We may not be able to
obtain any licenses on acceptable terms, if at all. We also may have to indemnify certain
customers if it is determined that we have infringed upon or misappropriated another party’s
intellectual property.
Any of these results could adversely affect our business, financial condition and results of
operations. In addition, the cost of addressing any intellectual property litigation claim, both
in legal fees and expenses, and the diversion of management resources, regardless of whether the
claim is valid, could be significant and could materially harm our business, financial condition
and results of operations.
If critical components that we currently purchase from a small number of third-party suppliers
become unavailable or third-party manufacturers otherwise experience delays, we may incur delays in
shipment, which would damage our business.
We depend on others to manufacture a significant portion of the component parts incorporated into
our products. We purchase our component parts from third-party manufacturers that serve the
advanced lighting systems market and believe that alternative sources of supply are readily
available for most component parts. However, consolidation in the lighting industry could result
in one or more current suppliers being acquired by a competitor, rendering us unable to continue
purchasing necessary amounts of key components at competitive prices.
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In an effort to reduce manufacturing costs, we have outsourced the production of certain parts and
components as well as finished goods in our product lines to a number of overseas suppliers. We
expect to outsource all of the production for selected products. While we believe alternative
sources for the production of these products are available, we have selected these particular
manufacturers based on their ability to consistently produce these products per our specifications
ensuring the best quality product at the most cost effective price. We depend on our suppliers to
satisfy performance and quality specifications and to dedicate sufficient production capacity
within scheduled delivery times. Although we maintain contracts with selected suppliers, we may be
vulnerable to unanticipated price increases and product shortages. Accordingly, the loss of all or
one of these suppliers or delays in obtaining shipments could have a material adverse effect on our
operations until such time as an alternative supplier could be found. We may be subject to
various import duties applicable to materials manufactured in foreign countries and, in addition,
may be affected by various other import and export restrictions, as well as other considerations or
developments impacting upon international trade, including economic or political instability,
shipping delays, and product quotas. These international trade factors will, under certain
circumstances, have an impact both on the cost of components, which will, in turn, have an impact
on the cost to us of the manufactured product, and the wholesale and retail prices of its products.
If the companies to which we outsource the manufacture of our products fail to meet our
requirements for quality, quantity and timeliness, our revenue and reputation in the marketplace
could be harmed.
We outsource a significant portion of the manufacture and assembly of our products and we expect to
outsource all of the production of many of our products. We currently depend on a small number of
contract manufacturers to manufacture our products at plants in various locations throughout the
world, primarily in the United States, Mexico, China, and Taiwan. These manufacturers supply most
of the necessary raw materials and provide all necessary facilities and labor to manufacture our
products. We currently do not have long-term contracts with some of these manufacturers. If these
companies were to terminate their arrangements with us without adequate notice, or fail to provide
the required capacity and quality on a timely basis, we would be unable to manufacture and ship our
lighting products until replacement manufacturing services could be obtained. To qualify a new
contract manufacturer, familiarize it with our products, quality standards and other requirements,
and commence volume production is a costly and time-consuming process. If it became necessary to
do so, we may not be able to establish alternative manufacturing relationships on acceptable terms.
Our reliance on contract manufacturers involves certain additional risks, including the following:
| • | lack of direct control over production capacity and delivery schedules, | ||
| • | lack of direct control over quality assurance, manufacturing yields and production costs, | ||
| • | risk of loss of inventory while in transit from China, Mexico, India, Japan, and Taiwan, and | ||
| • | risks associated with international commerce, particularly with China, Mexico, India, Japan, and Taiwan, including unexpected changes in legal and regulatory requirements, changes in tariffs and trade policies, risks associated with the protection of intellectual property and political and economic instability. |
Any interruption in our ability to manufacture and distribute products could result in delays in
shipment, lost sales, reductions in revenue and damage to our reputation in the market, all of
which would adversely affect our business.
We depend on independent distributors and sales representatives for a substantial portion of our
net sales, and the failure to manage successfully our relationships with these third parties, or
the termination of these relationships, could cause our net sales to decline and harm our business.
We rely significantly on indirect sales channels to market and sell our products. Most of our
products are sold through third-party independent distributors and sales representatives. In
addition, these parties provide technical sales support to end-users. Our current agreements
within these sales channels are non-exclusive with regard to lighting products in general, but
exclusive with respect to LED lighting and fiber optic products. We anticipate that any such
agreements we enter into in the future will be on similar terms. Furthermore, our agreements are
generally short-term, and can be cancelled by these sales channels without significant financial
consequence. We cannot control how these sales channels perform and cannot be certain that we or
end-users will be satisfied by their performance. If these distributors and sales representatives
significantly change their terms with us, or change their historical pattern of ordering products
from us, there could be a significant impact on our net sales and profits.
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Our products could contain defects or they may be installed or operated incorrectly, which could
reduce sales of those products or result in claims against us.
Despite product testing, defects have been found and may be found in our existing or future
products. This could result in, among other things, a delay in the recognition or loss of net
sales, loss of market share or failure to achieve market acceptance. These defects could cause us
to incur significant warranty, support and repair costs, divert the attention of our engineering
personnel from our product development efforts and harm our relationship with our customers. The
occurrence of these problems could result in the delay or loss of market acceptance of our lighting
products and would likely harm our business. Some of our products use line voltages (such as 120 or
240 AC), or are designed for installation in environments such as swimming pools and spas, which
involve enhanced risk of electrical shock, injury or death in the event of a short circuit or other
malfunction. Defects, integration issues or other performance problems in our lighting products
could result in personal injury or financial or other damages to end-users or could damage market
acceptance of our products. Our customers and end-users could also seek damages from us for their
losses. A product liability claim brought against us, even if unsuccessful, would likely be time
consuming and costly to defend.
If we are unable to attract or retain qualified personnel, our business and product development
efforts could be harmed.
To a large extent, our future success will depend on the continued contributions of certain
employees, such as our current Chief Executive Officer, Chief Financial Officer, Chief Operating
Officer, President, and Chief Technical Officer. These and other key employees may be difficult to
replace. Although recently our Chief Financial Officer left our employ to pursue other
opportunities, on an interim basis we have replaced him with existing employees and are confident
of our ability to find qualified permanent replacements in due course. Our future success will
also depend on our ability to attract and retain qualified technical, sales, marketing and
management personnel, for whom competition is very intense. The loss of, or failure to attract,
hire, and retain, any such persons could delay product development cycles, disrupt our operations,
or otherwise harm our business or results of operations. We have been successful in hiring
experienced energy solutions salespeople from leading firms in the industry but if these
individuals are not successful in achieving our expectations, and then planned sales may not occur
and the anticipated net sales may not be realized.
A significant portion of our business is dependent upon the existence of government funding, which
may not be available into the future and could result in a significant reduction in sales and could
cause significant harm to our business.
Over the last three years, approximately 87.3% of our research and development efforts have been
supported directly by government funding and was contracted for short periods, usually one to two
years. Further, a significant portion of net sales generated by SRC are derived from state
government funding and supported by federal government funding. If government funding is reduced
or eliminated, there is no guarantee that we would be able to continue to fund our activities in
these areas at their current levels, if at all. If we are unable to maintain our access to
government funding in these areas, there could be a significant impact on our net sales and
profits.
We believe that certification and compliance issues are critical to adoption of our lighting
systems, and failure to obtain such certification or compliance would harm our business.
We are required to comply with certain legal requirements governing the materials in our products.
Although we are not aware of any efforts to amend any existing legal requirements or implement new
legal requirements in a manner with which we cannot comply, our net sales might be adversely
affected if such an amendment or implementation were to occur.
Moreover, although not legally required to do so, we strive to obtain certification for
substantially all our products. In the United States, we seek, and to date have obtained,
certification on substantially all of our products from Underwriters Laboratories or Intertek.
Where appropriate in jurisdictions outside the United States and Europe, we seek to obtain other
similar national or regional certifications for our products. Although we believe that our broad
knowledge and experience with electrical codes and safety standards have facilitated certification
approvals, we cannot ensure that we will be able to obtain any such certifications for our new
products or that, if certification standards are amended, that we will be able to maintain such
certifications for our existing products. Moreover, although we are not aware of any effort to
amend any existing certification standard or implement a new certification standard in a manner
that would render us unable to maintain certification for our existing products or obtain
ratification for new products, our net sales might be adversely affected if such an amendment or
implementation were to occur.
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We must comply with regulatory requirements regarding internal control over financial reporting,
corporate governance and public disclosure, which will cause us to incur significant costs and our
failure to comply with these requirements could cause our stock price to decline.
Section 404 of the Sarbanes-Oxley Act of 2002 requires that we annually evaluate and report on our
systems of internal controls. These rules and regulations have increased our legal and compliance
costs and made certain activities more time-consuming and costly. In the future, there may be
material weaknesses in our internal controls that would be required to be reported in future Annual
Reports on Form 10-K and/or Quarterly Reports on Form 10-Q. A negative reaction by the equity
markets to the reporting of a material weakness could cause our stock price to decline. In
addition, if we acquire a company with weak internal controls, it will take time to improve the
internal controls of the acquired company to a satisfactory level of operating effectiveness. Any
failure to improve an acquired company’s financial systems could result in delays or inaccuracies
in reporting financial information.
We have not been in compliance with the continued listing requirements of the NASDAQ Stock Market.
Prior to the opening of trading on July 14, 2010, the listing of our shares of common stock for
trading transferred from the NASDAQ Global Market to the NASDAQ Capital Market.
From time to time during the fourth quarter of 2009 and early in the first quarter of 2010, we did
not meet the Global Market’s continued listing requirements that called for the maintenance of a
minimum bid price of our common stock of $1.00 per share and minimum shareholders’ equity of
$10,000,000. We received formal notices of non-compliance from the Global Market. Although we
regained compliance with the continued listing requirements on those occasions, there was a
continuing risk that we could again become non-compliant with the requirements.
In this regard, our shareholders’ equity as of the end of the first quarter fell below the minimum
shareholders’ equity requirement of the Global Market. On May 18, 2010, we received a notification
from the Global Market that we had fallen out of compliance and that we had until July 2, 2010 to
submit a plan to regain compliance or to submit an application to transfer the listing of our
shares of common stock from the NASDAQ Global Market to the NASDAQ Capital Market where the minimum
shareholders’ equity listing requirement is $2,500,000. On July 2, 2010 we submitted an
application to transfer to the Capital Market. On July 9, 2010 the NASDAQ Stock Market informed us
that it had approved our transfer application. Our common stock began trading on the Capital
Market on July 14, 2010.
The Capital Market, like the Global Market, has a continued listing requirement that calls for the
maintenance of a minimum bid price of our common stock of $1.00 per share. If the minimum bid
price of our common stock should fall below $1.00 for an extended period of time in the future, we
will be required to take remedial action on it. We are currently in compliance with all listing
requirements.
We could issue additional common stock, which might dilute the book value of our common stock.
Our Board of Directors has the authority, without action or vote of our shareholders, to issue a
sizeable part of our authorized but unissued shares. Such stock issuances could be made at a price
that reflects a discount or a premium from the then-current trading price of our common stock. In
addition, in order to raise capital or acquire businesses in the future, including future lighting
retrofit businesses, we may need to issue securities or promissory notes that are convertible or
exchangeable for shares of our common stock. These issuances would dilute shareholders’ percentage
ownership interest, which would have the effect of reducing influence on matters on which our
shareholders vote, and might dilute the book value of our common stock. Shareholders may incur
additional dilution if holders of stock options, whether currently outstanding or subsequently
granted, exercise those options, or if warrant holders exercise warrants purchasing shares of our
common stock. At our June 16, 2010 Annual Meeting our shareholders increased the total number of
authorized shares of common stock from 30,000,000 to 60,000,000. This increase should meet our
needs for unissued common shares for the near and foreseeable future. If an insufficient amount of
authorized, but unissued, shares of common stock exists to issue in the long term in connection
with a subsequent equity financing or acquisition transactions, we may be required to ask our
shareholders to authorize additional shares before undertaking, or as a condition to completing, a
financing or acquisition transaction.
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We may need to request our shareholders to authorize additional shares of common stock in
connection with subsequent equity finance or acquisition transactions.
We are authorized to issue 60,000,000 shares of common stock, of which approximately 23,962,000
shares were issued and outstanding, as of December 31, 2010. An additional 7,310,000 shares have
been reserved for issuance upon exercise of stock options and warrants outstanding and under our
Purchase agreement with the Lincoln Park Capital Fund, LLC. At our June 16, 2010 Annual Meeting
our shareholders increased the total number of authorized shares of common stock from 30,000,000 to
60,000,000. This increase should meet our needs for unissued common shares for the near and
foreseeable future. If an insufficient amount of authorized, but unissued, shares of common stock
exists to issue in the long term in connection with a subsequent equity financing or acquisition
transaction, we may be required to ask our shareholders to authorize additional shares before
undertaking, or as a condition to completing, an offering or transaction. We cannot be assured
that our shareholders would authorize an increase in the number of shares of our common stock.
Shares eligible for future sale may adversely affect the market for our common stock.
As of December 31, 2010, we had a significant number of convertible or derivative securities
outstanding, including: (i) 1,827,000 shares of common stock issuable upon exercise of outstanding
stock options at a weighted average exercise price of $3.36 per share, and (ii) 3,291,000 shares of
common stock issuable upon exercise of our outstanding warrants at a weighted average exercise
price of $2.12 per share. If or when these securities are exercised into shares of our common
stock, the number of our shares of common stock outstanding will increase. Increases in our
outstanding shares, and any sales of shares, could have an adverse affect on the trading activity
and market price of our common stock.
In addition, from time to time, certain of our shareholders may be eligible to sell all, or a
portion of, their shares of common stock by means of ordinary brokerage transactions in the open
market pursuant to Rule 144, promulgated under the Securities Act of 1933, or under effective
resale prospectuses. Any substantial sale of our common stock pursuant to Rule 144 or any resale
prospectus may have an adverse affect on the market price of our securities.
As a “thinly-traded” stock, large sales can and have placed negative pressure on our common stock
price.
Our common stock, despite certain increases of trading volume from time to time, experiences
periods when it could be considered “thinly-traded.” Financing or acquisition transactions
resulting in a large number of newly issued shares that become immediately tradable, or other
events that cause current shareholders to sell shares, could place negative pressure on the trading
price of our stock. In addition, the lack of a robust secondary market may require a shareholder
who desires to sell a large number of shares to sell those shares in increments over time in order
to mitigate any adverse impact of the sales on the market price of our common stock.
We may be subject to legal claims against us or claims by us which could have a significant impact
on our resulting financial performance.
At any given time, we may be subject to litigation, the disposition of which may have an adverse
affect upon our business, financial condition, or results of operation. Information regarding our
current legal proceedings is presented below in Part I, Item 3.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Our principal executive offices are located in a 79,000 square foot facility in Solon, Ohio, under
a lease agreement expiring in April, 2011. Approximately 12,000 square feet of this space was
subleased to another tenant through December 2010. During the first quarter of 2011, the Company
and its landlord for the Solon, Ohio office, located at 32000 Aurora Road, signed a non-binding
term sheet that will resolve past due amounts under the current lease agreement, as well as the
basic terms by which the Company and its landlord will enter into an extension of the current lease
through April 30, 2014. See Note 11, Commitments and Contingencies, to the Consolidated Financial
Statements for additional information.
We also have leased facilities in Nashville, Tennessee, Pleasanton, California, and Berkshire,
United Kingdom. In addition, we have a contract manufacturing facility near Tijuana, Mexico. We
believe that our current facilities are adequate to support our current and anticipated operations.
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Item 3. Legal Proceedings
On January 29, 2010, a competitor and former supplier filed a complaint against our Company in the
Court of Chancery of the State of Delaware, alleging that the Company has misused proprietary trade
secrets, breached a contract, and engaged in deceptive trade practices relating to one of our
lighting products. The complaint seeks injunctive relief and damages. We have answered the
complaint and filed a counterclaim for breach of contract. The parties currently are involved in
discovery. We strongly deny any impropriety, believe that the complaint is without merit, and have
been vigorously defending ourselves. We have reached an oral settlement of this case and are
negotiating a written settlement agreement. The defense of this lawsuit has not had, and in the
opinion of management, the implementation of the settlement will not have, an adverse effect on our
financial condition, cash flows, or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the year ended December 31, 2010, there were no matters submitted to a
vote of security holders.
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Executive Officers of the Registrant
The following is the name, age, and present position of each of our executive officers, as well as
all prior positions held by each of them during the last five years and when each of them was first
elected or appointed as an executive officer.
| Name | Age | Current Position and Business Experience | ||||
Joseph G. Kaveski
|
50 | Chief Executive Officer and Director — May, 2008 to present. Prior to joining Energy Focus, Mr. Kaveski led his own strategic consulting business, TGL Company. As a consultant he worked with equity investors and publicly traded companies on strategic initiatives and planning. Other corporations Mr. Kaveski has worked for include Johnson Controls, Inc. where he was Vice President of Energy Management Services and Strategic Projects. | ||||
John M. Davenport
|
65 | President and Director — May 2008 to present. Chief Executive Officer — July, 2005 to May, 2008. Chief Operating Officer — July, 2003 to July, 2005. Vice President and Chief Technology Officer — November, 1999 to July, 2003. Prior to joining Energy Focus, Mr. Davenport served as the president of Unison Fiber Optic Lighting Systems, LLC from 1998 to 1999. Before that, Mr. Davenport served at GE Lighting in various capacities for 25 years. | ||||
Eric W. Hilliard
|
43 | Chief Operating Officer, interim Chief Financial Officer and Vice President — November, 2006 to present. Prior to joining Energy Focus, Mr. Hilliard served as a Business Manager at Saint Gobain’s Aerospace Flight Structures Division from 2002 to 2006, overseeing the global sales and operation for composite flight structure components to customers such as Embraer, Gulfstream, and EADS. Other career assignments include Goodrich Aerospace, Chemical Leaman, and the HJ Heinz Company serving in operational and international roles throughout his career. | ||||
Frank Lamanna
|
47 | Corporate Controller and interim Chief Accounting Officer — November 2008 to present. Prior to joining Energy Focus, Mr. Lamanna served as Corporate Controller for a private lighting products distributor from 2005 to 2008. In addition, Mr. Lamanna also served as Chief Financial Officer of a publicly traded services company and is a Certified Public Accountant in the State of Ohio. | ||||
Roger F. Buelow
|
38 | Chief Technology Officer and Vice President — July, 2005 to present. Vice President of Engineering from February, 2003 to July, 2005. Prior to joining Energy Focus, Mr. Buelow was the director of engineering at Unison Fiber Optic Lighting Systems, LLC from 1998 to 1999. | ||||
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PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer
Purchases of Equity Securities
Our common stock trades on the NASDAQ Capital Market under the symbol “EFOI.” The following table
sets forth the high and low sales prices for our common stock from its consolidated transaction
reporting system.
| High | Low | |||||||
First quarter 2009 |
$ | 1.86 | $ | 0.62 | ||||
Second quarter 2009 |
1.21 | 0.56 | ||||||
Third quarter 2009 |
1.49 | 0.50 | ||||||
Fourth quarter 2009 |
1.04 | 0.47 | ||||||
First quarter 2010 |
$ | 1.50 | $ | 0.65 | ||||
Second quarter 2010 |
1.50 | 0.97 | ||||||
Third quarter 2010 |
2.68 | 1.20 | ||||||
Fourth quarter 2010 |
1.55 | 0.90 | ||||||
There were approximately 110 holders of record of our common stock as of March 14, 2011, and we
estimate that at that date there were approximately 3,330 additional beneficial owners.
We have not declared or paid any cash dividends, and do not anticipate paying cash dividends in the
foreseeable future.
Stockholder Matters
Prior to the opening of trading on July 14, 2010, the listing of our shares of common stock for
trading transferred from the NASDAQ Global Market to the NASDAQ Capital Market. From time to time
during the fourth quarter of 2009 and early in the first quarter of 2010, we did not meet the
Global Market’s continued listing requirements that called for the maintenance of a minimum bid
price of our common stock of $1.00 per share and minimum shareholders’ equity of $10,000,000. We
received formal notices of non-compliance from the Global Market. Although we regained compliance
with the continued listing requirements on those occasions, there was a continuing risk that we
could again become non-compliant with the requirements.
In this regard, our shareholders’ equity as of the end of the first quarter fell below the minimum
shareholders’ equity requirement of the Global Market. On May 18, 2010, we received a notification
from the Global Market that we had fallen out of compliance and that we had until July 2, 2010 to
submit a plan to regain compliance or to submit an application to transfer the listing of our
shares of common stock from the NASDAQ Global Market to the NASDAQ Capital Market where the minimum
shareholders’ equity listing requirement is $2,500,000. On July 2, 2010 we submitted an
application to transfer to the Capital Market. On July 9, 2010 the NASDAQ Stock Market informed us
that it had approved our transfer application. Our common stock began trading on the Capital
Market on July 14, 2010.
At the 2010 Annual Meeting of Shareholders (“Annual Meeting”) held on June 16, 2010, the
shareholders approved an increase in the total number of shares of common stock that may be awarded
under the 2008 Incentive Stock Plan from 1,000,000 shares to 3,000,000 shares. In addition, our
shareholders approved an increase in the total number of authorized shares of common stock from
30,000,000 to 60,000,000.
In our subscription rights offering in the fall of 2009, an investor inadvertently purchased
1,000,000 shares of our common stock at $0.75 per share. We agreed to facilitate the sale of these
shares to another shareholder or investor or to purchase them directly. A purchase of those shares
by us would have severely depleted our cash-on-hand and working capital. After contacting selected
shareholders and investors, we introduced the investor to The Quercus Trust (“Quercus”), our
largest shareholder. We were informed on December 30, 2009, by the investor and Quercus that
Quercus had agreed to purchase those shares at $0.80 per share. At that time, the closing market
price of a share of our common stock was approximately $0.65 per share. To facilitate the purchase
of the 1,000,000 shares by Quercus, on December 30, 2009, our Board of Directors agreed with
Quercus to reduce the exercise price of 1,560,062 warrants issued to Quercus, in the March 2008
private placement, to $0.01 per share upon the completion of the purchase of all 1,000,000 shares
in 2010. The purchase of the 1,000,000 shares by Quercus was completed on February 20, 2010. We
incurred a non-cash charge of $1,421,000 for the quarter ended March 31, 2010 related to the
valuation of the warrants to purchase shares of our common stock acquired by Quercus in our March
2008 equity financing. On April 28, 2010, Quercus exercised the 2008 warrants. Our shareholders
overwhelmingly approved the reduction in exercise price of the above mentioned warrants at the
Annual Meeting on June 16, 2010.
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On December 29, 2009 we issued five-year, detached warrants to John Davenport, President of the
Company, and Quercus to purchase 125,000 and 150,000, respectively, of the Company’s common stock
at an exercise price of $.01 per share. Our shareholders approved the warrants at the Annual
Meeting on June 16, 2010.
On November 2, 2009, we closed our common stock rights offering to our shareholders that raised
$3,344,000, net of expenses. Stockholder approval was not required. There were 15,000 stock
options exercised during the calendar year 2010.
Cumulative Total Return Comparison
The following graph compares the cumulative total shareholder return of the our common stock
against the cumulative total return of the Russell 2000 Value Index, and a self-determined Peer
Group for the period of the five fiscal years commencing December 31, 2005 and ending December 31,
2010. The graph and table assume that $100 was invested on December 31, 2005 in each of the Energy
Focus, Inc. Common Stock, the Russell 2000 Value Index, and the self-determined Peer Group, and
that all dividends were reinvested. The six companies in the self-determined Peer Group are:
Cooper Industries, LTD., Pentair, Inc., Lime Energy Co., Nexxus Lighting, Inc., LSI Industries,
Inc., and Orion Energy Systems, Inc. Cumulative total shareholder return for Energy Focus, Inc.
Common Stock, the Russell 2000 Value Index, and the self-determined Peer Group are based upon the
Energy Focus, Inc. fiscal year.
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Item 6. Selected Financial Data
The Selected Operations and Balance Sheet Data set forth below have been derived from our
Consolidated Financial Statements. It should be read in conjunction with the information appearing
under the heading “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included in Item 7 of this report and the Consolidated Financial Statements and related
notes found in Item 8 of this report.
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
| YEARS ENDED DECEMBER 31, | 2010 | 2009 | 2008 | 2007 | 2006 | |||||||||||||||
OPERATING SUMMARY |
||||||||||||||||||||
Net sales from continuing operations |
$ | 35,129 | $ | 12,489 | $ | 20,032 | $ | 19,761 | $ | 24,038 | ||||||||||
Gross profit from continuing operations |
6,403 | 2,040 | 4,106 | 5,057 | 6,139 | |||||||||||||||
Net loss from continuing operations |
(8,517 | ) | (9,814 | ) | (12,673 | ) | (10,987 | ) | (9,329 | ) | ||||||||||
Net loss from discontinued operations |
— | (1,201 | ) | (1,775 | ) | (330 | ) | (321 | ) | |||||||||||
Net loss |
(8,517 | ) | (11,015 | ) | (14,448 | ) | (11,317 | ) | (9,650 | ) | ||||||||||
Net loss per share: |
||||||||||||||||||||
Basic |
$ | (0.37 | ) | $ | (0.70 | ) | $ | (1.02 | ) | $ | (0.98 | ) | $ | (0.85 | ) | |||||
Diluted |
$ | (0.37 | ) | $ | (0.70 | ) | $ | (1.02 | ) | $ | (0.98 | ) | $ | (0.85 | ) | |||||
Shares used in per share calculation: |
||||||||||||||||||||
Basic |
22,791 | 15,763 | 14,182 | 11,500 | 11,385 | |||||||||||||||
Diluted |
22,791 | 15,763 | 14,182 | 11,500 | 11,385 | |||||||||||||||
FINANCIAL POSITION SUMMARY |
||||||||||||||||||||
Total assets |
$ | 20,374 | $ | 17,378 | $ | 23,636 | $ | 29,104 | $ | 40,652 | ||||||||||
Cash and cash equivalents |
4,107 | 1,062 | 10,568 | 8,412 | 15,968 | |||||||||||||||
Credit line borrowings |
— | — | 1,904 | 1,159 | 1,124 | |||||||||||||||
Current portion of long-term borrowings |
481 | — | 54 | 1,726 | 780 | |||||||||||||||
Long-term borrowings |
1,344 | 715 | 245 | 314 | 1,860 | |||||||||||||||
Shareholders’ equity |
6,658 | 11,505 | 16,789 | 21,618 | 30,880 | |||||||||||||||
Common shares outstanding |
23,962 | 21,250 | 14,835 | 11,623 | 11,394 | |||||||||||||||
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Energy Focus, Inc. and its subsidiaries (the “Company”) engage in the design, development,
manufacturing, marketing, and installation of energy-efficient lighting systems and solutions where
we serve two segments:
| • | solutions-based sales providing turnkey, high-quality, energy-efficient lighting application alternatives primarily to the existing public-sector building market; and | ||
| • | product-based sales providing military, general commercial and industrial lighting and pool lighting offerings, each of which markets and sells energy-efficient lighting systems. |
We continue to evolve our business strategy to include providing our customers with turnkey,
comprehensive energy-efficient lighting solutions, which use, but are not limited to, our patented
and proprietary technology. Our product-based solutions include light-emitting diode (“LED”),
fiber optic, high-intensity discharge (“HID”), fluorescent tube and other highly energy-efficient
lighting technologies. Typical savings related to our current technology approximates 80% in
electricity costs, while providing full-spectrum light closely simulating daylight colors. Our
strategy also incorporates continued investment into the research of new and emerging energy
sources including, but not limited to, LED and solar energy applications.
During 2010, we made major progress in completing a restructuring plan focused on repositioning our
Company for growth and profitability. This plan involves three major areas of focus which include:
| • | Dramatic reductions of unabsorbed manufacturing and fixed overhead costs. | ||
| • | Leveraging our fundamental intellectual property and government research to create extremely energy-efficient illumination products for existing buildings. We are currently developing IntellitubeTM, an intelligent LED lamp to replace linear fluorescent lamps for general illumination. The LED replacement lamp is designed to reduce energy consumption by more than 80% while delivering superior lighting qualities. | ||
| • | Establishing a national sales and delivery vehicle into the existing building market through the acquisition of lighting retrofit companies. We completed our first full year with Stones River Companies, LLC (“SRC”), a well established lighting retrofit company, which we acquired on December 31, 2009, that primarily services the Southeastern region of the United States. We anticipate further growth through expansion of SRC’s geographical coverage and, possibly, through one or more subsequent acquisitions across the United States. |
Our development of solar technology is continuing through our leadership role in the United States
government’s Very High Efficiency Solar Cell (“VHESC”) Consortium sponsored by the Defense Advanced
Research Projects Agency (“DARPA”). The goal of the VHESC project is to develop a 40% or greater
efficient solar cell for United States military applications, which would also be available to the
public for commercial application.
In January 2010, we were selected to receive three LED lighting awards totaling $1,600,000. Two of
these awards, “Explosion-Proof Solid State Lighting for Extreme Environments” and “A Spectrally
Dynamic Berth Light for Active Circadian Cycle Management” are Phase II Small Business Innovation
Research (“SBIR”) grants from DARPA. The third award, “Innovative Solid State Lighting
Replacements for Industrial and Test Facility Locations”, is a Phase I Small Business Technology
Transfer (“STTR”) program grant received from the National Aeronautics and Space Administration
(“NASA”). In August 2010, we were selected to receive an additional $1,400,000 to: develop
advanced coatings capable of enhancing the performance of both energy efficient lighting and solar
systems under a Phase II Department of Energy (“DOE”) SBIR award, a Phase I Department of Defense
(“DOD”) SBIR grant to develop additional LED Lighting Fixtures based on its proprietary
IntellitubeTM technology, increased VHESC funding to accelerate the
development of advanced coatings for the Naval Air Systems Command and a grant for the development
of advanced optical designs. These four projects, which were awarded in August 2010, will directly
contribute to the development of our LED IntellitubeTM technology.
Results of Operations
Cash Accumulation
Net increase in cash and cash equivalents was $3,045,000 for the year ended December 31, 2010,
which included $1,150,000 of proceeds received from the selling of a Secured Subordinated
Promissory Note and $669,000 of net proceeds from the issuance of our common stock. Net decrease
in cash and cash equivalents for the twelve months ended December 31, 2009 was $9,506,000, which
included $3,749,000 of cash proceeds received from the issuance of rights to purchase common stock
and $3,650,000 of net cash disbursements related to the acquisition of SRC and related bonding
securitization.
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Net Sales
Our sales breakdowns, by business segment, are as follows (in thousands):
| Year ending December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Solutions: |
||||||||||||
Net sales — solutions |
$ | 19,763 | $ | — | $ | — | ||||||
Products: |
||||||||||||
Net sales — pool and commercial |
12,265 | 11,561 | 18,362 | |||||||||
Net sales — government products/R&D services |
3,101 | 928 | 1,670 | |||||||||
Total net sales — product segment |
15,366 | 12,489 | 20,032 | |||||||||
Total net sales from continuing operations |
$ | 35,129 | $ | 12,489 | $ | 20,032 | ||||||
Net sales from continuing operations increased $22,640,000 from 2009 net sales to $35,129,000 for
the twelve months ended December 31, 2010. The increase is primarily related to $19,763,000 of
solution sales for SRC, which was acquired on December 31, 2009 and an increase in government
product/R&D services of $2,173,000 which is related to delivery of certain milestones to E.I.
DuPont de Nemours and Company as part of the VHESC Consortium being funded by DARPA. Net sales
from the product segment increased $2,877,000 over 2009 to $15,366,000, representing 43.7% of total
net sales. Of this amount, net sales for pool and commercial products increased $704,000,
representing 34.9% of total net sales, and net sales from government products/R&D Services
increased $2,173,000 over 2009, representing 8.8% of total net sales. The increase in the net sales
of the product segment is primarily related to a slight improvement in customer confidence as it
relates to the economy and a general softening within the markets in which we serve. Our solutions
segment accounted for 56.3% of our total net sales for the year ended December 31, 2010 and was
derived primarily from the public sector markets such as state and municipal governments.
For the twelve months ended December 31, 2009, net sales from continuing operations decreased 37.7%
to $12,489,000, compared to $20,032,000 in 2008. The decline was primarily a result of a
$2,764,000 decrease in EFO product net sales, a decrease of $2,632,000 in traditional pool lighting
sales, and a decrease of $2,417,000 in net sales by our United Kingdom subsidiary. During 2009,
$571,000 of net sales was recognized from the delivery of certain milestones to E.I. DuPont de
Nemours and Company as part of the VHESC Consortium being funded by DARPA. Net sales were
significantly depressed from prior year levels due to the on-going global economic and financial
crisis. Our net sales were particularly adversely impacted by significant reductions in
residential and new construction against which our pool and commercial markets are closely aligned.
International Sales
We have a foreign manufacturing operation in the United Kingdom, and net sales and expenses from
these operations are denominated in local currency, thereby creating exposures to changes in
exchange rates. Fluctuations in this operation’s respective currency may have an impact on our
business, results of operations, and financial position. We currently do not use financial
instruments to hedge our exposure to exchange rate fluctuations with respect to our international
operations. As a result, we may experience substantial foreign currency translation gains or
losses due to the volatility of other currencies compared to the United States dollar, which may
positively or negatively affect our results of operations attributed to these operations. For
continuing operations, international net sales accounted for approximately 10.9% of net sales in
2010, as compared to 36.5% for 2009, and 35.6% for 2008. On a local currency basis, net sales
decreased 20.7% for our United Kingdom operation from 2009 levels. The breakdown of our global
sales is as follows (in thousands):
| Year ending December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
United States Domestic |
$ | 31,314 | $ | 7,930 | $ | 12,902 | ||||||
International |
3,815 | 4,559 | 7,130 | |||||||||
Total net sales from continuing operations |
$ | 35,129 | $ | 12,489 | $ | 20,032 | ||||||
Gross Profit
We had gross profit of $6,403,000 in 2010 compared to $2,040,000 in 2009. Total gross profit as a
percentage of total net sales was 18.2% in 2010, compared to 16.3% in 2009. Gross profit for the
product segment was 19.3% while the gross profit for the solutions segment was 17.4%. The increase
in gross profit for the product segment is partially attributable to our efforts to reduce fixed
and manufacturing overhead. In 2009, we had gross profit of $2,040,000, compared to $4,106,000 in
2008. As a percentage of sales, the gross profit for 2009, was 16.3% compared to 20.5% in 2008.
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Operating Expenses
Research and Development
Gross research and development expenses were $579,000 in 2010, a 46.4% decrease from $1,081,000 in
2009. This decrease was primarily due to increased cost recovery from revenue generating
government contracts.
In 2009, gross research and development expenses were $1,081,000, a 4.5% decrease from $1,132,000
in 2008. This decrease was primarily due to an $86,000 decrease in salaries and benefits.
Research and development expenses include salaries, contractor and consulting fees, supplies and
materials, as well as costs related to other overhead such as depreciation and facilities costs.
Research and development costs are expensed as they are incurred. Our gross research and
development expenses are reduced on a proportional performance basis under DARPA SBIR development
contracts. During 2009 and 2010, SBIR contracts were signed totaling $2,548,000 to be reimbursed
over a two-year recovery period, respectively. Of this total contract amount, $1,310,000 was
billed through December 31, 2010 with the remaining $1,238,000 categorized as unrecognized
reductions of gross research and development expenses. The amount of credits incurred and accrued
from government contracts were $781,000 in 2010, compared to $762,000 in 2009, and $895,000 in
2008. We are currently pursuing additional contracts through various government agencies, and
anticipate being granted additional contracts throughout 2011.
When the government contract is for the delivery of a product or service, we recognize revenues
from those government projects according to proportional performance method or actual deliveries
made. Costs related to the completion of the sale are charged to cost of sales. Revenues
recognized from completed deliveries were $3,101,000 in 2010, $928,000 in 2009 and $1,670,000 in
2008. For further information on our revenue recognition policy, please refer to “Critical
Accounting Policies and Estimates” within this section of the report.
Net credits received from government reimbursement are the combination of revenues and credits
against gross research and development costs. In 2010, our net credits were $3,882,000, compared
to $1,690,000 in 2009 and $2,565,000 in 2008. Net research and development income was $202,000 in
2010, or 0.6% of net sales, compared to expenses $319,000 in 2009, or 2.6% of net sales and
$237,000 in 2008, or 1.2% of net sales.
The gross and net research and development spending along with credits from government contracts is
shown in the following table (in thousands):
| Year ending December 31, | ||||||||||||
| Net Research & Development Spending | 2010 | 2009 | 2008 | |||||||||
Revenues |
$ | 3,101 | $ | 928 | $ | 1,670 | ||||||
Expenses |
||||||||||||
Gross Research & Development Expenses |
(579 | ) | (1,081 | ) | (1,132 | ) | ||||||
Credits from Government Contracts |
781 | 762 | 895 | |||||||||
Net Research & Development Income / (Expense) |
$ | 202 | $ | (319 | ) | $ | (237 | ) | ||||
Sales and Marketing
Sales and marketing expenses were $6,415,000 or 18.3% of net sales in 2010, compared to $6,044,000
or 48.4% of net sales in 2009, an increase of 6.1% year over year. This increase in expense is
related to the sales and marketing costs incurred by our lighting solutions business segment, SRC,
which was acquired on December 31, 2009 and partially offset by a reduction in the sales and
marketing costs of our product based business segment.
In 2009, sales and marketing expenses were $6,044,000, a decrease of 25.2% compared to $8,081,000
in 2008. In 2009, sales and marketing expenses for pool lighting amounted to $1,032,000, or 17.1%
of total sales and marketing cost, whereas sales and marketing expense for commercial lighting was
$5,012,000, or 82.9% of total marketing costs. In 2008, sales and marketing expenses for pool
lighting amounted to $2,149,000, or 26.6% of total sales and marketing cost, whereas sales and
marketing expense for commercial lighting was $5,932,000, or 73.4% of total marketing costs.
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General and Administrative
General and administrative expenses were 17.4% of net sales in 2010, compared to 42.7% of net sales
in 2009, and 27.2% of net sales in 2008. General and administrative expenses were $6,115,000 in
2010, a 14.7% increase, as compared to $5,333,000 in 2009. This increase was primarily due to the
amortization of intangible assets from the acquisition of SRC on December 31, 2009.
General and administrative expenses were $5,333,000 in 2009, a 2.0% decrease, as compared to
$5,443,000 in 2008. This reduction included a decrease of $114,000 in salaries and benefits.
Excluding one-time expenses of $434,000 associated with the acquisition of SRC, general and
administrative expenses for 2009 were $4,899,000, which represents a decrease of 10.0% from 2008
levels.
Loss on impairment
Long-lived assets are reviewed for impairment whenever events or circumstances indicate the
carrying amount may not be recoverable. As a result of this review, the Company recorded an
impairment charge of $156,000, which represented the difference between the fair value of the asset
group and its carrying value and is included in the Consolidated Statements of Operations under the
caption “Loss on impairment”.
In 2008, as a result of our annual test for impairment required under Accounting Standards
Codification (“ASC”) Number 350, Intangibles—Goodwill and Others (“ASC 350”), and based on an
assessment of its present and future operations, we recognized a non-cash expense of $4,305,000 for
the impairment of our goodwill. Of this amount, $3,195,000 related to continuing operations. The
goodwill was originally recorded at the time of the acquisitions of Fiber Optic International,
Crescent Lighting Limited, LBM, Unison Fiber Optic Lighting Systems, and Lightly Expressed Limited.
As of December 31, 2009, we had no remaining goodwill on our books related to these acquisitions.
As of December 31, 2010, we have $672,000 of goodwill on our books related to the acquisition of
SRC in Nashville, Tennessee, which occurred on December 31, 2009.
Valuation of Equity Instruments
During the first quarter of 2010, we recognized a non-cash charge of $1,421,000 related to the
valuation of warrants to purchase shares of our common stock acquired by The Quercus Trust
(“Quercus”) in our March 2008 equity financing. Furthermore, during the second quarter of 2010, we
recognized non-cash charges of $281,000 related to the valuation of 350,000 warrants issued to
Lincoln Park Capital Partners, LLC. In addition, we recorded non-cash charges of an additional
$110,000 relating to the valuation of our common stock issued to Lincoln Park Capital Partners,
LLC. Please refer to Note 12, Shareholders’ Equity, to the Consolidated Financial Statements for
discussion of these transactions.
Restructuring
For the twelve months ended December 31, 2010, we recognized restructuring expenses of $26,000.
These expenses are associated with the relocation of our remaining manufacturing equipment and
operations in Solon, Ohio to a third-party warehouse facility located in California. During the
twelve months ended December 31, 2009, we incurred restructuring expenses of $125,000 associated
with relocating our manufacturing operations in the United States from Solon, Ohio to Mexico. We
incurred no restructuring expense during 2008.
Other Income and Expenses
We had interest income of $6,000 and interest expense of $573,000 in 2010. Interest income
consists of interest earned on deposits. Interest expense is primarily related to our debt, which
includes the amortization of debt discounts. Our interest income was $15,000 in 2009, compared to
$181,000 in 2008. Our interest expense was $88,000 in 2009, compared to $163,000 in 2008.
We have certain long-term leases. Payments due under these leases are disclosed below and in Note
11, Commitments and Contingencies, to the Consolidated Financial Statements and related notes
included elsewhere in this report.
Discontinued Operations
As part of our strategy of evaluating the viability of our non-core businesses and our aggressive
pursuit of capital funding, we determined that our German subsidiary, LBM, was not directly aligned
with our objective to become a leading provider of turnkey, comprehensive energy-efficient lighting
solutions. Therefore, in the third quarter of 2009, we committed to a plan to sell our German
subsidiary, LBM.
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In December 2009, we completed the sale of our ownership in LBM for $225,000 comprised of cash and
a promissory note. Furthermore, we will receive an earn-out equal to ten percent of
post-acquisition, pre-amortization, pre-tax profit for a period of 24 months commencing January,
2010. Excluding this earn-out, we recorded a loss on disposal of subsidiary of $664,000. As part
of this transaction, the purchaser assumed all rights to both tangible and intangible assets as
well as all of the liabilities of LBM.
There were no net sales or losses from discontinued operations in 2010. Net sales from
discontinued operations for 2009 and 2008 were $1,462,000 and $2,787,000, respectively. Losses
from discontinued operations, net of taxes were $1,201,000 and $1,775,000 for the years 2009 and
2008, respectively. Included in the 2009 loss from discontinued operations, net of taxes was the
loss on the sale of LBM of $664,000, and an impairment charge of $165,000 that arose when the
office building owned by LBM was sold during the restructuring of LBM into a sales office. For
2008, loss from discontinued operations, net of taxes included a $1,110,000 non-cash expense for
the impairment of goodwill as a result of our annual test for impairment required under ASC 350,
and based on an assessment of its present and future operations.
We have reported the business described above as discontinued operations for all periods presented.
For further information about discontinued operations, see Note 4, Discontinued Operations, to the
Consolidated Financial Statements.
Income Taxes
We provided a full valuation allowance against our United States deferred tax assets in 2010 and
2009. The net deferred tax assets for 2010 and 2009 amounted to $14,000 and $11,000, respectively
and were for our United Kingdom subsidiary, which has been profitable in prior years. We had no
net deferred liabilities at December 31, 2010 or December 31, 2009. There were no Federal tax
expenses for the United States operations in 2010, as any expected benefits were offset by an
increase in the valuation allowance.
For 2008, we had a full valuation allowance against our United States and German deferred tax
assets. The net deferred tax assets for 2008 amounted to $15,000 and were for our United Kingdom
subsidiary, which reported income in 2008. The income tax benefit from the United States
operations for 2008 related to the reversal of the 2007 deferred tax liability of $252,000 for
goodwill as a result of the book impairment. There were no Federal tax expenses for the United
States operations in 2008, as any expected benefits were offset by an increase in the valuation
allowance. A tax provision of $2,000 was recorded for our United Kingdom operations and no tax
benefits were recorded for the 2008 German operations loss.
Net Loss
The net loss was $8,517,000 for 2010, a decrease of 22.7% from our net loss of $11,015,000 for
2009. Included in this net loss for 2010 are non-cash charges of $1,968,000 related to a charge
for the impairment of long-lived assets and the valuation of equity instruments.
The net loss was $11,015,000 for 2009, a decrease of 23.8% from our net loss of $14,448,000 for
2008. Included in the 2008 net loss is total expense in the amount of $1,071,000 related to our
increase in slow-moving and obsolete inventory reserves. Also included in the 2008 net loss is a
non-cash expense of $4,305,000 for the impairment of our goodwill. Of this amount, $3,195,000
relates to continuing operations.
Liquidity and Capital Resources
Cash and Cash Equivalents
At December 31, 2010, our cash and cash equivalents were $4,107,000, compared to $1,062,000 at
December 31, 2009. This balance includes restricted cash of $128,000 and relates to funds received
from a grant from/for a branch of United States government. We had $1,825,000 in borrowings as of
December 31, 2010 and $715,000 as of December 31, 2009. The net increase in cash and cash
equivalents was $3,045,000 for the twelve months ended December 31, 2010.
At December 31, 2009, our cash and cash equivalents were $1,062,000, compared to $10,568,000 at
December 31, 2008. We had $715,000 in borrowings as of December 31, 2009 and $2,203,000 in
borrowings as of December 31, 2008. Net cash decrease in cash and cash equivalents was $9,605,000
for the twelve months ended December 31, 2009, excluding $3,749,000 of cash proceeds received from
the issuance of rights to purchase common stock in November, 2009, and $3,650,000 of net cash
disbursements related to the acquisition of SRC and related bonding securitization, which occurred
on December 31, 2009. Excluding bonding securitization, net cash disbursements related to the
acquisition of SRC were $1,150,000.
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In November, 2009, we received an additional $3,344,000 in equity financing, net of expenses by
selling 4,813,000 shares of common stock in a registered offering. The investment was made by
numerous current Energy Focus shareholders. The investment was made under our Company’s
registration statement for a $3,500,000 common stock subscription rights offering. Under the terms
of the rights offering, we distributed, at no charge to our shareholders, transferable rights to
purchase up to 3.5 million of our common stock at the established subscription price per share of
$0.75, which was set by our Board of Directors. At the time the offering began, we distributed to
each shareholder one transferable right for each share of common stock owned by the shareholder.
Each right entitled the holder to purchase one share of our common stock, par value $0.0001 per
share, subject to a maximum of 4,600,000 shares to be issued in the offering. Shareholders were
entitled to subscribe for shares not subscribed for by other shareholders.
In March, 2008, we received an additional $9,335,000 in equity financing, net of expenses. The
investment was made by several current Energy Focus shareholders. These investors agreed to an
at-market purchase of approximately 3,184,000 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 has been
used to fund working capital requirements and perform additional research and development.
Cash Provided by (Used in) Operating Activities
Net cash provided by/used in operating activities primarily consists of net loss adjusted by
non-cash items, including depreciation, amortization, stock-based compensation, loss on impairment,
and the effect of changes in working capital. In 2010, net cash provided by continuing operating
activities was $1,493,000 compared to a net cash use of $10,141,000 and $5,695,000 for 2009 and
2008, respectively. Cash decreased during 2009 by a net loss of $11,015,000, compared to a net
loss of $14,448,000 for 2008. There was no cash used in operating activities of discontinued
operations in 2010. Cash decreased during 2009 by a net loss from discontinued operations of
$1,201,000, compared to a net loss of $1,775,000 for 2008. After adjustments, net cash used by
operating activities of discontinued operations was $421,000 for 2009, compared to a net cash usage
of $135,000 for 2008.
Billing procedures for our solutions-based segment are based on billing terms specific to each
contract, generally occur on a monthly basis and are reviewed and approved by the customer prior to
submittal of the billing. As a result of this procedure, once a bill is submitted to a customer,
we are generally able to collect amounts owed to us in accordance with the payment terms of the
contract. These payment terms may also vary from contract to contract and range from 30 to 60
days. Additionally, the receivables for our solutions-based segment typically are subject to
retainage, or amounts held back until the project is completed or until a specified condition or
guarantee is met. Retainage is stipulated by the contract and is typically stated at a fixed
percentage of 5% or 10% of each billing. We typically pay our subcontractors and vendors after
receiving a payment from our customer. As a result, cash used to support these contracts is
generally provided by project billings or from cash provided by operations.
Cash (Used in) Provided by Investing Activities
Net cash used in continuing investing activities was $282,000 for 2010. This usage primarily
results from the acquisition of property and equipment. Net cash used in continuing investing
activities was $1,682,000 for 2009 resulting from $1,500,000 for the acquisition of SRC and
$182,000 for the purchase of property and equipment. There was a usage of cash of $358,000 in 2008
for the purchase of property and equipment.
Cash Provided by Financing Activities
Net cash provided by continuing financing activities was $1,827,000 for 2010, compared to
$2,352,000 for 2009 and $8,598,000 in 2008. In 2010, cash proceeds from borrowings were $1,150,000
and cash proceeds from stock issuances, net of expenses, provided an additional $669,000. In 2009,
proceeds from stock issuances, net of expenses, provided $3,508,000 in additional working capital.
Also in 2009, additional long-term borrowings of $620,000 were reduced by debt repayments of
$1,776,000. In 2008, proceeds from stock issuances provided $9,335,000 in cash, net of expenses,
and additional borrowings of $802,000 were reduced by debt repayments of $1,672,000. In 2010, the
cash provided by financing activities was primarily the result of us issuing a secured subordinated
note payable to EF Energy Partners. The additional working capital provided by financing activities
in 2009 was related to a subscription rights offering and in 2008 was due to a private placement of
our common stock.
There was no cash used in discontinued financing activities in 2010. Net cash used in discontinued
financing activities was $428,000 for 2009 compared to $105,000 in 2008. This cash usage was
primarily the result of repayments by our German subsidiary on its line of credit and other
borrowings of $2,768,000, offset by borrowings on its line of credit of $2,348,000.
The net increase of $3,045,000 in cash over the prior year was primarily the result of the cash
provided by operating and financing activities, which resulted in an ending cash balance of
$4,107,000 as of December 31, 2010. This compares to a net decrease in cash of $9,506,000 in 2009
and a net increase of $2,156,000 in cash in 2008.
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On March 30, 2010, we entered into an agreement with EF Energy Partners LLC (“EF Energy”), an Ohio
limited liability company, under which it sold to EF Energy a Secured Subordinated Promissory Note
(“Subordinated Note”) for the principal amount of $1,150,000. We secured the full amount of this
financing with a pledge of our United States gross accounts receivable and selected capital
equipment. This Subordinated Note bears interest at a rate of 12.5%, which is payable quarterly,
in arrears, commencing September 30, 2010. The entire outstanding principal balance of this
Subordinated Note, together with all accrued interest thereon, is due and payable on March 30,
2013. Additionally, we issued to the eight investors in EF Energy five-year, detached penny
warrants ($.01 per share) to purchase shares of its common stock at a rate of 0.2 warrants per
dollar of financing, or 230,000 warrants, with an expiration date of March 30, 2015. Our Company
and EF Energy Partners are not related.
On March 17, 2010, we entered into a Purchase Agreement (the “Purchase Agreement”) with Lincoln
Park Capital Fund, LLC (“LPC”) of Chicago, Illinois and issued to LPC 120,000 shares of our common
stock. Under the Purchase Agreement, on May 31, 2010 we sold and issued to LPC, and LPC purchased
from us, 360,500 shares of our common stock, together with warrants (“Warrants”) to purchase
350,000 shares at an exercise price of $1.20 per share, for a total consideration of $375,000. The
Warrants have a term of five years, are not exercisable until December 1, 2010, and expire on
December 1, 2015. Under the Purchase Agreement, LPC has also agreed to purchase up to an additional
3,650,000 shares of our common stock at our option over approximately 25 months. As often as every
five (5) business days, we have the right to direct LPC to purchase a calculated number of shares
as defined by the terms of the Purchase Agreement. We can suspend purchases or accelerate the
number of shares to be purchased at any time. No sales of shares may occur below $1.00 per share.
The purchase prices of the shares will be based on the market prices of our shares at the time of
sale, as computed under the Agreement without any fixed discount. We may at any time in our sole
discretion terminate the Agreement without fee, penalty, or cost upon five business dates notice.
In connection with the transactions contemplated by the Purchase Agreement, the Company filed a
Registration Statement (the “Registration Statement”) with the U.S. Securities & Exchange
Commission (the “SEC”) to register under the Securities Act of 1933, as amended, the shares of
common stock associated with this transaction. On July 14, 2010, we received a Notice of
Effectiveness from the SEC relating to the Registration Statement. As of December 31, 2010, we
sold and issued to LPC, and LPC purchased from us, a total of 705,550 shares of our common stock
for a total consideration of $791,000 which was offset by expenses of $139,000. In the first
quarter of 2011, we sold and issued to LPC, and LPC purchased from us, a total of 412,000 shares of
our common stock for a total consideration of $407,000.
In conjunction with the acquisition of SRC on December 31, 2009, we entered into an agreement with
TLC Investments, LLC (“TLC”), whereby a convertible promissory note (“Convertible Note”) was issued
for the principal amount of $500,000. This Convertible Note bears interest at the Wall Street
Journal Prime Rate plus two percent (2%), which along with the principal, is due and payable on
June 30, 2013 (“maturity date”). Additionally, TLC has the right to convert the principal of the
Convertible Note, in whole, into 500,000 shares of our common stock at any time during the period
commencing on June 30, 2010 and through the maturity date. Additionally, as a provision to the
Convertible Note, if the reported closing price of a share of common stock of the Company shall not
be equal to or greater than $2.00 for at least twenty (20) trading days between June 30, 2010 and
June 30, 2013, we shall pay TLC an additional fee of $500,000 on the maturity date.
On December 29, 2009 and in conjunction with the acquisition of SRC, we entered into Letter of
Credit Agreements (“LOC’s”) with John Davenport, President of our Company, and with The Trust, for
$250,000 and $300,000, respectively. These LOC’s have terms of 24 months and bear interest at a
rate of 12.5% on the face amount. The LOC’s are collateralized by a percentage of the capital
stock of Crescent Lighting Ltd. (“CLL”) which in turn is based on CLL’s net worth as of November
30, 2009 and is subordinated to the senior indebtedness of the Company and CLL. As an incentive to enter into the
LOC’s, the Company issued five-year, detached warrants to purchase 125,000 and 150,000 shares, respectively, of
common stock at an exercise price of $0.01 per share. The Company’s shareholders approved the warrants at the Annual
Meeting on June 16, 2010.
On May 27, 2009, we entered into an unsecured Promissory Note (“Note”) with The Quercus Trust
(“Quercus”) in the amount of $70,000. Under the terms of this Note, we are obligated to pay The
Trust the principal sum of the Note and interest accruing at a yearly rate of 1.00% in one lump sum
payment on or before June 1, 2109. We received these funds on June 9, 2009.
Effective October 15, 2008, we entered into a one year credit agreement with Silicon Valley Bank
(“SVB”) incorporating a $4,000,000 revolving line of credit which replaced all existing facilities
including the United States term loans. This new line of credit included a $1,500,000 sub-limit
for cash management products, letters of credit and foreign currency exchange. Under this
agreement, all domestic existing term loans and revolving credit lines were repaid and funded by
this new borrowing arrangement. Borrowings under this agreement were collateralized by our assets,
including intellectual property, and bore interest at the SVB Prime Rate plus 1%. We were required
to maintain 85% of our cash and cash equivalents in operating and investment accounts with SVB and
were also required to comply with certain covenant requirements, including a tangible net worth
covenant. The amount of borrowings available to the Company was the lesser of $4,000,000 or the
sum of up to 75% of eligible accounts receivable, as defined by the agreement, and 50% of our cash
balance in deposit at SVB, capped at $1,500,000.
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At December 31, 2008, we were not in compliance with the tangible net worth covenant requirement
and such condition continued throughout 2009. As such, we entered into a series of loan
modification and forbearance agreements (“agreements”) with effective dates ranging from January
31, 2009 through November 17, 2009. In conjunction with these agreements, the terms of our credit
facility were revised culminating in a reduction to our revolving line of credit to $1,300,000 with
a maturity date of October 15, 2009 and a change in the rates of interest charged throughout 2009
in the range of SVB Prime Rate plus 1.5% to 3.00%. Under this revised credit facility, we were
required to maintain all of our cash and cash equivalents in operating and investment accounts with
SVB and its affiliates and were also required to continue compliance with certain covenant
requirements, including the tangible net worth covenant. During the third quarter of 2009, SVB
informed the Company that it did not intend to renew our revolving line of credit when it was set
to expire on October 15, 2009. Ultimately, we were able to extend the maturity date of this credit
facility to December 31, 2009 at which time we liquidated the outstanding balance of $253,000 on
the line of credit. We have yet not replaced this credit facility but we are actively pursuing
other potential financial resources to replace and/or compensate for the loss of the line of
credit. The interest rate at the time of the liquidation of the credit facility on December 31,
2009 was 7.0% versus 5.0% at December 31, 2008.
Through our United Kingdom subsidiary, we maintain a British pounds sterling-denominated bank
overdraft facility with Lloyds Bank Plc, in the amount of $388,000, based on the exchange rate at
December 31, 2010. There were no borrowings against this facility as of December 31, 2010 or
December 31, 2009. This facility is renewed annually on January 1. The interest rate on the
facility was 2.75% at December 31, 2010 and 2009.
Through our former German subsidiary, which has been classified as discontinued operations in our
Consolidated Financial Statements; we maintained a Euro-denominated 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 were owned and occupied by our former German
subsidiary. In June, 2009, we paid, in its entirety, the balance due on the credit facility with
proceeds received from the sale of the office building in Berching, Germany. In addition, our
former German subsidiary had a Euro-denominated revolving line of credit with Sparkasse Neumarkt
Bank.
Contractual Obligations
The following summarizes our contractual obligations as of December 31, 2010, consisting of current
and future payments for borrowings in the United States, and minimum lease payments under operating
leases, as well as the effect that these obligations are expected to have on our liquidity and cash
flow in future periods (in thousands):
| United States | Non-Cancelable | |||||||||||
| Long-Term | Operating | |||||||||||
| Year ending December 31, | Borrowings | Leases | Total | |||||||||
2011 |
$ | 550 | $ | 801 | $ | 1,351 | ||||||
2012 |
— | 558 | 558 | |||||||||
2013 |
1,650 | 560 | 2,210 | |||||||||
2014 |
— | 181 | 181 | |||||||||
2015 and thereafter |
70 | 108 | 178 | |||||||||
Total contractual obligations, gross |
2,270 | 2,208 | 4,478 | |||||||||
Less: discounts on long-term borrowings and sublease payments |
(445 | ) | — | (445 | ) | |||||||
Total contractual obligations, net |
$ | 1,825 | $ | 2,208 | $ | 4,033 | ||||||
For further information regarding our contractual obligations, refer to Notes 10 and 11 to the
Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of December 31, 2010 or 2009.
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Going Concern
We have experienced net losses of $8,517,000 and $11,015,000 for the years ended December 31, 2010
and 2009, respectively. As of December 31, 2010, we had an accumulated deficit of $68,860,000.
Although management continues to address many of the legacy issues that have
historically burdened our financial performance, we still face challenges in order to reach
profitability. In order for us to attain profitability and growth, we will need to successfully
address these challenges, including the continuation of cost reductions throughout our
organization, execution of our marketing and sales plans for our new turnkey energy-efficient
lighting solutions business, the development of new technologies into sustainable product
lines, and continued improvements in our supply chain performance.
Our independent public accounting firm has issued an opinion in connection with our 2010 Annual Report on Form 10-K raising substantial doubt as to our ability to continue as a going concern. This opinion stems from our
historically poor operating performance, the current economic environment, and our historical
inability to generate sufficient cash flow to meet obligations and sustain operations without
obtaining additional external financing. Although we are optimistic about obtaining the funding
necessary for us to continue as a going concern, there can be no assurances that this objective
will be successful. As such, we will continue to review and pursue selected external funding sources, if necessary,
to execute these objectives including, but not limited to, the following:
| • | obtain financing from traditional or non-traditional investment capital organizations or individuals, | ||
| • | potential sale or divestiture 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 contains risks, including:
| • | 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 economic environment combined with our capital constraints 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. |
Critical Accounting Policies and Estimates
The preparation of 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 net sales and expenses in the financial statements. Material differences may result in
the amount and timing of net sales and expenses if different judgments or different estimates were
utilized. Critical accounting policies, judgments, and estimates that we believe have the most significant
impact on our financial statements are set forth below:
| • | Revenue recognition; | ||
| • | Allowances for doubtful accounts, returns and discounts; | ||
| • | Impairment of long-lived assets; | ||
| • | Valuation of inventories; | ||
| • | Accounting for income taxes; and | ||
| • | Share-Based compensation. |
Revenue Recognition
Revenue is recognized when it is realized or realizable, has been earned, and when all of the
following has occurred:
| • | persuasive evidence or an arrangement exists, e.g., a sales order, a purchase order, or a sales agreement, | ||
| • | shipment has occurred, with the standard shipping term being F.O.B. ship point, or services provided on a proportional performance basis or installation has been completed, | ||
| • | price to the buyer is fixed or determinable, and | ||
| • | collectability is reasonably assured. |
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Revenues from our products-based business are generally recognized upon shipping based upon the
following:
| • | all sales made by the Company to its customer base are non-contingent, meaning that they are not tied to that customer’s resale of products, | ||
| • | standard terms of sale contain shipping terms of F.O.B. ship point, meaning that title is transferred when shipping occurs, and | ||
| • | there are no automatic return provisions that allow the customer to return the product in the event that the product does not sell within a defined timeframe. |
Revenues from our products-based business that incorporate specifically-defined installation
services have historically been recognized as follows:
| • | product sale at completion of installation, and | ||
| • | installation service at completion of installation. |
Revenues and profits from our lighting solutions-based business are generally recognized by
applying percentages-of-completion for the period to the estimated profits for the respective
contracts. Percentage-of-completion is determined by relating the actual cost of the work
performed to date to the current estimated total cost of the respective contracts. When the
estimate on a contract indicates a loss, our policy is to record the entire loss during
the accounting period in which it is estimable. In the ordinary course of business, at a minimum
on a quarterly basis, we prepare updated estimates of the total forecasted revenue, cost
and profit or loss for each contract. The cumulative effect of revisions in estimates of the total
forecasted revenue and costs during the course of the work is reflected in the accounting period in
which the facts that caused the revision become known. The financial impact of these revisions to
any one contract is a function of both the amount of the revision and the percentage-of- completion
of the contract. For 2010, revenues from our lighting solutions-based business will generally be
larger contracts and may range from three to eighteen months in duration.
In accordance with normal practices in the industry, we include in current assets and
current liabilities amounts related to contracts realizable and payable over a period in excess of
one year. Billings in excess of costs represents the excess of contract billings to date over the
amount of contract costs and profits (or contract revenue) recognized to date on a
percentage-of-completion basis. Costs in excess of billings represents the excess of contract
costs and profits (or contract revenue) recognized to date on the percentage-of-completion basis
over the amount of contract billings to date on the remaining contracts. See Note 9, Contracts in Progress, to the Consolidated Financial Statements for additional
information.
We warrant our products against defects or workmanship issues. We set up allowances for estimated
returns, discounts, and warranties upon recognition of revenue and these allowances are adjusted
periodically to reflect actual and anticipated returns, discounts, and warranty expenses. These
allowances are based on past history and historical trends, current economic conditions, and
contractual terms. Our distributor’s obligation to us is not contingent upon the resale of our
products and as such does not prohibit revenue recognition.
Allowances for Doubtful Accounts, Returns, and Discounts
We establish allowance for doubtful accounts and returns for probable losses based on the
customers’ loss history with us, the financial condition of the customer, the condition of the
general economy and the industry as a whole and the contractual terms established with the
customer. The specific components are as follows:
| • | Allowance for doubtful accounts for accounts receivable, and | ||
| • | Allowance for sales returns. |
In 2010, the total allowance was $446,000, with $302,000 related to accounts receivable and
$144,000 related to sales returns. In 2009, the total allowance had a balance of $395,000 with
$317,000 related to accounts receivable and $78,000 related to sales returns.
We review these allowance accounts periodically and adjust them accordingly for current conditions.
Long-lived Assets
Property and equipment is stated at cost and include expenditures for additions and major
improvements. Expenditures for repairs and maintenance are charged to operations as incurred. We
use the straight-line method of depreciation over their estimated useful lives of the related
assets (generally two to fifteen years) for financial reporting purposes. Accelerated methods of
depreciation are used for federal income tax purposes. When assets are sold or otherwise disposed
of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is
reflected in the Consolidated Statement of Operations. Refer to Note 6, Property and Equipment, to
the Consolidated Financial Statements for additional information.
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We classify intangible assets into two categories: (1) intangible assets with definite lives
subject to amortization, and (2) goodwill. We determine the useful lives of our identifiable intangible
assets after considering the specific facts and circumstances related to each intangible asset.
Factors we consider when determining useful lives include the contractual term of any agreement
related to the asset, the historical performance of the asset, our long-term strategy for
using the asset, any laws or other local regulations which could impact the useful life of the
asset, and other economic factors, including competition and specific market conditions. Intangible
assets that are deemed to have definite lives are amortized, on a straight-line basis or other
method which best approximates cash flows, over their useful lives, ranging from 5 to 10 years.
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets
acquired in a business acquisition. Refer to Note 7, Goodwill and Intangible Assets, to the
Consolidated Financial Statements for additional information.
Long-lived assets, other than goodwill, are reviewed for impairment whenever events or
circumstances indicate the carrying amount may not be recoverable. Events or circumstances that
would result in an impairment review primarily include operations reporting losses, a significant
change in the use of an asset, or the planned disposal or sale of the asset. The asset would be
considered impaired when the future net undiscounted cash flows generated by the asset are less
than its carrying value. An impairment loss would be recognized based on the amount by which the
carrying value of the asset exceeds its fair value, as determined by quoted market price (if
available) or the present value of expected future cash flows.
We evaluate goodwill for impairment at least annually. Evaluating goodwill for impairment involves
a two-step process. The first step is to estimate the fair value of the reporting unit. There are
several valuation methods for estimating a reporting unit’s fair value, including market quotations
and discounted projected future net earnings or net cash flows and multiples of earnings. If the
carrying amount of a reporting unit, including goodwill, exceeds the estimated fair value, a second
step is performed. Under the second step, the identifiable assets, including identifiable
intangible assets and liabilities of the reporting unit are estimated at fair value as of the
current testing date. The excess of the estimated fair value of the reporting unit over the
estimated fair value of net assets establishes the implied value of goodwill. The excess of the
recorded goodwill over the implied value is charged to earnings as an impairment loss. A
significant amount of judgment is required in estimating fair value of the reporting unit and
performing these tests.
Valuation of Inventories
We state inventories at the lower of standard cost (which approximates actual cost determined using
the first-in-first-out method) or market. We establish provisions for excess and obsolete
inventories after evaluation of historical sales, current economic trends, forecasted sales,
product lifecycles, and current inventory levels. During 2010, 2009, and 2008, we charged
$295,000, $533,000, and $1,503,000, respectively, to cost of sales for excess and obsolete
inventories. Included in 2008 is total expense in the amount of $1,071,000 related to our
modification of the definition of slow-moving and obsolete inventory reserve. Management deemed
this increase appropriate as technology developments within the lighting industry continues to
accelerate. Adjustments to our estimates, such as forecasted sales and expected product
lifecycles, could harm our operating results and financial position.
Accounting for Income Taxes
As part of the process of preparing our Consolidated Financial Statements, we are required to
estimate our income tax liability in each of the jurisdictions in which we do business. This
process involves estimating our actual current tax expense together with assessing temporary
differences resulting from differing treatment of items, such as deferred revenues, for tax and
accounting purposes. These differences result in deferred tax assets and liabilities, which are
included in our Consolidated Balance Sheet. We then assess the likelihood that these deferred tax
assets will be recovered from future taxable income and, to the extent that we believe that
recovery is is more likely than not, or is unknown, we establish a valuation allowance.
Significant management judgment is required in determining our provision for income taxes, our
deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax
assets. At December 31, 2010, we have recorded a full valuation allowance against our deferred tax
assets in the United States due to uncertainties related to our ability to utilize our deferred tax
assets, primarily consisting of certain net operating losses carried forward. The valuation
allowance is based upon our estimates of taxable income by jurisdiction and the period over which
our deferred tax assets will be recoverable.
Share-Based Payments
In December 2004, the FASB issued Accounting Standards Codification (“ASC”) Topic Number 718,
Compensation — Stock Compensation (“ASC 718”). ASC 718 requires all entities to recognize
compensation expense in an amount equal to the fair value of share-based payments, such as stock
options granted to employees. We have applied ASC 718 using the modified prospective method. Under
this method, we are required to record compensation expense (as previous awards continue to vest)
for the unvested portion of previously granted awards that remain outstanding at the date of
adoption. In March, 2005, the SEC released Staff Accounting Bulletin No. 107, “Share-Based
Payment” (“SAB 107”), which provides interpretive guidance related to the interaction between ASC
718 and certain SEC rules and regulations. It also provides the SEC staff’s views regarding
valuation of share based payment arrangements. The application of ASC 718 with SAB 107 had the
effect of increasing stock-based compensation expense and reducing earnings by $552,000 in 2010,
$624,000 in 2009, and $715,000 in 2008.
32
Table of Contents
We measure all employee stock-based awards as an expense based on the grant-date fair value of
these awards. The fair value of options is estimated on the date of grant using the Black-Scholes
option pricing model. Weighted average assumptions used in the model include the expected life of
the options, risk-free interest rate, and volatility. The estimated expected life of the option is
calculated based on the contractual life of the option, the vesting life of the option, and
historical exercise patterns of vested options. The volatility estimates are calculated using
historical pricing experience.
Recently Issued Accounting Pronouncements
Refer to Note 2, Summary of Significant Accounting Policies, to the Consolidated Financial
Statements for a discussion of recent accounting standards and pronouncements.
Item 7A. Qualitative and Quantitative Disclosures About Market Risk
As of December 31, 2010, we had $632,000 in cash held in foreign currencies based on the exchange
rates at December 31, 2010. 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.
Periodically, cash will be transferred in order to repay inter-company debts.
33
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Item 8. Financial Statements and Supplementary Data
TABLE OF CONTENTS
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| 37 | ||||
| 38 | ||||
| 39 | ||||
| 40 | ||||
| 41 | ||||
| 43 | ||||
34
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Energy Focus, Inc.
Energy Focus, Inc.
We have audited the accompanying consolidated balance sheets of Energy Focus, Inc. (a Delaware
corporation) and Subsidiaries (collectively the “Company”) as of December 31, 2010 and 2009, and
the related consolidated statements of operations, comprehensive income (loss), shareholders’
equity, and cash flows for the years then ended. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Energy Focus, Inc. and Subsidiaries as of December 31,
2010 and 2009, and the results of their operations and their cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United States of America.
We have also audited the retrospective adjustments to the 2008 consolidated financial statements
for the operations discontinued in 2009 as discussed in Note 4 to the consolidated financial
statements and the retrospective adjustments to the disclosures for changes in the composition of
reportable segments in 2008, as discussed in Note 14 to the consolidated financial statements. Our
procedures with respect to the discontinued operations included (1) obtaining the Company’s
underlying accounting analysis prepared by management of the retrospective adjustments for
discontinued operations and comparing the retrospectively adjusted amounts per the 2008 financial
statements to such analysis, (2) comparing previously reported amounts to the previously issued
financial statements for such years, (3) testing the mathematical accuracy of the accounting
analysis, and (4) on a test basis, comparing the adjustments to retrospectively adjust the
financial statements for discontinued operations to the Company’s supporting documentation. Our
procedures with respect to the changes in segments included (1) comparing the adjustment amounts of
segment revenues, operating income, and assets to the Company’s underlying analysis and (2) testing
the mathematical accuracy of the reconciliations of segment amounts to the consolidated financial
statements. In our opinion, such retrospective adjustments are appropriate and have been properly
applied. However, we were not engaged to audit, review, or apply any procedures to the 2008
consolidated financial statements of the Company other than with respect to the retrospective
adjustments and, accordingly, we do not express an opinion or any other form of assurance on the
2008 consolidated financial statements taken as a whole.
The accompanying consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2, the Company incurred net losses of
$8,517,000 and $11,015,000 during the years ended December 31, 2010 and 2009. In addition, as
discussed in Note 10, the Company’s line of credit came due in 2009, and the Company has not
obtained any financing on a long-term basis. These factors, among others, as discussed in Note 2
to the financial statements, raise substantial doubt about the Company’s ability to continue as a
going concern. Management’s plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.
/s/ Plante & Moran, PLLC
Cleveland, Ohio
March 31, 2011
March 31, 2011
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Energy Focus, Inc.
Energy Focus, Inc.
We have audited, before the effects of the retrospective adjustments for the discontinued
operations discussed in Note 4 and the retrospective adjustments for the change in the composition
of reportable segments discussed in Note 14, the consolidated statements of operations,
comprehensive income (loss), shareholders’ equity, and cash flow of Energy Focus, Inc. (a Delaware
corporation) and subsidiaries (collectively the “Company”) for the year ended December 31, 2008
(the 2008 financial statements before the effects of the adjustments discussed in Note 4 and Note
14 are not presented herein). Our audit of the basic financial statements included the financial
statement schedule listed in the index appearing under Item 15 (a)(2). These 2008 financial
statements and financial statement schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, which are before the
effects of the retrospective adjustments for the discontinued operations in Note 4 and the
retrospective adjustments for the change in the composition of reportable segments discussed in
Note 14, present fairly, in all material respects, the results of operations and cash flows of
Energy Focus, Inc. and subsidiaries for the year ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule, when considered in relation to the basic financial statements
as a whole, presents fairly, in all material respects, the information set forth therein.
We were not engaged to audit, review, or apply any procedures to the retrospective adjustments
for the discontinued operations discussed in Note 4 and the retrospective adjustments for the
change in the composition of reportable segments discussed in Note 14 and accordingly, we do not
express an opinion or any other form of assurance about whether such adjustments are appropriate
and have been properly applied. Those adjustments were audited by other auditors.
The accompanying consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2, the Company incurred a net loss of
$14,448,000 and negative cash flows from operations of $5,830,000 during the year ended December
31, 2008. In addition, as discussed in Note 10, the Company’s line of credit is due in 2009.
These factors, among others, as discussed in Note 2 to the financial statements raise substantial
doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to
these matters are also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
Cleveland, Ohio
March 30, 2009
March 30, 2009
36
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ENERGY
FOCUS, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
(amounts in thousands except share and per share amounts)
As of December 31,
(amounts in thousands except share and per share amounts)
| 2010 | 2009 | |||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 4,107 | $ | 1,062 | ||||
Accounts receivable trade, net of allowances of $446 in 2010
and $395 in 2009 |
5,483 | 2,922 | ||||||
Retainage receivable |
731 | — | ||||||
Inventories, net |
2,543 | 3,770 | ||||||
Costs in excess of billings |
22 | — | ||||||
Prepaid and other current assets |
632 | 509 | ||||||
Total current assets |
13,518 | 8,263 | ||||||
Property and equipment, net |
2,446 | 3,091 | ||||||
Goodwill |
672 | 672 | ||||||
Intangible assets, net |
1,677 | 2,750 | ||||||
Collateralized assets |
2,000 | 2,500 | ||||||
Other assets |
61 | 102 | ||||||
Total assets |
$ | 20,374 | $ | 17,378 | ||||
LIABILITIES |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 7,167 | $ | 1,677 | ||||
Accrued liabilities |
2,358 | 1,854 | ||||||
Deferred revenue |
1,214 | 295 | ||||||
Billings in excess of costs |
297 | — | ||||||
Current portion of long-term borrowings |
481 | — | ||||||
Total current liabilities |
11,517 | 3,826 | ||||||
Other deferred liabilities |
28 | 149 | ||||||
Acquisition-related contingent liabilities |
827 | 1,183 | ||||||
Long-term borrowings |
1,344 | 715 | ||||||
Total liabilities |
13,716 | 5,873 | ||||||
SHAREHOLDERS’ EQUITY |
||||||||
Preferred stock, par value $0.0001 per share: |
||||||||
Authorized: 2,000,000 shares in 2010 and 2009
Issued and outstanding: no shares in 2010 and 2009 |
— | — | ||||||
Common stock, par value $0.0001 per share: |
||||||||
Authorized: 60,000,000 shares in 2010 and 30,000,000 in 2009
Issued and outstanding: 23,962,000 in 2010 and 21,250,000 in 2009 |
1 | 1 | ||||||
Additional paid-in capital |
75,094 | 71,373 | ||||||
Accumulated other comprehensive income |
423 | 474 | ||||||
Accumulated deficit |
(68,860 | ) | (60,343 | ) | ||||
Total shareholders’ equity |
6,658 | 11,505 | ||||||
Total liabilities and shareholders’ equity |
$ | 20,374 | $ | 17,378 | ||||
The accompanying notes are an integral part of these financial statements.
37
Table of Contents
ENERGY
FOCUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
(amounts in thousands except per share amounts)
For the years ended December 31,
(amounts in thousands except per share amounts)
| 2010 | 2009 | 2008 | ||||||||||
Net sales |
$ | 35,129 | $ | 12,489 | $ | 20,032 | ||||||
Cost of sales |
28,726 | 10,449 | 15,926 | |||||||||
Gross profit |
6,403 | 2,040 | 4,106 | |||||||||
Operating expenses: |
||||||||||||
Research and development |
(202 | ) | 319 | 237 | ||||||||
Sales and marketing |
6,415 | 6,044 | 8,081 | |||||||||
General and administrative |
6,115 | 5,333 | 5,443 | |||||||||
Loss on impairment |
156 | — | 3,195 | |||||||||
Valuation of equity instruments |
1,812 | — | — | |||||||||
Restructuring |
26 | 125 | — | |||||||||
Total operating expenses |
14,322 | 11,821 | 16,956 | |||||||||
Loss from operations |
(7,919 | ) | (9,781 | ) | (12,850 | ) | ||||||
Other income (expense): |
||||||||||||
Other (expense) income |
(25 | ) | 47 | (91 | ) | |||||||
Interest (expense) income |
(567 | ) | (73 | ) | 18 | |||||||
Loss from continuing operations before income taxes |
(8,511 | ) | (9,807 | ) | (12,923 | ) | ||||||
(Provision for) benefit from income taxes |
(6 | ) | (7 | ) | 250 | |||||||
Net loss from continuing operations |
$ | (8,517 | ) | $ | (9,814 | ) | $ | (12,673 | ) | |||
Discontinued operations: |
||||||||||||
Loss before income taxes of discontinued operations, including
loss on disposal of discontinued operations of $664 in
2009 |
— | (1,201 | ) | (1,775 | ) | |||||||
Provision for income taxes |
— | — | — | |||||||||
Loss from discontinued operations |
— | (1,201 | ) | (1,775 | ) | |||||||
Net loss |
$ | (8,517 | ) | $ | (11,015 | ) | $ | (14,448 | ) | |||
Net loss per share — basic and diluted |
$ | (0.37 | ) | $ | (0.70 | ) | $ | (1.02 | ) | |||
Shares used in computing net loss per share —
basic and diluted |
22,791 | 15,763 | 14,182 | |||||||||
The accompanying notes are an integral part of these financial statements.
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Table of Contents
ENERGY
FOCUS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the years ended December 31,
For the years ended December 31,
(amounts in thousands)
| 2010 | 2009 | 2008 | ||||||||||
Net loss |
$ | (8,517 | ) | $ | (11,015 | ) | $ | (14,448 | ) | |||
Other comprehensive income (loss): |
||||||||||||
Foreign currency translation adjustments |
(51 | ) | 223 | (564 | ) | |||||||
Comprehensive loss |
$ | (8,568 | ) | $ | (10,792 | ) | $ | (15,012 | ) | |||
The accompanying notes are an integral part of these financial statements.
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Table of Contents
ENERGY
FOCUS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the years ended December 31, 2010, 2009, and 2008
For the years ended December 31, 2010, 2009, and 2008
(amounts in thousands)
| Accumulated | Retained | |||||||||||||||||||||||
| Additional | Other | Earnings | ||||||||||||||||||||||
| Common Stock | Paid-in | Comprehensive | (Accumulated | |||||||||||||||||||||
| Shares | Amount | Capital | Income | Deficit) | Total | |||||||||||||||||||
Balances at December
31, 2007 |
11,623 | $ | 1 | $ | 55,682 | $ | 815 | $ | (34,880 | ) | $ | 21,618 | ||||||||||||
Private investment
public equity, net of
expenses |
3,184 | — | 9,335 | — | — | 9,335 | ||||||||||||||||||
Exercise of common
stock options |
23 | — | 126 | — | — | 126 | ||||||||||||||||||
Issuance of common
stock under employee
stock option purchase
plan |
5 | — | 7 | — | — | 7 | ||||||||||||||||||
Stock-based
compensation |
— | — | 715 | — | — | 715 | ||||||||||||||||||
Foreign currency
translation adjustment |
— | — | — | (564 | ) | — | (564 | ) | ||||||||||||||||
Net loss |
— | — | — | — | (14,448 | ) | (14,448 | ) | ||||||||||||||||
Balances at December
31, 2008 |
14,835 | $ | 1 | $ | 65,865 | $ | 251 | $ | (49,328 | ) | $ | 16,789 | ||||||||||||
Issuance of common
stock under rights
offering |
5,168 | — | 3,344 | — | — | 3,344 | ||||||||||||||||||
Issuance of common
stock |
228 | — | 153 | — | — | 153 | ||||||||||||||||||
Issuance of common
stock under employee
stock option purchase
plan |
19 | — | 11 | — | — | 11 | ||||||||||||||||||
Issuance of common
stock for acquisition
of subsidiary |
1,000 | — | 1,239 | — | — | 1,239 | ||||||||||||||||||
Stock-based
compensation |
— | — | 624 | — | — | 624 | ||||||||||||||||||
Warrants issued for
financing |
— | — | 137 | — | — | 137 | ||||||||||||||||||
Foreign currency
translation adjustment |
— | — | — | 223 | — | 223 | ||||||||||||||||||
Net loss |
— | — | — | — | (11,015 | ) | (11,015 | ) | ||||||||||||||||
Balances at December
31, 2009 |
21,250 | $ | 1 | $ | 71,373 | $ | 474 | $ | (60,343 | ) | $ | 11,505 | ||||||||||||
Issuance of common
stock under rights
offering |
— | — | 1,421 | — | — | 1,421 | ||||||||||||||||||
Issuance of common
stock |
948 | — | 1,195 | — | — | 1,195 | ||||||||||||||||||
Issuance of common
stock under employee
stock option purchase
plan |
20 | — | 15 | — | — | 15 | ||||||||||||||||||
Issuance of common
stock for acquisition
of subsidiary |
— | — | — | — | — | — | ||||||||||||||||||
Stock-based
compensation |
— | — | 552 | — | — | 552 | ||||||||||||||||||
Stock options exercised |
14 | — | 8 | — | — | 8 | ||||||||||||||||||
Warrants issued for
financing |
— | 528 | — | — | 528 | |||||||||||||||||||
Warrants exercised |
1,730 | — | 2 | — | — | 2 | ||||||||||||||||||
Foreign currency
translation adjustment |
— | — | — | (51 | ) | — | (51 | ) | ||||||||||||||||
Net loss |
— | — | — | — | (8,517 | ) | (8,517 | ) | ||||||||||||||||
Balances, December 31,
2010 |
23,962 | $ | 1 | $ | 75,094 | $ | 423 | $ | (68,860 | ) | $ | 6,658 | ||||||||||||
The accompanying notes are an integral part of these financial statements.
40
Table of Contents
ENERGY
FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
For the years ended December 31,
(amounts in thousands)
| 2010 | 2009 | 2008 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net loss |
$ | (8,517 | ) | $ | (11,015 | ) | $ | (14,448 | ) | |||
Less: loss from discontinued operations |
— | (1,201 | ) | (1,775 | ) | |||||||
Net loss from continuing operations |
(8,517 | ) | (9,814 | ) | (12,673 | ) | ||||||
Adjustments to reconcile net loss from continuing operations to net
cash provided by (used in) operating activities: |
||||||||||||
Loss on impairment |
156 | — | 3,195 | |||||||||
Depreciation |
790 | 987 | 1,151 | |||||||||
Stock-based compensation |
878 | 624 | 715 | |||||||||
Valuation of equity instruments |
1,812 | — | — | |||||||||
Provision for doubtful accounts receivable |
44 | 45 | (52 | ) | ||||||||
Amortization of intangible assets |
1,073 | — | — | |||||||||
Amortization of discounts on long-term borrowings |
349 | — | — | |||||||||
Deferred taxes |
— | — | (255 | ) | ||||||||
Deferred revenue |
1,215 | 104 | (52 | ) | ||||||||
Gain on disposal of fixed assets |
(22 | ) | 44 | — | ||||||||
Changes in assets and liabilities: |
||||||||||||
Accounts receivable, inventories, and
other assets |
(1,694 | ) | (906 | ) | 1,374 | |||||||
Accounts payable and accrued liabilities |
5,409 | (1,225 | ) | 902 | ||||||||
Total adjustments |
10,010 | (327 | ) | 6,978 | ||||||||
Net cash provided by (used in) continuing operations |
1,493 | (10,141 | ) | (5,695 | ) | |||||||
Net cash used in discontinued operations |
— | (421 | ) | (135 | ) | |||||||
Net cash provided by (used in) operating activities |
1,493 | (10,562 | ) | (5,830 | ) | |||||||
Cash flows from investing activities: |
||||||||||||
Cash paid for acquisition of subsidiary |
— | (1,500 | ) | — | ||||||||
Proceeds from the sale of fixed assets |
50 | — | — | |||||||||
Acquisition of fixed assets |
(332 | ) | (182 | ) | (358 | ) | ||||||
Net cash used in continuing investing activities |
(282 | ) | (1,682 | ) | (358 | ) | ||||||
Net cash provided by (used in) discontinued investing
activities |
— | 765 | (37 | ) | ||||||||
Net cash used in investing activities |
(282 | ) | (917 | ) | (395 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuances of common stock, net |
669 | 3,508 | 9,335 | |||||||||
Proceeds from exercise of stock options |
8 | — | 133 | |||||||||
Proceeds from other borrowings |
1,150 | 620 | — | |||||||||
Net (repayments) / proceeds on credit line borrowings |
— | (1,776 | ) | 802 | ||||||||
Net repayments on bank borrowings |
— | — | (1,672 | ) | ||||||||
Net cash provided by continuing financing activities |
1,827 | 2,352 | 8,598 | |||||||||
Net cash used in discontinued financing activities |
— | (428 | ) | (105 | ) | |||||||
Net cash provided by financing activities |
1,827 | 1,924 | 8,493 | |||||||||
Effect of exchange rate changes on cash |
7 | 49 | (112 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents |
3,045 | (9,506 | ) | 2,156 | ||||||||
Cash and cash equivalents at beginning of year |
1,062 | 10,568 | 8,412 | |||||||||
Cash and cash equivalents at end of year |
$ | 4,107 | $ | 1,062 | $ | 10,568 | ||||||
(Continued on following page)
41
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ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(amounts in thousands)
| 2010 | 2009 | 2008 | ||||||||||
Supplemental Information |
||||||||||||
Interest paid |
$ | 171 | $ | 98 | $ | 198 | ||||||
Non-cash investing and financing activities: |
||||||||||||
Fully depreciated assets disposed of |
$ | 1,548 | $ | 1,149 | $ | 35 | ||||||
The Company purchased all of the members’ interest
of Stones River
Companies, LLC for $1,500. In conjunction with the
acquisition,
liabilities were incurred and common stock was
issued as follows: |
||||||||||||
Fair value of assets acquired |
$ | — | $ | 4,700 | $ | — | ||||||
Cash paid for the members’ interest |
— | (1,500 | ) | — | ||||||||
Liabilities incurred and common stock issued |
$ | — | $ | 3,200 | $ | — | ||||||
The accompanying notes are an integral part of these financial statements.
42
Table of Contents
ENERGY
FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
December 31, 2010, 2009, and 2008
1. Nature of Operations
Energy Focus, Inc. and its subsidiaries (the “Company”) engage in the design, development,
manufacturing, marketing, and installation of energy-efficient lighting systems and solutions where
the Company serves two segments:
| • | solutions-based sales providing turnkey, high-quality, energy-efficient lighting application alternatives primarily to the existing public-sector building market; and | ||
| • | product-based sales providing military, general commercial and industrial lighting and pool lighting offerings, each of which markets and sells energy-efficient lighting systems. |
The Company continues to evolve its business strategy to include providing its customers with
turnkey, comprehensive energy-efficient lighting solutions, which use, but are not limited to, its
patented and proprietary technology. Company product-based solutions include light-emitting diode
(“LED”), fiber optic, high-intensity discharge (“HID”), fluorescent tube and other highly
energy-efficient lighting technologies. Typical savings related to current technology of the
Company approximates 80% in electricity costs, while providing full-spectrum light closely
simulating daylight colors. The Company’s strategy also incorporates continued investment into the
research of new and emerging energy sources including, but not limited to, LED and solar energy
applications.
The Company’s development of solar technology continues through its role in the United States
Government’s Very High Efficiency Solar Cell (“VHESC”) Consortium sponsored by the Defense Advanced
Research Projects Agency (“DARPA”). The goal of the VHESC project is to develop a 40% or greater
efficient solar cell for United States military applications, which would ultimately become
available to the public for commercial application.
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; revenues recognized on a percentage-of-completion basis; and
stock-based compensation. In addition, estimates and assumptions associated with the determination
of fair value of financial instruments and evaluation of goodwill and long-lived assets for
impairment requires considerable judgment. Actual results could differ from those estimates and
such differences could be material.
Reclassifications
Certain prior year amounts have been reclassified within the Consolidated Financial Statements
(“financial statements”), and related notes thereto, to be consistent with the current year
presentation.
Basis of Presentation
The financial statements include the accounts of the Company and its subsidiaries, Stones River
Companies, LLC (“SRC”) in Nashville, Tennessee, and Crescent Lighting Limited (“CLL”) located in
the United Kingdom. LBM Lichtleit-Fasertechnik (“LBM”) located in Berching, Germany, was sold in
December, 2009 and is included in discontinued operations. All significant inter-company balances
and transactions have been eliminated.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
Going Concern
The Company has experienced net losses of $8,517,000, $11,015,000 and $14,448,000 for the years
ended December 31, 2010, 2009 and 2008, respectively. As of December 31, 2010, the Company had an
accumulated deficit of $68,860,000. Although management continues to address many of the legacy
issues that have historically burdened the Company’s financial performance, the Company still faces
challenges in order to reach profitability. In order for the Company to attain profitability and
growth, it will need to successfully address these challenges, including the continuation of cost
reductions throughout its organization, execution of its marketing and sales plans for its turnkey
energy-efficient lighting solutions business, the development of new technologies into sustainable
product lines and continued improvements in its supply chain performance.
The Company’s independent public accounting firm has issued an opinion in connection with the
Company’s 2010 Annual Report on Form 10-K raising substantial doubt as to the Company’s ability to
continue as a going concern. This opinion stems from the Company’s historically poor operating
performance, the current economic environment, and the Company’s historical inability to generate
sufficient cash flow to meet obligations and sustain operations without obtaining additional
external financing. The Company is optimistic about obtaining the funding necessary to meet
on-going tactical and strategic capital requirements. However, there can be no assurances that
this objective will be successful. As such, the Company will continue to review and pursue
selected external funding sources, if necessary, to execute these objectives including, but not
limited to, the following:
| • | obtain financing from traditional or non-traditional investment capital organizations or individuals, | ||
| • | potential sale or divestiture of one or more operating units, and | ||
| • | obtain funding from the sale of our common stock or other equity or debt instruments. |
Obtaining financing through the above-mentioned mechanisms contains risks, including:
| • | 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 economic environment combined with our capital constraints 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. |
Revenue Recognition
Revenue is recognized when it is realized or realizable, has been earned, and when all of the
following has occurred:
| • | persuasive evidence or an arrangement exists (e.g., a sales order, a purchase order, or a sales agreement), | ||
| • | shipment has occurred, with the standard shipping term being F.O.B. ship point, or services provided on a proportional performance basis or installation have been completed, | ||
| • | price to the buyer is fixed or determinable, and | ||
| • | collectability is reasonably assured. |
Revenues from our products-based business are generally recognized upon shipping based upon the
following:
| • | all sales made by the Company to its customer base are non-contingent, meaning that they are not tied to that customer’s resale of products, | ||
| • | standard terms of sale contain shipping terms of F.O.B. ship point, meaning that title is transferred when shipping occurs, and | ||
| • | there are no automatic return provisions that allow the customer to return the product in the event that the product does not sell within a defined timeframe. |
Revenues from our products-based business that incorporate specifically-defined installation
services have historically been recognized as follows:
| • | product sale at completion of installation, and | ||
| • | installation service at completion of installation. |
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
Revenues and profits from our lighting solutions-based business are generally recognized by
applying percentage-of-completion for the period to the estimated profits for the respective
contracts. Percentage-of-completion is determined by relating the actual cost of the work
performed to date to the current estimated total cost of the respective contracts. When the
estimate on a contract indicates a loss, the Company’s policy is to record the entire loss during
the accounting period in which it is estimable. In the ordinary course of business, at a minimum
on a quarterly basis, the Company prepares updated estimates of the total forecasted revenue, cost
and profit or loss for each contract. The cumulative effect of revisions in estimates of the total
forecasted revenue and costs during the course of the work is reflected in the accounting period in
which the facts that caused the revision become known. The financial impact of these revisions to
any one contract is a function of both the amount of the revision and the percentage-of- completion
of the contract. Revenues from our lighting solutions-based business will generally be larger
contracts and may range from three to eighteen months in duration.
In accordance with normal practices in the industry, the Company includes in current assets and
current liabilities amounts related to contracts realizable and payable. Billings in excess of
costs represents the excess of contract billings to date over the amount of contract costs and
profits (or contract revenue) recognized to date on a percentage-of-completion basis. Costs in
excess of billings represents the excess of contract costs and profits (or contract revenue)
recognized to date on the percentage-of-completion basis over the amount of contract billings to
date on the remaining contracts. See Note 9, Contracts in Progress, for additional information.
The Company warrants its products against defects or workmanship issues. We set up allowances for
estimated returns, discounts, and warranties upon recognition of revenue, and these allowances are
adjusted periodically to reflect actual and anticipated returns, discounts, and warranty expenses.
These allowances are based on past history and historical trends, current economic conditions, and
contractual terms.
Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents. The Company has $3,475,000 in cash on deposit with financial
institutions in the United States as of December 31, 2010, of which $128,000 is designated as
restricted cash and relates to funds received from a grant from/for a branch of the United States
government. The remaining cash of $632,000 is on deposit with a European bank in the United
Kingdom.
Inventories
The Company states inventories at the lower of standard cost (which approximates actual cost
determined using the first-in-first-out method) or market. The Company establishes provisions for
excess and obsolete inventories after evaluation of historical sales, current economic trends,
forecasted sales, product lifecycles, and current inventory levels. Charges to cost of sales for
excess and obsolete inventories amounted to $295,000, $533,000, and $1,503,000 in 2010, 2009, and
2008, respectively.
Accounts Receivable
The Company’s customers currently are concentrated in the United States and Europe. In the normal
course of business, the Company extends unsecured credit to its customers related to the sale of
its lighting solutions services and sale of its products. Typical credit terms require payment
within thirty days from the date of delivery or service. The Company evaluates and monitors the
creditworthiness of each customer on a case-by-case basis. The Company also provides allowances
for sales returns and doubtful accounts based on its continuing evaluation of its customers’
ongoing requirements and credit risk. The Company writes-off accounts receivable when management
deems that they have become uncollectible, and payments subsequently received on such receivables
are credited to the allowance for doubtful accounts. The Company does not generally require
collateral from its customers.
Retainage Receivable
The Company’s solutions-based sales are normally subject to a holdback of a percentage of the sale
as retainage. This holdback is recorded on the Company’s Consolidated Balance Sheet as “Retainage
receivable”. Retainage is a portion of the total bid price of a project that is held back by the
customer until the project is complete and functioning satisfactorily according to the contract
terms. Retainage percentages typically range from 5% to 10% and are collected anywhere from three
to eighteen months from the inception of the project. For the year ended December 31, 2010, the
Company had a retainage receivable from its customers totaling $731,000. No retainage receivable
existed in 2009.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
Income Taxes
As part of the process of preparing its financial statements, the Company estimates its income tax
liability in each of the jurisdictions in which it does business. This process involves estimating
the Company’s actual current tax expense together with assessing temporary differences resulting
from differing treatment of items, such as deferred revenues, for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are included in the
Consolidated Balance Sheets. The Company then assesses the likelihood that these deferred tax
assets will be recovered from future taxable income and, to the extent to which the Company
believes that recovery is more likely than not, or is unknown, the Company establishes a valuation
allowance.
Significant management judgment is required in determining the provision for income taxes, deferred
tax assets and liabilities, and any valuation allowance recorded against such deferred tax assets.
At December 31, 2010, the Company has a full valuation allowance against deferred tax assets in the
United States due to uncertainties related to its ability to utilize those deferred tax assets. The
valuation allowance is based on estimates of taxable income by jurisdiction and the periods over
which its deferred tax assets could be recoverable.
Collateralized Assets
The Company maintains $2,000,000 of cash collateral related to the Company’s $10,000,000 surety
bonding program associated with SRC. This cash is pledged to the surety carrier through December,
2011, unless the Company is able to provide sufficient alternative means of collateralization
satisfactory to the surety carrier.
Fair Value of Financial Instruments
The carrying amounts of certain financial instruments including cash and cash equivalents, accounts
receivable, and accounts payable approximate fair value due to their short maturities. Based on
borrowing rates currently available to the Company for loans with similar terms, the carrying value
of long-term debt obligations also approximates fair value.
Long-Lived Assets
Property and equipment is stated at cost and include expenditures for additions and major
improvements. Expenditures for repairs and maintenance are charged to operations as incurred. The
Company uses the straight-line method of depreciation over their estimated useful lives of the
related assets (generally two to fifteen years) for financial reporting purposes. Accelerated
methods of depreciation are used for federal income tax purposes. When assets are sold or
otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any
gain or loss is reflected in the Consolidated Statement of Operations. Refer to Note 6, Property
and Equipment, for additional information.
The Company classifies intangible assets into two categories: (1) intangible assets with definite
lives subject to amortization, and (2) goodwill. The Company determines the useful lives of our
identifiable intangible assets after considering the specific facts and circumstances related to
each intangible asset. Factors we consider when determining useful lives include the contractual
term of any agreement related to the asset, the historical performance of the asset, the Company’s
long-term strategy for using the asset, any laws or other local regulations which could impact the
useful life of the asset, and other economic factors, including competition and specific market
conditions. Intangible assets that are deemed to have definite lives are amortized, on a
straight-line basis or other method which best approximates cash flows, over their useful lives,
ranging from 5 to 10 years. Goodwill represents the excess of the purchase price over the fair
value of identifiable net assets acquired in a business acquisition. Refer to Note 7, Goodwill and
Intangible Assets, for additional information.
Long-lived assets, other than Goodwill, are reviewed for impairment whenever events or
circumstances indicate the carrying amount may not be recoverable. Events or circumstances that
would result in an impairment review primarily include operations reporting losses, a significant
change in the use of an asset, or the planned disposal or sale of the asset. The asset would be
considered impaired when the future net undiscounted cash flows generated by the asset are less
than its carrying value. An impairment loss would be recognized based on the amount by which the
carrying value of the asset exceeds its fair value, as determined by quoted market price (if
available) or the present value of expected future cash flows.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
The Company evaluates goodwill for impairment at least annually. Evaluating goodwill for
impairment involves a two-step process. The first step is to estimate the fair value of the
reporting unit. There are several valuation methods for estimating a reporting unit’s fair value,
including market quotations and discounted projected future net earnings or net cash flows and
multiples of earnings. If the carrying amount of a reporting unit, including goodwill, exceeds the
estimated fair value, a second step is performed. Under the second step, the identifiable assets,
including identifiable intangible assets and liabilities of the reporting unit are estimated at
fair value as of the current testing date. The excess of the estimated fair value of the reporting
unit over the estimated fair value of net assets establishes the implied value of goodwill. The
excess of the recorded goodwill over the implied value is charged to earnings as an impairment
loss. A significant amount of judgment is required in estimating fair value of the reporting unit
and performing these tests.
Certain Risks and Concentrations
The Company invests its excess cash in demand deposits and high-grade short-term securities with a
major financial institution that is insured by the Federal Deposit Insurance Corporation (“FDIC”)
up to $250,000 and the Securities Investor Protection Corporation (“SIPC”) up to $500,000 of
primary net equity protection including $100,000 for claims for cash. At times, the Company’s cash
balances may exceed the amounts insured by the FDIC. As of December 31, 2010, the Company does not
have any short-term securities investments. The Company has not experienced any losses in such
accounts and believes that it is not exposed to significant risk of loss.
The Company sells its products and solutions services through a combination of direct sales
employees, independent sales representatives, and various distributors in different geographic
markets throughout the world. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. Although the Company maintains allowances for potential
credit losses that it believes to be adequate, a payment default on a significant sale could
materially and adversely affect its operating results and financial condition.
At December 31, 2010, three customers accounted for 56.5% of the net accounts receivable, including
retainage receivable, and two customers accounted for 43.0% of the net accounts receivable,
including retainage receivable, at December 31, 2009. For the year ended December 31, 2010, two
customers accounted for 36.3% of net sales. For the years ended December 31, 2009 and 2008, no
single customer accounted for more than 10% of net sales.
The Company requires substantial amounts of purchased materials from selected vendors. With
specific materials, the Company purchases 100% of its requirement from a single vendor. Included
in purchased materials are small diameter stranded fiber, plastic fixtures, lamps, reflectors,
drivers and power supplies. Substantially all of the materials the Company requires are in
adequate supply. However, the availability and costs of materials may be subject to change due
to, among other things, new laws or regulations, suppliers’ allocation to other purchasers,
interruptions in production by suppliers, and changes in exchange rates and worldwide price and
demand levels. The Company’s inability to obtain adequate supplies of materials for its products
at favorable prices could have a material adverse effect on its business, financial position, or
results of operations by decreasing our profit margins and by hindering its ability to deliver
products to its customers on a timely basis.
Research and Development
Research and development expenses include salaries, contractor and consulting fees, supplies and
materials, as well as costs related to other overhead such as depreciation and facilities costs.
Research and development costs are expensed as they are incurred. The Company’s research and
development expenses are reduced on a proportional performance basis under Defense Advanced
Research Projects Agency (“DARPA”) Small Business Innovation Research (“SBIR”) development
contracts. During 2009 and 2010, additional SBIR contracts were signed totaling $2,548,000 to be
reimbursed over a two-year recovery period, respectively. Of this total contract amount,
$1,310,000 was billed through December 31, 2010 with the remaining $1,238,000 categorized as
unrecognized reductions of gross research and development expenses. The Company is currently
pursuing additional contracts through various government agencies, and anticipates being granted
additional contracts during 2011.
Credits received from government contracts for research for which the Company is the beneficiary
during the fiscal year are recorded as a reduction to research and development expense.
When the government contract is for the delivery of a product or service, the Company recognizes
revenue from those government projects according to proportional performance method or actual
deliveries made. Costs related to the completion of the sale are charged to cost of sales in the
same period in which the revenue is recognized.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
Earnings (Loss) Per Share
Basic loss per share is computed by dividing net loss available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted loss per share is
computed giving effect to all dilutive potential common shares that were 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.
A reconciliation of basic and diluted loss per share is provided as follows (in thousands, except
per share amounts):
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Basic and diluted loss per share: |
||||||||||||
Net loss |
$ | (8,517 | ) | $ | (11,015 | ) | $ | (14,448 | ) | |||
Basic and diluted loss per share: |
||||||||||||
Weighted average shares outstanding |
22,791 | 15,763 | 14,182 | |||||||||
Basic and diluted net loss per share |
$ | (0.37 | ) | $ | (0.70 | ) | $ | (1.02 | ) | |||
Options and warrants to purchase approximately 5,119,000 shares, 6,159,000 shares and 5,329,000
shares of common stock were outstanding at December 31, 2010, 2009, and 2008, respectively, 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 accounts for stock-based compensation following Accounting Standards Codification
(“ASC”) Topic Number 718, Compensation — Stock Compensation (“ASC 718”). ASC 718 focuses
primarily on accounting for transactions in which an entity obtains employee services in
share-based payment transactions. The statement requires entities to recognize compensation expense
for awards of equity instruments to employees based on grant-date fair value of those awards (with
limited exceptions). ASC 718 also requires the benefits of tax deductions in excess of recognized
compensation expense to be reported as a financing cash flow rather than as an operating cash flow
as prescribed under the prior accounting rules. For the years ended December 31, 2010, 2009, and
2008, the Company recorded stock compensation expense of $552,000, $624,000, and $715,000,
respectively. At December 31, 2010, the Company had unamortized stock compensation expense of
$579,000. The remaining weighted average life is approximately 1.5 years as of December 31, 2010.
These costs will be charged to expense, amortized on a straight-line method, in future periods in
accordance with ASC 718 accounting. At December 31, 2010, the intrinsic value of total options
outstanding was $109,000.
The expenses for 2010, 2009, and 2008 include both the costs of awards granted in those years and
those unvested at the beginning of 2008. Both the expense and future unearned compensation have
been estimated using the Black-Scholes option pricing model. Estimates utilized in the calculation
include the expected life of the option, risk-free interest rate, and volatility and are further
comparatively detailed below. The estimated expected life of the option is calculated based on
contractual life of the option, the vesting life of the option, and historical exercise patterns of
vested options. The volatility estimates are calculated using historical pricing experience.
As of December 31, 2010, the Company has one stock-based employee compensation plan, which is
described more fully in Note 12, Shareholders’ Equity. The Company accounts for equity instruments
issued to non-employees in accordance with the provisions of ASC 718 and related interpretations.
Under these principles, the equity instruments are valued at the fair value, which is computed
based on stock price on the date of grant or other measurement date, exercise price, estimated
life, stock volatility, and the risk-free rate of interest.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 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 2010, 2009, and 2008.
| 2010 | 2009 | 2008 | ||||||||||
Fair value of options issued |
$ | 0.80 | $ | 0.46 | $ | 1.04 | ||||||
Exercise price |
$ | 1.16 | $ | 0.73 | $ | 1.91 | ||||||
Expected life of option |
4.0 years | 4.0 years | 4.0 years | |||||||||
Risk-free interest rate |
1.61 | % | 1.88 | % | 2.36 | % | ||||||
Expected volatility |
98.31 | % | 88.26 | % | 72.53 | % | ||||||
Dividend yield |
0 | % | 0 | % | 0 | % | ||||||
At the 2010 Annual Meeting of Shareholders (“Annual Meeting”) held on June 16, 2010, the
shareholders approved an increase in the total number of shares of common stock that may be awarded
under the 2008 Incentive Stock Plan from 1,000,000 shares to 3,000,000 shares. Under this plan,
the Company granted 1,000,000 performance-based stock options during the year ended December 31,
2010. These performance-based stock options are exercisable by the grantees if, and only if, the
Company achieves required revenue and cash-flow generation targets as reported in the Company’s
2010 Form 10-K. Of the 1,000,000 performance-based stock options awarded in 2010, 850,000 stock
options were canceled in the first quarter of 2011 as a result of these defined targets not being
achieved during the year ended December 31, 2010.
In the third quarter of 2010, the Board of Directors approved a program offering the independent
Directors of the Company the option of accepting restricted shares of the Company’s common stock in
lieu of quarterly cash compensation. Directors who chose to participate and accept restricted
shares in lieu of cash compensation would receive the equivalent of two dollars ($2.00) of Company
common stock for every one dollar ($1.00) of their normal cash compensation. Directors that chose
to accept this program agreed to receive restricted shares compensation for four consecutive
quarters, covering the period of July 2010 until June 2011 with the aforementioned common stock
vesting over an equivalent 12 month period. The price of the common stock shares was based on the
closing price of the Company’s common stock on September 20, 2010. On September 1, 2010, four of
the five Directors agreed to participate in this program and, subsequently, 123,000 of restricted
shares of common stock were issued to the participants. Director compensation expense under this
program amounted to $107,000 for year ending December 31, 2010 related to these restricted shares.
In addition to the above, the Company granted 92,000 stock options, net of cancellations of 144,000
stock options, and 379,000 shares of restricted stock for the period ending December 31, 2010.
On May 29, 2009, the Company’s five senior executive officers agreed to accept voluntary salary
reductions for the remainder of the 2009 calendar year in exchange for the issuance of restricted
shares of common stock as authorized under the Company’s 2008 Incentive Stock Plan. Two other key
executives of the Company also accepted salary reductions for the balance of the year in exchange
for restricted shares. Each officer and key executive voluntarily accepted a ten percent (10%)
salary reduction for the remainder of 2009, except for one officer who voluntarily accepted a forty
percent (40%) decrease for the remainder of 2009. The number of restricted shares of common stock
issued to each officer and executive was equal to the dollar value of the individual’s salary
reduction divided by the closing price per share of the Company’s common stock on May 29, 2009.
The total number of restricted shares of common stock issued to these officers and executives was
209,000. The Company reserved the right to extend these salary reductions into the 2010 calendar
year and beyond. Additionally, on May 29, 2009, two members of the Company’s Board of Directors
voluntarily relinquished their directors’ fee for the balance of 2009 in exchange for restricted
shares of common stock on the same terms as the shares granted to the officers. The number of
restricted shares of common stock issued to each director was equal to the dollar value of the
individual’s relinquished director’s fee divided by the closing price per share of the Company’s
common stock on May 29, 2009. The total number of restricted shares of common stock issued to
these directors was 19,000. The Company recorded $140,000 of compensation expense related to these
restricted shares for the period ending December 31, 2010.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
On December 31, 2009, the Company extended these salary reductions through June 30, 2010 issuing an
additional 170,000 of restricted shares. The number of restricted shares of common stock issued to
each officer and executive was equal to the dollar value of the individual’s salary reduction
divided by the closing price per share of the Company’s common stock on December 30, 2009. On
July 9, 2010, the Company’s Chief Executive Officer, with the approval of the Board of Directors,
decided to continue the cash salary reductions through December 31, 2010. Each officer and key
executive voluntarily accepted a ten percent (10%) salary reduction for this six month period,
except for one officer who voluntarily accepted a forty percent (40%) decrease for this six month
period. The number of restricted shares of common stock issued to each officer and executive was
equal to the dollar value of the individual’s salary reduction divided by the closing price per
share of the Company’s common stock on July 9, 2010. The total number of restricted shares of
common stock to be issued to these officers and executives is 88,000, but these shares have not yet
been issued to the affected executives. The Company recorded $220,000 of compensation expense
related to these restricted shares for the period ending December 31, 2010.
Foreign Currency Translation
The Company’s international subsidiary uses its local currency as its functional currency. Assets
and liabilities are translated at exchange rates in effect at the balance sheet date and income and
expense accounts are translated at average exchange rates during the year. Resulting translation
adjustments are recorded directly to “Accumulated other comprehensive income” within shareholders’
equity. Foreign currency transaction gains and losses are included as a component of “Other
(expense)/income”. Gains and losses from foreign currency translation are included as a separate
component of “Other comprehensive loss” within the Consolidated Statement of Comprehensive Income
(Loss).
Advertising Expenses
The Company expenses the costs of advertising, which consists of costs for the placement of
advertisements in various media. Advertising expenses were $206,000, $368,000, and $601,000 for the
years ended December 31, 2010, 2009, and 2008, respectively.
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” in the Consolidated Balance Sheet. The warranty activity for the respective
years is as follows (in thousands):
| Year ended | ||||||||
| December 31, | ||||||||
| 2010 | 2009 | |||||||
Balance at the beginning of the year |
$ | 211 | $ | 308 | ||||
Accruals for warranties issued |
(11 | ) | 290 | |||||
Settlements made during the year (in cash or in kind) |
(74 | ) | (387 | ) | ||||
Balance at the end of the year |
$ | 126 | $ | 211 | ||||
Recent Accounting Standards and Pronouncements
In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-02, Consolidation (Topic
810) — Accounting and Reporting for Decreases in Ownership of a Subsidiary — A Scope
Clarification. ASU 2010-02 clarifies the scope of the decrease in ownership provisions of Subtopic
810 and expands disclosure requirements about deconsolidation of a subsidiary or de-recognition of
a group of assets. ASU 2010-02 is effective beginning in the first interim of annual reporting
period ending on or after December 15, 2009. The adoption of ASU 2010-02-02 did not have an impact
on the Company’s financial statements.
In October 2009, the FASB issued ASU 2009-013, Revenue Recognition (Topic 605) —
Multiple-Deliverable Revenue Arrangements. ASU 2009-13 revises certain accounting for revenue
arrangements with multiple deliverables. In particular, when vendor specific objective evidence or
third-party evidence for deliverables in an arrangement cannot be determined, ASU 2009-13 allows
use of a best estimate of the selling price to allocate the arrangement consideration among them.
ASU 2009-13 is effective for the first quarter of 2011, with early adoption permitted. The
adoption of ASU 2009-13 did not have an impact on the Company’s financial statements.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
In August 2009, the FASB issued ASU 2009-05, an amendment to Accounting Standards Codification
(“ASC”) 820-10, Fair Value Measurements and Disclosures — Overall for measuring liabilities at fair
value. ASU 2009-05 provides clarification that in certain circumstances in which a quoted price in
an active market for the identical liability is not available, a reporting entity is required to
measure fair value using certain other valuation techniques. The guidance provided in this ASU is
effective for the first reporting period beginning after issuance. This ASU had no impact on the
Company’s financial statements.
In June 2009, the FASB issued ASU 2009-01, Generally Accepted Accounting Principles (Topic 105)
which amends the FASB ASC for the issuance of FASB Statement No. 168 “The FASB Accounting Standards
Codification on the Hierarchy of Generally Accepted Accounting Principles”. This statement
establishes the FASB Accounting Standards Codification as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in the preparation of
financial statements in conformity with GAAP. This statement is effective for financial statements
issued for interim and annual periods ending after September 15, 2009.
3. Acquisition
On December 31, 2009, the Company acquired 100% of the members’ interest of SRC, a Tennessee
limited liability company, from TLC Investments, LLC (“TLC”), a Tennessee limited liability company
for a combination of cash, convertible debt, a contingent based earn-out, and shares of the
Company’s common stock. SRC is a lighting retro fit company and an energy systems and solutions
provider located in Nashville Tennessee. SRC provides the Company with the reputation and strong
brand recognition within in the existing public sector buildings market based upon its 20 years of
experience serving these markets. Given the significant existing contract backlog, pipeline of
potential future contracts, proven delivery performance and strong existing relationships with its
customer base that SRC brings to the Company; it will be able to readily penetrate these markets
with its unique and proven technology while simultaneously benefiting from the other natural
synergies that exist between our two businesses. This acquisition is the foundation by which the
Company will emerge into a national turnkey energy solutions provider.
The Company acquired approximately $4,700,000 in assets, including accounts receivable, fixed
assets, and other intangible assets. Of the purchase price, $672,000 was recorded on the Company’s
Consolidated Balance Sheet as goodwill. Purchase price consideration was paid in the form of
$1,500,000 of cash, 1,000,000 shares of Energy Focus common stock, and a $500,000 promissory note
convertible into 500,000 shares of the Company’s common stock. The transaction also included
performance-related contingent consideration including a 2.5% payout on the annual revenues of SRC
over 42 months, and a $500,000 fee if the market price of the Company’s common stock is not equal
to or greater than $2.00 per share for at least twenty trading days between June 30, 2010 and June
30, 2013.
The acquisition was accounted for as a stock purchase and, accordingly, was included in the
financial statements of the Company as of December 31, 2009. Due to the absence of activity
between the purchase date, December 31, 2009, and the date of our financial statements, there were
no results of operations to be reported in 2009. In addition, comparative pro forma information
was not presented as SRC was not a comparable stand-alone entity prior to the acquisition.
The purchase price was allocated based on the fair value of the assets acquired leading to the
purchase price allocation as follows (in thousands):
| Amortization | ||||||||
| Life | ||||||||
| Assets acquired: | (in years) | Amount | ||||||
Accounts receivable |
$ | 1,258 | ||||||
Property and equipment |
20 | |||||||
Goodwill |
n/a | 672 | ||||||
Intangible assets: |
||||||||
Tradename |
10 | 500 | ||||||
Client relationships |
5 | 2,250 | ||||||
Total purchase price |
$ | 4,700 | ||||||
51
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
The purchase price in excess of the fair value of the tangible assets acquired has been allocated
to intangible assets and goodwill. The Company engaged an independent third-party expert to assist
in the allocation of the purchase price to the various specific separately identifiable intangible
assets. The methods utilized by this third-party are based upon generally accepted accounting
valuation conventions used in acquisition-related valuations and include peer volatility analysis,
discounted cash flow analysis, annuity stream valuation and earnings based valuation techniques.
These conventions were reviewed and approved by management. Of the intangible assets acquired,
$672,000 was assigned to goodwill. None of the goodwill is deductible for tax purposes.
4. Discontinued Operations
As part of the Company’s strategy of evaluating the viability of its non-core businesses and its
aggressive pursuit of capital funding, the Company determined that its German subsidiary, LBM, was
not directly aligned with its objective to become a leading provider of turnkey, comprehensive
energy-efficient lighting systems. Therefore, in the third quarter of 2009, the Company committed
to a plan to divest itself of LBM.
In December 2009, the Company completed the sale of its ownership rights in LBM for $225,000
comprised of cash and a promissory note. Furthermore, the Company will receive an earn-out equal
to ten percent (10% ) of post-acquisition, pre-amortization, pre-tax profit for a period of 24
months commencing January, 2010. Excluding this earn-out, the Company recorded a loss on disposal
of subsidiary of $664,000. As part of this transaction, the purchaser assumed all rights to both
tangible and intangible assets as well as all of the liabilities of LBM.
The following table summarizes the components included in loss from discontinued operations within
the Company’s Consolidated Statement of Operations (amounts in thousands):
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Net sales |
$ | — | $ | 1,462 | $ | 2,787 | ||||||
Total expenses |
— | 2,663 | 4,562 | |||||||||
Loss before income taxes of
discontinued operations |
— | (1,201 | ) | (1,775 | ) | |||||||
Provision for income tax |
— | — | — | |||||||||
Loss from discontinued operations |
$ | — | $ | (1,201 | ) | $ | (1,775 | ) | ||||
5. 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 consists of the following (in thousands):
| December 31, | ||||||||
| 2010 | 2009 | |||||||
Raw materials |
$ | 2,164 | $ | 2,785 | ||||
Inventory reserve |
(972 | ) | (1,010 | ) | ||||
Finished goods |
1,351 | 1,995 | ||||||
Inventories, net |
$ | 2,543 | $ | 3,770 | ||||
52
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
6. Property and Equipment
Property and equipment is stated at cost and is depreciated using the straight-line method over the
estimated useful lives of the related assets and consists of the following (in thousands):
| December 31, | ||||||||
| 2010 | 2009 | |||||||
Equipment (useful life 3 — 15 years) |
$ | 6,328 | $ | 7,856 | ||||
Tooling (useful life 2 — 5 years) |
2,507 | 2,305 | ||||||
Furniture and fixtures (useful life 5 years) |
161 | 168 | ||||||
Computer software (useful life 3 years) |
373 | 476 | ||||||
Leasehold improvements (the shorter of useful
life or lease life) |
909 | 911 | ||||||
Construction in progress |
14 | — | ||||||
Property and equipment at cost |
10,292 | 11,716 | ||||||
Less: accumulated depreciation |
(7,846 | ) | (8,625 | ) | ||||
Property and equipment, net |
$ | 2,446 | $ | 3,091 | ||||
As a result of the Company’s efforts to reduce overhead costs and in conjunction with the
renegotiation efforts related to the lease at its Solon, Ohio office, which is set to expire on
April 30, 2011, the decision was made to relocate the remaining Solon, Ohio operations to its
facilities in Mexico and California. This decision would enable the Company to reduce the square
footage of the premises leased and strategically align the products-based segment of the Company
which is located in California. As a result of this strategic change, the Company performed an
evaluation of its remaining property, plant and equipment at the Solon office as of December 31,
2010, as this strategic change created a “triggering event” necessitating such a review. In
performing this review, the Company obtained quoted market prices for similar assets while also
considering market demand for these assets. As a result of this review, the Company recorded an
impairment charge of $156,000, which represented the difference between the fair value of the asset
group and its carrying value and is included in the Consolidated Statements of Operations under the
caption “Loss on Impairment”.
7. Goodwill and Intangible Assets
The following table summarizes information related to net carrying value of intangible assets (in
thousands):
| Amortization | December 31, | |||||||||||
| Life (in years) | 2010 | 2009 | ||||||||||
Goodwill |
n/a | $ | 672 | $ | 672 | |||||||
Definite-lived intangible assets: |
||||||||||||
Tradenames |
10 | 450 | 500 | |||||||||
Customer relationships |
5 | 1,227 | 2,250 | |||||||||
Total definite-lived intangible assets |
1,677 | 2,750 | ||||||||||
Total intangible assets, net |
$ | 2,349 | $ | 3,422 | ||||||||
Amortization expense for intangible assets subject to amortization was $1,073,000 for the year
ended December 31, 2010. There was no amortization expense in the years ended December 31, 2009
and 2008. The company amortizes Tradenames on a straight-line basis over the estimated useful
lives of the intangible assets. Customer relationships are amortized over their expected useful
lives on an accelerated method that approximates the cash flows associated with those
relationships. Based on the carrying value of amortized intangible assets the Company estimates
amortization expense for future years to be as follows (in thousands):
| Year ending December 31, | Amount | |||
2011 |
$ | 649 | ||
2012 |
420 | |||
2013 |
253 | |||
2014 |
105 | |||
2015 |
50 | |||
2016 and thereafter |
200 | |||
Total amortization expense |
$ | 1,677 | ||
53
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
As of December 31, 2010, the Company had $672,000 of goodwill recorded on its financial statements
related to the December 31, 2009 acquisition of SRC. The Company engaged an independent
third-party expert to assist in the allocation of the excess purchase price to the various specific
separately identifiable intangible assets, including goodwill, which is described more fully in
Note 3, Acquisition.
In 2008, as a result of our annual test for impairment required under Accounting Standards
Codification (“ASC”) Number 350, Intangibles—Goodwill and Others (“ASC 350”), and based on an
assessment of its present and future operations, we recognized a non-cash expense of $4,305,000 for
the impairment of our goodwill. Of this amount, $3,195,000 related to continuing operations and is
included in the Consolidated Statement of Operations under the caption “Loss on impairment”. The
goodwill was originally recorded at the time of the acquisitions of Fiber Optic International,
Crescent Lighting Limited, LBM, Unison Fiber Optic Lighting Systems, and Lightly Expressed Limited.
As of December 31, 2009, we had no remaining goodwill on our books related to these acquisitions.
8. Accrued Liabilities (Current):
Accrued liabilities consisted of the following (in thousands):
| December 31, | ||||||||
| 2010 | 2009 | |||||||
Accrued sales commissions and incentives |
$ | 566 | $ | 79 | ||||
Accrued warranty expense |
126 | 211 | ||||||
Accrued professional fees |
92 | 282 | ||||||
Accrued employee benefits |
331 | 376 | ||||||
Accrued interest |
53 | — | ||||||
Accrued rent |
230 | 29 | ||||||
Accrued taxes |
185 | 151 | ||||||
Accrued performance-related contingent
consideration |
525 | 420 | ||||||
Accrued subcontractor services |
102 | 128 | ||||||
Accrued other expenses |
148 | 178 | ||||||
Total accrued expenses |
$ | 2,358 | $ | 1,854 | ||||
9. Contracts in Progress
Costs and estimated earnings on contracts in progress for 2010 are summarized in the table below
(in thousands). There were no costs and estimated earnings on contracts for the year ending
December 31, 2009.
| December 31, | ||||
| 2010 | ||||
Costs incurred on uncompleted contracts |
$ | 9,912 | ||
Estimated earnings |
3,138 | |||
Total revenues |
13,050 | |||
Less: billings to date |
13,325 | |||
Total |
$ | (275 | ) | |
Balance sheet classification: |
||||
Costs in excess of billings on uncompleted contracts |
$ | 22 | ||
Billings in excess of costs on uncompleted contracts |
(297 | ) | ||
Total |
$ | (275 | ) | |
54
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
10. Long-Term Borrowings
Effective October 15, 2008, the Company entered into a one year credit agreement with Silicon
Valley Bank (“SVB”) incorporating a $4,000,000 revolving line of credit which replaced all existing
facilities including the United States term loans. This new line of credit included a $1,500,000
sub-limit for cash management products, letters of credit and foreign currency exchange. Under
this agreement, all domestic existing term loans and revolving credit lines were repaid and funded
by this new borrowing arrangement. Borrowings under this agreement were collateralized by the
Company’s assets, including intellectual property, and bore interest at the SVB Prime Rate plus 1%.
The Company was required to maintain 85% of its cash and cash equivalents in operating and
investment accounts with SVB and was also required to comply with certain covenant requirements,
including a tangible net worth covenant. The amount of borrowings available to the Company was the
lesser of $4,000,000 or the sum of up to 75% of eligible accounts receivable, as defined by the
agreement, and 50% of our cash balance in deposit at SVB, capped at $1,500,000.
At December 31, 2008, the Company was not in compliance with the tangible net worth covenant
requirement and such condition continued throughout 2009. As such, the Company entered into a
series of loan modification and forbearance agreements (“agreements”) with effective dates ranging
from January 31, 2009 through November 17, 2009. In conjunction with these agreements, the terms
of its credit facility were revised culminating in a reduction to its revolving line of credit to
$1,300,000 with a maturity date of October 15, 2009 and a change in the rates of interest charged
throughout 2009 in the range of SVB Prime Rate plus 1.5% to 3.00%. Under this revised credit
facility, the Company was required to maintain all of its cash and cash equivalents in operating
and investment accounts with SVB and its affiliates and was also required to continue compliance
with certain covenant
requirements, including the tangible net worth covenant. During the third quarter of 2009, SVB
informed the Company that it did not intend to renew the Company’s revolving line of credit when it
was set to expire on October 15, 2009. Ultimately, the Company was able to extend the maturity
date of this credit facility to December 31, 2009 at which time it liquidated the outstanding
balance of $253,000 on the line of credit.
On May 27, 2009, the Company entered into an unsecured Promissory Note (the “Note”) with The
Quercus Trust (“Quercus”) in the amount of $70,000. Under the terms of this Note, we are obligated
to pay Quercus the principal sum of the Note and interest accruing at a yearly rate of 1.00% in one
lump sum payment on or before June 1, 2109. The Company received these funds on June 9, 2009.
On December 29, 2009 and in conjunction with the acquisition of SRC, the Company entered into
Letter of Credit Agreements (“LOC’s”) with John Davenport, President of the Company, and with
Quercus, for $250,000 and $300,000, respectively. These LOC’s have terms of 24 months and bear
interest at a rate of 12.5% on the face amount. The LOC’s are collateralized by 15% and 18%,
respectively, of the capital stock of CLL which in turn is based on CLL’s net worth as of November
30, 2009 and are subordinated to the senior indebtedness of the Company and CLL. As an incentive
to enter into the LOC’s, the Company issued five-year, detached warrants to purchase 125,000 and
150,000 shares, respectively, of the Company’s common stock at an exercise price of $0.01 per
share. The Company’s shareholders approved the warrants at the Annual Meeting on June 16, 2010.
In conjunction with the acquisition of SRC, on December 31, 2009, the Company entered into an
agreement with TLC, whereby a Convertible Promissory Note (“Convertible Note”) was issued for the
principal amount of $500,000. This Convertible Note bears interest at the Wall Street Journal
Prime Rate plus two percent (2%), which along with the principal, is due and payable on June 30,
2013 (“maturity date”). Additionally, TLC has the right to convert the principal of the
Convertible Note, in whole, but not in part, into 500,000 shares of the Company’s common stock at
any time during the period commencing on June 30, 2010 and through the maturity date.
Additionally, as a provision to the Convertible Note, if the reported closing price of a share of
common stock of the Company is not equal to or greater than $2.00 for at least twenty (20) trading
days between June 30, 2010 and June 30, 2013, the Company shall pay TLC an additional fee of
$500,000 on the maturity date. The Company has accrued for this potential fee at the time of the
agreement.
On March 30, 2010, the Company entered into an agreement with EF Energy Partners LLC (“EF Energy”),
an Ohio limited liability company, under which it sold to EF Energy a Secured Subordinated
Promissory Note (“Subordinated Note”) for the principal amount of $1,150,000. The Company secured
the full amount of this financing with a pledge of its United States gross accounts receivable and
selected capital equipment. This Subordinated Note bears interest at a rate of 12.5%, which is
payable quarterly, in arrears, commencing September 30, 2010. The entire outstanding principal
balance of this Subordinated Note, together with all accrued interest thereon, is due and payable
on March 30, 2013. Additionally, the Company issued to the eight investors in EF Energy five-year,
detached penny warrants ($.01 per share) to purchase shares of its common stock at a rate of 0.2
warrants per dollar of financing, or 230,000 warrants, with an expiration date of March 30, 2015.
The Company and EF Energy Partners are not related.
55
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
Through the Company’s United Kingdom subsidiary, the Company maintains a British pounds
sterling-denominated bank overdraft facility with Lloyds Bank Plc, in the amount of $388,000, based
on the exchange rate at December 31, 2010. There were no borrowings against this facility as of
December 31, 2010 or December 31, 2009. The facility is renewed annually on January 1. The interest
rate on the facility was 2.75% at December 31, 2010 and 2009.
Future maturities of remaining borrowings are (in thousands):
| Long-Term | ||||
| Year ending December 31, | Borrowings | |||
2011 |
$ | 550 | ||
2012 |
— | |||
2013 |
1,650 | |||
2014 |
— | |||
2015 and thereafter |
70 | |||
Gross long-term borrowings |
2,270 | |||
Less: discounts on long-term borrowings |
(445 | ) | ||
Total commitment, net |
$ | 1,825 | ||
11. Commitments and Contingencies
The Company leases certain equipment, manufacturing, warehouse and office space under
non-cancelable operating leases expiring through 2017 under which it is responsible for related
maintenance, taxes, and insurance. Future minimum non-cancelable lease commitments are as follows
(in thousands):
| Minimum Lease | ||||
| Year ending December 31, | Commitments | |||
2011 |
$ | 801 | ||
2012 |
558 | |||
2013 |
560 | |||
2014 |
181 | |||
2015 — 2017 |
108 | |||
Total commitment |
$ | 2,208 | ||
These leases included certain escalation clauses; thus, rent expense was recorded on a
straight-line basis. Net rent expense for continuing operations was $820,000, $797,000, and
$841,000 for the years ended December 31, 2010, 2009, and 2008, respectively.
Beginning in 2006, a portion of our Solon facility has been subleased. In each of the years, 2010,
2009, and 2008, the gross rent for continuing operations was reduced by $71,000 of sublease
rentals.
During the first quarter of 2011, the Company and its landlord for the Solon, Ohio office, located
at 32000 Aurora Road, signed a non-binding term sheet that will resolve past due amounts under the
current lease agreement, set to expire April 30, 2011, as well as the basic terms by which the
Company and its landlord will enter into an extension of the current lease. The term sheet
includes a reduction of the gross rent to $25,000 for the period September 1, 2010 to April 30,
2011 (the “period”), an extension of the lease until April 30, 2014 with a Company option to extend
thereafter and a reduction in both the square footage of the premises and the gross rent per square
foot to be paid from May 1, 2011 to April 30, 2014. In conjunction with the signing of the lease
agreement term sheet and to satisfy past due amounts, the Company will deliver an unsecured
promissory note to the landlord in the amount of approximately $676,000 which will bear interest at
a rate of 10% annually commencing May 1, 2011 and have a maturity date of April 30, 2014. In
addition, the Company will make a payment of approximately $121,000 on April 30, 2011, not subject
to interest, and provided the Company makes gross rent payments during the period, the balance of
the note will be reduced to $355,000. The Company is making the gross rent payments for the period
as they become due. The future minimum lease commitments relating to this lease agreement have
been included in the above schedule.
56
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
In connection with the acquisition of SRC, the Company maintains a performance-related contingent
obligation related to the 2.5% payout based upon the annual revenues of the acquired business over
the 42 months commencing January 1, 2010, and a $500,000 fee if the market price of the Company’s
common stock is not equal to or greater than $2.00 per share for at least twenty trading days
between June 30, 2010 and June 30, 2013. The Company accrued for this potential fee at the time of
the agreement. For the year ending December 31, 2010, the Company has paid $519,000 relating to
the 2.5% payout.
12. Shareholders’ Equity
Warrants
On March 30, 2010, the Company entered into an agreement with EF Energy under which it sold to EF
Energy a Secured Subordinated Promissory Note for the principal amount of $1,150,000.
Additionally, the Company issued to the eight investors in EF Energy five-year, detachable penny
warrants to purchase shares of the Company’s common stock at a rate of 0.2 warrants per dollar of
financing, or 230,000 warrants, with an expiration date of March 30, 2015.
On March 17, 2010, the Company entered into a purchase agreement with Lincoln Park Capital Fund,
LLC (“LPC”), an Illinois limited liability company, whereby LPC agreed to purchase 350,000 shares
of the Company’s common stock together with a warrant to purchase an equivalent amount of shares,
subject to a registration statement being filed and declared effective with the SEC, for total
consideration of $375,000. The warrant has a term of five (5) years, an exercise price of $1.20,
and may not be exercised until 6 months after issuance. There were no penalties or liquidated
damages associated with the company’s registration obligations. LPC also agreed to purchase up to
an additional 3,650,000 shares of common stock, at the Company’s option, over a 25 month period.
The purchase price of these shares will be based on the market prices of the Company’s common stock
at the time of the sale without any fixed discount. The company may suspend purchases by LPC at
any time, and may also, in its sole discretion, accelerate or reduce purchases under certain
conditions. LPC cannot purchase shares of the Company’s common stock on any business day that the
price of the common stock is below $1.00. The common stock purchase agreement may be terminated by
the Company, at any time, at its discretion without any cost to it. The proceeds to be received by
the Company under the agreement will be used for working capital and general corporate purposes.
LPC has agreed not to engage in any shorting or hedging in any manner whatsoever. On July 14,
2010, the Company received a Notice of Effectiveness from the SEC relating to the Registration
Statement.
On December 31, 2009 the Company entered into LOC’s with John Davenport and with Quercus for
$250,000 and $300,000, respectively. As an incentive to enter into the LOC’s , the Company issued
five-year, detached warrants to purchase 125,000 and 150,000, respectively, of the Company’s common
stock at an exercise price of $.01 per share. The Company’s shareholders approved the warrants at
the Annual Meeting on June 16, 2010.
On December 31, 2009, the Company entered into a strategic alliance with Woodstone Energy LLC
(“Woodstone”), a commercial and industrial energy services company serving Fortune 100 companies
throughout the United States. This strategic alliance creates a path for contracts totaling not
less than $15,000,000 to be issued by Woodstone to SRC. In return for this Woodstone commitment,
the Company issued 600,000 warrants. 400,000 warrants are exercisable by Woodstone upon the
written commitment of $10,000,000 in specific secured contracts with the remaining 200,000 warrants
being exercisable by Woodstone upon the written commitment of an
additional $5,000,000 in specific secured contracts. These warrants will expire on December 31,
2014. The Company issued 3,566,440 warrants on March 14, 2008 as part of a private placement
equity financing. Those warrants are fully exercisable and will expire on March 14, 2013. Prior
to December 31, 2007, warrants were issued as part of acquisitions as part of stock-based
financings. There have been no warrants issued to employees, directors, or consultants for
compensation purposes. All warrants, except as noted otherwise, are fully vested and exercisable.
57
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
The activity relating to previously issued warrants is as follows:
| Warrants | Warrants | Fair | ||||||||||||||
| Outstanding | Outstanding | Warrants | Value of | |||||||||||||
| Commitments | Exercise Price | Exerciseable | Warrants | |||||||||||||
Balance, December
31, 2007 |
271,199 | $ | 4.30 — 4.50 | 271,199 | $ | 1,220 | ||||||||||
Warrants issued |
3,566,440 | $ | 3.08 | 3,566,440 | 10,985 | |||||||||||
Balance, December
31, 2008 |
3,837,639 | $ | 3.08 — 4.50 | 3,837,639 | $ | 12,205 | ||||||||||
Warrants issued |
600,000 | $ | 0.65 | — | — | |||||||||||
Balance, December
31, 2009 |
4,437,639 | $ | 0.01 — 4.50 | 3,837,639 | $ | 12,205 | ||||||||||
Warrants issued |
855,000 | $ | 0.01 — 1.20 | 855,000 | 474,700 | |||||||||||
Warrants exercised |
(1,730,062 | ) | $ | 0.01 | (1,730,062 | ) | (1,626,258 | ) | ||||||||
Warrants cancelled |
(271,199 | ) | $ | 4.50 | (271,199 | ) | — | |||||||||
Balance, December
31, 2010 |
3,291,378 | $ | 0.01 — 3.08 | 2,691,378 | $ | 494,900 | ||||||||||
In the Company’s subscription rights offering that expired on October 30, 2009, an investor
inadvertently purchased 1,000,000 shares of our common stock at $0.75 per share. The Company
agreed to facilitate the sale of these shares to another shareholder or investor or to purchase
them directly. After contacting selected shareholders and investors, the Company introduced the
investor to Quercus, the Company’s largest shareholder. David Gelbaum, a member of the Company’s
Board of Directors at the time of the transaction, and his spouse are co-trustees of Quercus. The
Company was informed on December 30, 2009, by the investor and Quercus that Quercus had agreed to
purchase those shares at $0.80 per share. At that time, the closing market price of a share of our
common stock was approximately $0.65 per share.
On March 14, 2008, in a private placement to nineteen investors of 3,184,321 shares of common stock
and an equal number of five-year warrants to purchase common stock, Quercus had acquired 1,560,062
warrants. To facilitate the purchase of the 1,000,000 shares discussed above, on December 30, 2009
the Company’s Board of Directors agreed with Quercus to reduce the exercise price of the warrants
issued to Quercus to $0.01 per share upon the execution of the purchase of all 1,000,000 shares
which was completed on February 20, 2010. The Company’s shareholders subsequently approved the
reduction in the exercise price of the above mentioned warrants at its Annual Meeting on June 16,
2010.
2004 Stock Incentive Plan
On May 19, 2004, the shareholders approved the 2004 Stock Incentive Plan (the “2004 Plan”). The
stated purpose of the 2004 Plan is to promote the long-term success of the Company and the creation
of stockholder value by (a) encouraging employees, outside directors, and consultants to focus on
critical long-range objectives; (b) encouraging the attraction and retention of employees, outside
directors, and consultants with exceptional qualifications; and (c) linking employees, outside
directors, and consultants directly to stockholder interests through increased stock ownership. The
2004 Plan seeks to achieve this purpose by providing for awards in the form of restricted shares,
stock units, options (which may constitute incentive stock options or non-statutory stock options),
or stock appreciation rights. An aggregate of 500,000 shares of the Company’s common stock was
reserved for issuance under the 2004 Plan on May 19, 2004. On June 15, 2006, the shareholders
reserved an additional 500,000 shares of the Company’s common stock for issuance under the 2004
Plan.
On May 6, 2008, an individual was granted an incentive stock option under the 2004 Plan to purchase
100,000 shares of our common stock at an exercise price of $2.00 per share. At that time, only
59,000 shares were available for grant under the plan. In order to provide enough shares to cover
the grants, the individual was asked to surrender 141,000 shares under an option granted to him on
June 28, 2005 at an exercise price of $9.60 per share. This modification of options required the
Company to recognize additional stock-based compensation of $88,000 over the remaining vesting
period of the June 28, 2005 option.
2008 Stock Incentive Plan
On September 30, 2008, the Company’s shareholders approved its 2008 Incentive Stock Plan. Under
the Plan, the maximum aggregate number of stock options awarded shall not exceed 1,000,000 shares,
plus any shares remaining available for grant under existing plans. Under existing plans, only a
limited number of shares remain available for grant. At the 2010 Annual Meeting of Shareholders
held on June 16, 2010, the shareholders approved an increase in the total number of shares of
common stock that may be awarded under the 2008 Incentive Stock Plan from 1,000,000 shares to
3,000,000 shares.
58
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
Options outstanding under all plans have a contractual life between five and ten years, and vesting
periods between one and four years. Option activity under all plans comprised (in thousands,
except per share data):
| Weighted | ||||||||||||
| Options | Number of | Average | ||||||||||
| Available | Options | Exercise Price | ||||||||||
| for Grant | Outstanding | Per Share | ||||||||||
Balance, December
31, 2007 |
67 | 1,276 | $ | 7.07 | ||||||||
Granted |
(477 | ) | 477 | 1.91 | ||||||||
Cancelled |
238 | (238 | ) | 8.22 | ||||||||
Exercised |
— | (23 | ) | 3.27 | ||||||||
Additional shares
reserved |
1,000 | — | — | |||||||||
Balance, December
31, 2008 |
828 | 1,492 | $ | 5.29 | ||||||||
Granted |
(1,146 | ) | 1,146 | 0.70 | ||||||||
Cancelled |
520 | (520 | ) | 3.35 | ||||||||
Exercised |
— | (397 | ) | 0.66 | ||||||||
Balance, December
31, 2009 |
202 | 1,721 | $ | 3.63 | ||||||||
Granted |
(1,115 | ) | 1,115 | 1.08 | ||||||||
Cancelled |
994 | (994 | ) | 1.68 | ||||||||
Exercised |
— | (15 | ) | 0.60 | ||||||||
Restricted Shares
Granted |
(602 | ) | — | — | ||||||||
Additional shares
reserved |
2,000 | — | — | |||||||||
Balance, December
31, 2010 |
1,479 | 1,827 | $ | 3.36 | ||||||||
At December 31, 2010, options to purchase 1,124,000 shares of common stock were exercisable at a
weighted-average fair value of $2.28 with an intrinsic value of $47,000. At December 31, 2010,
options to purchase 1,827,000 shares were outstanding, with a weighted-average fair value of $1.90
with an intrinsic value of $109,000.
At December 31, 2009, options to purchase 922,000 shares of common stock were exercisable at a
weighted-average fair value of $2.81 with an intrinsic value of $2,000. At December 31, 2009,
options to purchase 1,721,000 shares were outstanding, with a weighted-average fair value of $2.00
with an intrinsic value of $4,000.
| OPTIONS OUTSTANDING | OPTIONS CURRENTLY EXERCISABLE | |||||||||||||||||||||||
| Weighted | Weighted | |||||||||||||||||||||||
| Average | Weighted | Average | Weighted | |||||||||||||||||||||
| Range of | Number | Remaining | Average | Remaining | Average | |||||||||||||||||||
| Exercise | of Shares | Contactual | Exercise | Number | Contactual | Exercise | ||||||||||||||||||
| Prices | Outstanding | Life | Price | Exercisable | Life | Price | ||||||||||||||||||
| (in thousands) | (in years) | (in thousands) | (in years) | |||||||||||||||||||||
$0.60 — $4.80 |
1,275 | 7.7 | $ | 1.58 | 662 | 6.7 | $ | 1.94 | ||||||||||||||||
$4.91 — $7.19 |
329 | 6.2 | $ | 6.39 | 278 | 6.2 | $ | 6.45 | ||||||||||||||||
$7.23 — $9.60 |
174 | 4.7 | $ | 8.48 | 135 | 4.5 | $ | 7.81 | ||||||||||||||||
$10.64 — $12.00 |
49 | 4.5 | $ | 11.14 | 49 | 4.5 | $ | 11.14 | ||||||||||||||||
| 1,827 | 1,124 | |||||||||||||||||||||||
1994 Employee Stock Purchase Plan
A total of 150,000 shares of common stock had been reserved for issuance under the 1994 Employee
Stock Purchase Plan. The plan permits eligible employees to purchase common stock through payroll
deductions at a price equal to the lower of 85% of the fair market value of the Company’s common
stock at the beginning or end of the offering period. Employees may end their participation at any
time during the offering period, and participation ends automatically on termination of employment
with the Company. On June 15, 2006, the shareholders reserved an additional 50,000 shares of the
Company’s common stock for issuance under the 1994 Employee Stock Purchase Plan. At December 31,
2010, 2009, and 2008, 134,000 shares, 114,000 shares, and 103,000 shares had been issued under this
plan since inception, respectively.
59
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
Shareholder Rights Plan
On September 12, 2001, the Board of Directors declared a dividend distribution of one “Right” for
each outstanding share of common stock of the Company to shareholders of record at the close of
business on September 26, 2002. One Right also will attach to each share of common stock issued by
the Company subsequent to such date and prior to the distribution date defined below. With certain
exceptions, each Right, when exercisable, entitles the registered holder to purchase from the
Company one one-thousandth of a share of a new series of preferred stock, designated as Series A
Participating Preferred Stock, at a price of $30.00 per one one-thousandth of a share, subject to
adjustment. The Rights were distributed as a non-taxable dividend and expire ten years from the
date of the Rights Plan. In general, the Rights will become exercisable and trade independently
from the common stock on a distribution date that will occur on the earlier of (i) the public
announcement of the acquisition by a person or group of 15% or more of the common stock or (ii) 10
days after commencement of a tender or exchange offer for the common stock that would result in the
acquisition of 15% or more of the common stock. Upon the occurrence of certain other events
related to changes in ownership of the common stock, each holder of a Right would be entitled to
purchase shares of common stock, or an acquiring corporation’s common stock, having a market value
of twice the exercise price. Under certain conditions, the Rights may be redeemed at $0.001 per
Right by the Board of Directors.
The description and terms of the Rights are set forth in a Rights Agreement dated as of September
20, 2002, between the Company and Mellon Investor Services LLC, as rights agent. On March 12,
2008, as part of a private placement of shares of common stock and warrants to a number of existing
shareholders, with the largest portion being purchased by Quercus, the Company and Mellon Investor
Services LLC amended the agreement to increase the 15% ceiling noted above to 20% for Quercus and
persons who are beneficial owners through Quercus, without triggering the rights under the
agreement.
60
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
13. Income Taxes
The Company adopted the provisions of ASC Topic 740, Accounting for Uncertainty in Income Taxes on
January 1, 2007. ASC Topic 740 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to be taken
in a tax return. Guidance also is provided on derecognition, classification, interest and
penalties, accounting in interim periods, and disclosure and transition. Based on the Company’s
evaluation, there are no significant uncertain tax positions requiring recognition in the Company’s
financial statements. There was no effect on financial condition or results of operations as a
result of implementing ASC Topic 740 to all tax positions for which the statute of limitation
remained open, and the Company did not have any unrecognized tax benefits. At December 31, 2010,
there have been no changes to the liability for uncertain tax positions, and there are no
unrecognized tax benefits.
The Company files income tax returns in the United States federal jurisdiction, as well as in
various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to
United States federal, state, and local, or non-United States income tax examinations by tax
authorities for years before 2007.
The Company’s policy is to reflect interest expense related to uncertain income tax positions as
part of income tax expense, when and if they become applicable.
The components of the benefit from (provision for) income taxes are as follows (in thousands):
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Current |
||||||||||||
Federal |
$ | — | $ | — | $ | — | ||||||
Foreign |
— | — | — | |||||||||
State |
(10 | ) | (3 | ) | (6 | ) | ||||||
| (10 | ) | (3 | ) | (6 | ) | |||||||
Deferred |
||||||||||||
Federal |
— | — | 238 | |||||||||
Foreign |
4 | (4 | ) | 4 | ||||||||
State |
— | — | 14 | |||||||||
| 4 | (4 | ) | 256 | |||||||||
(Provision for) benefit from income
taxes |
$ | (6 | ) | $ | (7 | ) | $ | 250 | ||||
The following table shows the geographic components of pretax income (loss) from continuing
operations between United States and foreign subsidiaries (in thousands):
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
United States |
$ | (8,410 | ) | $ | (9,902 | ) | $ | (13,039 | ) | |||
Foreign subsidiaries |
(101 | ) | 95 | 116 | ||||||||
Pretax loss from continuing operations |
$ | (8,511 | ) | $ | (9,807 | ) | $ | (12,923 | ) | |||
The principal items accounting for the difference between income taxes computed at the United
States statutory rate and the benefit from (provision for) income taxes reflected in the statements
of operations are as follows:
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
United States statutory rate |
34.0 | % | 34.0 | % | 34.0 | % | ||||||
State taxes (net of federal tax
benefit) |
(0.1 | %) | — | % | — | % | ||||||
Valuation allowance |
(33.7 | %) | (35.7 | %) | (31.1 | %) | ||||||
Other |
(0.3 | %) | 1.6 | % | (1.2 | %) | ||||||
| (0.1 | %) | (0.1 | %) | 1.7 | % | |||||||
61
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
The tax effects of temporary differences that give rise to significant portions of the deferred tax
assets are as follows (in thousands):
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Allowance for doubtful accounts |
$ | 87 | $ | 75 | $ | 92 | ||||||
Accrued expenses and other reserves |
2,146 | 1,936 | 1,905 | |||||||||
Tax credits, deferred R&D, and other |
899 | 633 | 833 | |||||||||
Net operating loss |
22,088 | 19,576 | 15,807 | |||||||||
Valuation allowance |
(25,206 | ) | (22,209 | ) | (18,622 | ) | ||||||
Total deferred tax asset |
14 | 11 | 15 | |||||||||
Deferred tax liabilities associated
with indefinite-lived intangibles |
— | — | — | |||||||||
Net total deferred taxes |
$ | 14 | $ | 11 | $ | 15 | ||||||
Since the Company believes that it is more likely than not that the benefit from net operating loss
carry-forwards will not be realized, the Company has provided a full valuation allowance against
its United States deferred tax assets. The net deferred tax assets for 2010 amounted to $14,000 and
were for the Company’s United Kingdom subsidiary, which has been profitable in prior years. The
Company had no net deferred tax liabilities at December 31, 2010 and at December 31, 2009. There
were no Federal tax expenses for the United States operations in 2010, as any expected benefits
were offset by an increase in the valuation allowance.
As of December 31, 2010, the Company has a net operating loss carry-forward of approximately
$60,700,000 for federal, state and local income tax purposes. If not utilized, these carry-forwards
will begin to expire in 2021 for federal and has begun to expire for state and local purposes.
62
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
14. Segments and Geographic Information
The Company has two reportable segments: product-based sales featuring pool lighting and general
commercial lighting, each of which markets and sells lighting systems, and solutions-based sales
providing turnkey, high-quality, energy-efficient lighting application alternatives. The Company’s
products are sold through a combination of direct sales employees, independent sales
representatives, and various distributors in different geographic markets throughout the world.
The Company’s solutions-based sales are designed to enhance total value by positively impacting
customers’ profitability, the environment, and the communities it serves. These solutions are sold
through our direct sales employees as well as our SRC subsidiary, and include not only the
Company’s proprietary energy-efficient lighting solutions, but also sourced lighting systems,
energy audits, and service agreements.
The following summarizes the Company’s reportable segment data for periods indicated (in
thousands):
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Solutions: |
||||||||||||
Net sales |
$ | 19,763 | $ | — | $ | — | ||||||
Cost of sales |
16,332 | — | — | |||||||||
Gross profit |
3,431 | — | — | |||||||||
Operating expenses: |
||||||||||||
Sales and marketing |
1,407 | — | — | |||||||||
General and administrative |
1,377 | — | — | |||||||||
Total operating expenses |
2,784 | — | — | |||||||||
Segment income |
$ | 647 | $ | — | $ | — | ||||||
Products: |
||||||||||||
Net sales |
$ | 15,366 | $ | 12,489 | $ | 20,032 | ||||||
Cost of sales |
12,394 | 10,449 | 15,926 | |||||||||
Gross profit |
2,972 | 2,040 | 4,106 | |||||||||
Operating expenses: |
||||||||||||
Research and development |
(202 | ) | 319 | 237 | ||||||||
Sales and marketing |
4,796 | 5,843 | 8,032 | |||||||||
General and administrative |
293 | 546 | 473 | |||||||||
Restructuring |
26 | 125 | — | |||||||||
Loss on impairment |
156 | — | 3,195 | |||||||||
Total operating expenses |
5,069 | 6,833 | 11,937 | |||||||||
Segment loss |
$ | (2,097 | ) | $ | (4,793 | ) | $ | (7,831 | ) | |||
Reconciliation of segment income (loss) to net loss: |
||||||||||||
Segment income (loss): |
||||||||||||
Solutions |
$ | 647 | $ | — | $ | — | ||||||
Products |
(2,097 | ) | (4,793 | ) | (7,831 | ) | ||||||
Total segment loss |
(1,450 | ) | (4,793 | ) | (7,831 | ) | ||||||
Operating expenses: |
||||||||||||
Sales and marketing |
212 | 201 | 49 | |||||||||
General and administrative |
4,445 | 4,787 | 4,970 | |||||||||
Valuation of equity instruments |
1,812 | — | — | |||||||||
Total operating expenses |
6,469 | 4,988 | 5,019 | |||||||||
Other expense |
(592 | ) | (26 | ) | (73 | ) | ||||||
Net loss from continuing operations before income taxes |
(8,511 | ) | (9,807 | ) | (12,923 | ) | ||||||
(Provision for) benefit from income taxes |
(6 | ) | (7 | ) | 250 | |||||||
Net loss from continuing operations |
(8,517 | ) | (9,814 | ) | (12,673 | ) | ||||||
Loss from discontinued operations |
— | (1,201 | ) | (1,775 | ) | |||||||
Net loss |
$ | (8,517 | ) | $ | (11,015 | ) | $ | (14,448 | ) | |||
63
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
The following table provides additional business unit gross profitability detail for the Company’s
Products-based business segment for the periods indicated (in thousands):
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
Products segment net sales: |
||||||||||||
Pool and commercial products |
$ | 12,265 | $ | 11,561 | $ | 18,362 | ||||||
Government products/R&D services |
3,101 | 928 | 1,670 | |||||||||
Total products segment net sales |
15,366 | 12,489 | 20,032 | |||||||||
Products segment cost of sales: |
||||||||||||
Pool and commercial products |
7,988 | 7,248 | 11,739 | |||||||||
Government products/R&D services |
3,104 | 838 | 643 | |||||||||
Unallocated manufacturing overhead |
1,302 | 2,363 | 3,544 | |||||||||
Total products segment cost of sales |
12,394 | 10,449 | 15,926 | |||||||||
Products segment gross profit: |
||||||||||||
Pool and commercial products |
4,277 | 4,313 | 6,623 | |||||||||
Government products/R&D services |
(3 | ) | 90 | 1,027 | ||||||||
Unallocated manufacturing overhead |
(1,302 | ) | (2,363 | ) | (3,544 | ) | ||||||
Total products segment gross profit |
$ | 2,972 | $ | 2,040 | $ | 4,106 | ||||||
Unallocated manufacturing overhead is defined as follows:
| 1) | costs associated with the operation and shut down of the Solon manufacturing facility which has been relocated to the Mexico facility; and | ||
| 2) | specific expenses which are not attributable to a specific business unit but rather are calculated on the total products business segment. Expenses include Solon manufacturing facility rent, Solon manufacturing depreciation, inventory reserves and accruals and Solon manufacturing support payroll and severance. |
A geographic summary of net sales from continuing operations is as follows (in thousands):
| Years ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
United States Domestic |
$ | 31,314 | $ | 7,930 | $ | 12,902 | ||||||
International |
3,815 | 4,559 | 7,130 | |||||||||
Net sales |
$ | 35,129 | $ | 12,489 | $ | 20,032 | ||||||
A geographic summary of long-lived assets, which consists of property and equipment, goodwill, and intangible
assets, is as follows (in thousands):
| December 31, | ||||||||
| 2010 | 2009 | |||||||
United States |
$ | 4,676 | $ | 6,306 | ||||
International |
119 | 207 | ||||||
Long-lived assets, net |
$ | 4,795 | $ | 6,513 | ||||
64
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
15. Employee Retirement Plan
The Company maintains a 401(k) profit-sharing plan (the “Plan”) for its employees who meet certain
qualifications. The Plan allows eligible employees to defer up to 15% of their earnings, not to
exceed the statutory amount per year on a pre-tax basis, through contributions to the Plan. The
Plan provides for employer contributions at the discretion of the Board of Directors; however, no
such contributions were made in 2010, 2009, or 2008.
16. Restructuring
The Company recognized restructuring expenses of $26,000 and $125,000 for 2010 and 2009,
respectively. For 2010, the restructuring expense was associated with relocating our distribution
facility from Solon, Ohio to our new distribution facility in Pleasanton, California. For 2009,
the restructuring expense was associated with relocating our manufacturing equipment and operations
from Solon, Ohio to our contract manufacturing facility near Tijuana, Mexico. The Company incurred
no restructuring expense during 2008.
17. Related Party Transactions
On February 3, 2006, the Company had entered into a consulting agreement with David Ruckert, a
former member of its Board of Directors. This agreement was terminated on June 30, 2007.
Additionally, Mr. Ruckert was granted options to purchase 32,000 shares of the Company’s common
stock. Stock expense incurred under Accounting Standards Codification Topic Number 718,
Compensation — Stock Compensation, relating to these options was $15,000 for the year ending
December 31, 2010 and $30,000 for the years ending December 31, 2009 and December 31, 2008.
On October 19, 2007, the Company entered into a management agreement with Barry Greenwald, former
General Manager of its Pool Lighting Division. Under 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, and $77,000 was paid on March 14, 2008. Upon Mr. Greenwald’s termination
on January 17, 2008, the balance of $155,000 would have been paid in 36 monthly installments
commencing on January 1, 2009, subject to certain conditions being met by Mr. Greenwald. Mr.
Greenwald failed to meet these certain conditions and subsequently the accrued liability of
$155,000 was reversed during the twelve months ending December 31, 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 then current Energy Focus, Inc. shareholders,
including four then current members of the Company’s 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. Also among the
investors was Quercus, whose trustees include David Gelbaum, who was a member of the Company’s
Board of Directors in 2009.
On May 27, 2009, the Company entered into a Promissory Note with Quercus in the amount of $70,000.
David Gelbaum, a trustee of Quercus, was a member of the Company’s Board of Directors at the time
of the transaction. Please refer to Note 10, Long-Term Borrowings, for a discussion of the terms
of the Promissory Note.
In November, 2009, the Company received an additional $3,344,000 in equity financing, net of
expenses by selling 4,813,000 shares of common stock in a registered offering. The investment was
made by numerous current Energy Focus shareholders, including two then current members of the
Company’s Board of Directors. The investment was made under the Company’s registration statement
for a $3,500,000 common stock subscription rights offering. Under the terms of the rights
offering, the Company distributed, at no charge to its shareholders, transferable rights to
purchase up to $3.5 million of the Company’s common stock at the established subscription price per
share of $0.75, which was set by the Company’s Board of Directors. At the time the offering began,
the Company distributed to each shareholder one transferable right for each share of common stock
owned by the shareholder. Each right entitled the holder to purchase one share of the Company’s
common stock, par value $0.0001 per share, subject to a maximum of 4,600,000 shares to be issued in
the offering. Shareholders were entitled to subscribe for shares not subscribed for by other
shareholders. Among the investors were Philip E. Wolfson, a member of the Company’s Board of
Directors at the time of the transaction, and who invested approximately $8,000 in the aggregate.
Also among the investors was Quercus, whose trustees include David Gelbaum, who was a member of the
Company’s Board of Directors at the time of the offering.
65
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
In the Company’s subscription rights offering discussed above, an investor inadvertently purchased
1,000,000 shares of our common stock at $0.75 per share. The Company agreed to facilitate the sale
of these shares to another shareholder or investor or to purchase them directly. A purchase of
those shares by the Company would have severely depleted its cash-on-hand and working capital.
After contacting selected shareholders and investors, the Company introduced the investor to
Quercus, the Company’s largest shareholder. The Company was informed on December 30, 2009, by the
investor and Quercus that Quercus had agreed to purchase those shares at $0.80 per share. At that
time, the closing market price of a share of the Company’s common stock was approximately $0.65 per
share. To facilitate the purchase of the 1,000,000 shares by Quercus, on December 30, 2009, the
Company’s Board of Directors agreed with Quercus to reduce the exercise price of 1,560,062 warrants
issued to Quercus, in the March 2008 private placement, to $0.01 per share upon the completion of
the purchase of all 1,000,000 shares in 2010. The purchase of the 1,000,000 shares by Quercus was
completed on February 20, 2010. The Company incurred a non-cash charge of $1,421,000 for the
quarter ended March 31, 2010 related to the valuation of the warrants to purchase shares of the
Company’s common stock acquired by Quercus in the Company’s March 2008 equity financing. On April
28, 2010, Quercus exercised the 2008 warrants. The Company’s shareholders approved the reduction
in exercise price of the above mentioned warrants at its Annual Meeting on June 16, 2010.
On December 29, 2009, and in conjunction with the acquisition of SRC, the Company entered into
Letter of Credit Agreements (“LOC’s”) with John Davenport, President of the Company, and with
Quercus, for $250,000 and $300,000, respectively. Please refer to Note 10, Long-Term Borrowings,
for discussion of the terms of these LOC’s.
The Vice President of SRC is a minority owner in TLC Investments, LLC (“TLC”), a Tennessee limited
liability company, as well as in Woodstone Energy, LLC (“Woodstone”), a Tennessee limited liability
company, both of which are located in Nashville, Tennessee.
SRC renders lighting design and lighting solution services to these related parties within the
scope of their ordinary business activities. Conversely, these related parties, operating as
electrical subcontractors, provide installation support services to SRC as part of their normal
business. For the year ended December 31, 2010, related party sales totaled $7,012,000. Of these
sales, the Company had $1,188,000 of receivables, including retainage, at year end. Subcontractor
installation support services provided by these related parties was $14,569,000, of which
$4,498,000 was payable at December 31, 2010.
With the acquisition of SRC, the Company entered into an agreement with the seller, TLC, whereby,
SRC would be guaranteed a profit percentage of 25% on certain projects which were begun prior to
the acquisition or were out for bid at the time the acquisition occurred on December 31, 2009.
During 2010, a significant portion of our projects were subject to this guarantee.
In conjunction with the acquisition of SRC on December 31, 2009, the Company entered into an
agreement with TLC whereby a Convertible Promissory Note (“Convertible Note”) was issued for the
principal amount of $500,000. This Convertible Note bears interest at a rate of the Wall Street
Journal Prime Rate plus two percent (2%), which along with the principal, is due and payable on
June 30, 2013. Additionally, TLC has the right to convert the principal of the Convertible Note,
in whole, into 500,000 shares of the Company’s common stock at any time during the period
commencing on June 30, 2010 and ending on the maturity date. Additionally, as a provision to the
Convertible Note, if the reported closing price of a share of the Company’s common stock shall not
be equal to or greater than $2.00 for at least twenty (20) trading days between June 30, 2010 and
June 30, 2013, the Company shall pay TLC an additional fee of $500,000 on the maturity date.
On December 31, 2009, the Company issued to Woodstone warrants to purchase up to 600,000 shares of
the Company’s common stock at an exercise price of $0.65 per share, and with a term ending on
December 31, 2014. The warrants become exercisable only if SRC receives from Woodstone firm
contracts or purchase orders for at least $10,000,000 by June 30, 2013. The warrants vest in two
tranches: 400,000 shares when contracts or purchase orders between SRC and Woodstone reach
$10,000,000 and an additional 200,000 shares when contracts or purchase orders between SRC and
Woodstone reach an additional $5,000,000. As of December 31, 2010, no warrants related to this
issuance have vested.
The Company, in the agreement for the acquisition of SRC, provided for payment of a management fee
to TLC for overhead expenses in support of up to $20,000,000 in project billings for 2010 on those
projects which TLC provided installation support services. The management fee totaled $1,232,000,
payable in equal monthly installments, and began January 31, 2010 and ended on December 31, 2010.
Furthermore, an additional 8% management fee is payable for project billings above $20,000,000 in
fiscal year 2010 and for fiscal years after December 31, 2010, where TLC provides installation
support services on projects that were pending at the date of acquisition of SRC. For the fiscal
year ending December 31, 2010, the Company did not exceed the $20,000,000 threshold and incurred
only the $1,232,000 of management fees as stipulated in the agreement.
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ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2010, 2009, and 2008
18. Legal Matters
On January 29, 2010, a competitor and former supplier filed a complaint against the Company in the
Court of Chancery of the State of Delaware, alleging that the Company has misused proprietary trade
secrets, breached a contract, and engaged in deceptive trade practices relating to one of our
lighting products. The complaint seeks injunctive relief and damages. The Company has answered
the complaint and filed a counterclaim for breach of contract. The parties currently are involved
in discovery. The Company strongly denies any impropriety, believes that the complaint is without
merit, and has been vigorously defending itself. The Company has reached an oral settlement of
this case and is negotiating a written settlement agreement. The defense of this lawsuit has not
had, and in the opinion of management, the implementation of the settlement will not have, an
adverse effect on the Company’s financial condition, cash flows, or results of operations.
19. Subsequent Events
During the first three months of 2011, the Company sold and issued to Lincoln Park Capital Fund,
LLC (“LPC”), and LPC purchased a total of 412,000 shares of the Company’s common stock for a total
consideration of approximately $407,000. Although the Company retains the right, in its sole
discretion, to terminate the agreement without fee, penalty or cost, the Company plans to continue
to utilize this financing activity for general corporate and working capital purposes and pursuit
of its business strategy. On June 29, 2010, the Company registered with the SEC for the resale of
the shares issued and that we may issue in the future under the terms of the SRC, EF Energy and LPC
transactions.
Supplementary Financial Information to Item 8
The following table sets forth our selected unaudited financial information for the eight quarters
in the period ended December 31, 2010. This information has been prepared on the same basis as the
audited financial statements and, in the opinion of management, contains all adjustments necessary
for a fair presentation thereof.
Any variations from year-to-date amounts reported in this table are a result of rounding.
QUARTERLY FINANCIAL DATA (UNAUDITED)
(amounts in thousands, except per share amounts)
(amounts in thousands, except per share amounts)
| 2010 Quarters Ended | Dec. 31 | Sep. 30 | Jun. 30 | Mar. 31 | ||||||||||||
Net sales from continuing operations |
$ | 8,765 | $ | 9,049 | $ | 8,958 | $ | 8,357 | ||||||||
Net loss from continuing operations |
(1,572 | ) | (1,563 | ) | (1,812 | ) | (3,570 | ) | ||||||||
Net income/(loss) from discontinued
operations |
— | — | — | — | ||||||||||||
Net loss per share: |
||||||||||||||||
Basic |
$ | (0.06 | ) | $ | (0.06 | ) | $ | (0.08 | ) | $ | (0.17 | ) | ||||
Diluted |
$ | (0.06 | ) | $ | (0.06 | ) | $ | (0.08 | ) | $ | (0.17 | ) | ||||
| 2009 Quarters Ended | Dec. 31 | Sep. 30 | Jun. 30 | Mar. 31 | ||||||||||||
Net sales from continuing operations |
$ | 3,618 | $ | 3,023 | $ | 3,325 | $ | 2,523 | ||||||||
Net loss from continuing operations |
(2,406 | ) | (2,687 | ) | (1,982 | ) | (2,739 | ) | ||||||||
Net (loss)/income from discontinued
operations |
(602 | ) | 69 | (366 | ) | (302 | ) | |||||||||
Net loss per share: |
||||||||||||||||
Basic |
$ | (0.17 | ) | $ | (0.17 | ) | $ | (0.16 | ) | $ | (0.20 | ) | ||||
Diluted |
$ | (0.17 | ) | $ | (0.17 | ) | $ | (0.16 | ) | $ | (0.20 | ) | ||||
67
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Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. 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 interim Chief Accounting
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 that 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. Any design of disclosure
controls and procedures also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this Report on Form 10-K, our
Chief Executive Officer and interim Chief Accounting Officer have concluded that our disclosure
controls and procedures were effective.
(b) Changes in Internal Control over Financial Reporting
In October 2010, we replaced our Manager of Financial Reporting. The new manager has over eight
years of financial reporting, analysis, and budgeting experience with nationally-recognized,
multi-billion dollar, publicly-traded companies and approximately two years of experience working
with internationally-recognized independent public accounting firms. There were no other changes
in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange
Act). Further, there were no other items identified in connection with our internal evaluations
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Management’s Report on Internal Controls over Financial Reporting
The management of Energy Focus, Inc. is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of management, including our Chief Executive
Officer and interim Chief Accounting Officer, we conducted an evaluation of the effectiveness of
internal control over financial reporting based upon criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework
(“COSO framework”).
An effective internal control system, no matter how well designed, has inherent limitations,
including the possibility of human error and circumvention or overriding of controls; therefore, it
can provide only reasonable assurance with respect to reliable financial reporting. Furthermore,
effectiveness of an internal control system in future periods cannot be guaranteed, because the
design of any system of internal controls is based in part upon assumptions about the likelihood of
future events. There can be no assurance that any control design will succeed in achieving its
stated goals under all potential future conditions. Over time, certain controls may become
inadequate because of changes in business conditions, or the degree of compliance with policies and
procedures may deteriorate. As such, misstatements due to error or fraud may occur and not be
detected.
Based upon our evaluation under the COSO framework, management concluded that internal control over
financial reporting was effective as of December 31, 2010.
68
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Attestation Report of Independent Registered Public Accounting Firm
This annual report does not include an attestation report of our independent registered public
accounting firm regarding internal control over financial reporting. Management’s report was not
subject to attestation by our independent public accounting firm pursuant to the rules of the
Securities and Exchange Commission that permit us to provide only management’s report in this
annual report.
Item 9B. Other Information
None.
69
Table of Contents
PART III
Item 10. Directors, Executive Officers, and Corporate Governance
Directors
The information regarding our directors is set forth under the caption “Election of Directors” in
our Proxy Statement for our 2011 Annual Meeting of Stockholders (the “Proxy Statement”) and is
incorporated herein by reference.
There were no material changes to the procedures by which security holders may recommend nominees
to our Board of Directors during 2010.
Executive Officers
The information regarding our executive officers is set forth under the caption entitled “Executive
Officers of the Registrant” following Item 4, in Part I, of this report and is incorporated herein
by reference.
Section 16(a) Beneficial Ownership Reporting Compliance
The information regarding compliance with Section 16 of the Securities Exchange Act of 1934 is set
forth under the caption entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in our
Proxy Statement and is incorporated herein by reference.
Audit Committee
The information regarding the Audit Committee of our Board of Directors and the information
regarding “Audit Committee Financial Experts” are set forth under the caption entitled “Committees
of the Board” in our Proxy Statement and is incorporated herein by reference.
Code of Ethics
We have adopted a Code of Ethics and Business Conduct, which applies to all of our directors,
officers, and employees. Our Code of Ethics and Business Conduct is on our website at
http://www.efoi.com. Any person may receive a copy without charge by writing to us at Energy
Focus, Inc., 32000 Aurora Road, Solon, Ohio 44139, Attention: Secretary.
We intend to disclose on our website any amendment to, or waiver from, a provision of our Code of
Ethics and Business Conduct that applies to our directors and executive officers, including our
principal executive officer, principal financial officer, principal accounting officer or
controller, or any persons performing similar functions, and that is required to be publicly
disclosed pursuant to the rules of the Securities and Exchange Commission.
Item 11. Executive Compensation
The information required by this item is incorporated herein by reference from the information
provided in the section captioned “Executive Compensation and Other Information” in our Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information about security ownership of certain beneficial owners and management and related
stockholder matters required by this item is incorporated herein by reference from the information
provided in the sections captioned “Security Ownership of Principal Shareholders and Management”
and “Equity Compensation Plan Information” in our Proxy Statement.
The information regarding securities authorized for issuance under our equity compensation plans
required by this item is incorporated herein by reference from the information provided in the
section captioned “Equity Compensation Plan Information” in our Proxy Statement.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information regarding certain relationships and related transactions and director independence
required by this item is incorporated herein by reference to the information in our Proxy Statement
under the captions “Certain Transactions” and “Director Independence.”
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Item 14. Principal Accountant Fees and Services
The information regarding principal accountant fees and services and the pre-approval policies and
procedures required by this item is incorporated herein by reference from the information contained
in our Proxy Statement under the captions “Ratification of Appointment of Independent Registered
Public Accountants—Principal Accountant Fees and Services” and “Pre-Approval Policies and
Procedures.”
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PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) (1) Financial Statements
The financial statements required by this Item 15(a)(1) are set forth in Item 8.
| (2) | Financial Statement Schedules |
Schedule II—Valuation and Qualifying Accounts is set forth below. All other schedules
are omitted either because they are not applicable or the required information is shown in
the financial statements or the notes.
SCHEDULE II
ENERGY FOCUS, INC.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
ENERGY FOCUS, INC.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
| Balance at | Charges to | Balance | ||||||||||||||
| Beginning | Revenue/ | at End | ||||||||||||||
| Description | of Year | Expenses | Deductions | of Year | ||||||||||||
Year ended December 31, 2010 |
||||||||||||||||
Allowance for doubtful
accounts and returns |
$ | 395 | $ | 291 | $ | 240 | $ | 446 | ||||||||
Valuation allowance for
deferred tax assets |
22,209 | 2,997 | — | 25,206 | ||||||||||||
Year ended December 31, 2009 |
||||||||||||||||
Allowance for doubtful
accounts and returns |
486 | 73 | 164 | 395 | ||||||||||||
Valuation allowance for
deferred tax assets |
18,622 | 3,587 | — | 22,209 | ||||||||||||
Year ended December 31, 2008 |
||||||||||||||||
Allowance for doubtful
accounts and returns |
848 | 245 | 607 | 486 | ||||||||||||
Valuation allowance for
deferred tax assets |
14,054 | 4,568 | — | 18,622 | ||||||||||||
72
Table of Contents
| (3) | Exhibits |
| Exhibit | ||
| Number | Description of Documents | |
|
2.1
|
Agreement and Plan of Merger between Fiberstars, Inc., a California corporation, and Fiberstars, Inc., a Delaware corporation (incorporated by reference to Appendix C to the Registrant’s Definitive Proxy Statement filed on May 1, 2006). | |
|
3.1
|
Certificate of Incorporation of the Registrant (incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement filed on May 1, 2006). | |
|
3.2
|
Certificate of Designation of Series A Participating Preferred Stock of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on November 27, 2006). | |
|
3.3
|
Bylaws of the Registrant (incorporated by reference to Appendix C to the Registrant’s Current Report on Form 8-K filed on November 27, 2006). | |
|
3.4
|
Certificate of Ownership and Merger, Merging Energy Focus, Inc., a Delaware corporation, into Fiberstars, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 10, 2007). | |
|
4.1
|
Form of Warrant for the purchase of shares of common stock (incorporated by reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K filed on June 19, 2003). | |
|
4.2
|
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on November 27, 2006) | |
|
4.3
|
Rights Agreement dated as of October 25, 2006 between the Registrant and Mellon Investor Services, LLC, as rights agent (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on November 27, 2006). | |
|
4.4
|
Form of Warrant for the purchase of shares of common stock (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on November 27, 2006). | |
|
4.5
|
Form of Warrant for the purchase of shares of common stock (incorporated by reference to Exhibit 1.2 to the Registrant’s Current Report on Form 8-K filed on March 19, 2008). | |
|
4.6
|
Amendment No. 1 to Rights Agreement between the Registrant and Mellon Investment Services, LLC, as Rights Agent, dated as of March 12, 2008 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on March 19, 2009). | |
|
4.7
|
Amendment No. 2 to the Rights Agreement between the Registrant and Mellon Investment Services, LLC, as Rights Agent, dated as of December 31, 2009 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on March 3, 2010). | |
|
4.8
|
Common Stock Purchase Warrant No. 2009SRCW-01 for the purchase of 600,000 shares of common stock dated December 31, 2009 in the name of Woodstone Energy, LLC (incorporated by reference to Exhibit 4.8 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
4.9
|
Form of Common Stock Purchase Warrant for the purchase of shares of common stock dated as of December 29, 2009 (incorporated by reference to Exhibit 4.9 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
4.10
|
Form of Common Stock Purchase Warrant No. 2010LPCW-01 for the purchase of 350,000 shares of common stock (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on March 19, 2010). | |
|
4.11
|
Form of Common Stock Purchase Warrant for the purchase of shares of common stock dated as of March 30, 2010 (incorporated by reference to Exhibit 4.11 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.1†
|
1994 Employee Stock Purchase Plan, amended as of December 7, 2000 (incorporated by reference to Exhibit 99.3 to the Registrant’s Registration Statement on Form S-8 (Commission File No. 333-52042) filed on December 18, 2000). | |
|
10.2
|
Form of Agreement between the Registrant and independent sales representatives (incorporated by reference to Exhibit 10.20 to the Registrant’s Registration Statement on Form SB-2 (Commission File No. 33-79116-LA)). | |
|
10.3*
|
Distribution Agreement dated March 21, 1995 between the Registrant and Mitsubishi International Corporation (incorporated by reference to Exhibit 10.18 to the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 1994). | |
|
10.4*
|
Three -Year Supply Agreement dated November 30, 2000 between the Registrant and Mitsubishi International Corporation (incorporated by reference to Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K405 filed on April 2, 2001). | |
|
10.5
|
Securities Purchase Agreement dated June 17, 2003 among the Registrant and the investors named therein (incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed on June 19, 2003). | |
|
10.6†
|
Form of Indemnification Agreement for officers of the Registrant (incorporated by reference to Exhibit 10.42 to the Registrant’s Annual Report on Form 10-K filed on March 30, 2004). | |
|
10.7
|
Form of Indemnification Agreement for directors of the Registrant (incorporated by reference to Exhibit 10.44 to the Registrant’s Annual Report on Form 10-K filed on March 30, 2004). | |
|
10.8
|
Production Share Agreement dated October 9, 2003 among the Registrant, North American Production Sharing, Inc., and Industrias Unidas de B.C., S.A. de C.V. (incorporated by reference to Exhibit 10.45 to the Registrant’s Annual Report on Form 10-K filed on March 30, 2004). |
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Table of Contents
| Exhibit | ||
| Number | Description of Documents | |
|
10.9†
|
Consulting Agreement effective as of December 15, 2004 between the Registrant and Gensler Architecture, Design, and Planning, P.C. (incorporated by reference to Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2006). | |
|
10.10†
|
Consulting Agreement effective as of December 15, 2004 between the Registrant and Jeffrey H. Brite (incorporated by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2006). | |
|
10.11
|
Loan and Security Agreement between Silicon Valley Bank and the Registrant dated August 15, 2005 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 18, 2005). | |
|
10.12†
|
Employment Agreement between the Registrant and John M. Davenport dated July 1, 2005 (incorporated by reference from Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2005). | |
|
10.13†
|
Severance Agreement between the Registrant and David N. Ruckert dated September 16, 2005 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2005). | |
|
10.14*
|
Fiberstars Development Agreement between the Registrant and Advanced Lighting Technologies, Inc. dated September 19, 2005 (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2005) | |
|
10.15*
|
ADLT Development Agreement between the Registrant and Advanced Lighting Technologies, Inc. dated September 19, 2005 (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2005). | |
|
10.16*
|
Equipment Purchase and Supply Agreement between the Registrant and Deposition Sciences, Inc. dated September 19, 2005 (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2005). | |
|
10.17
|
Cross-License Agreement between the Registrant and Advanced Lighting Technologies, Inc. dated September 19, 2005 (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2005). | |
|
10.18
|
Master Services Agreement between the Registrant and Advanced Lighting Technologies, Inc. dated September 19, 2005 (incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Qfiled on November 14, 2005). | |
|
10.19
|
First Amendment to Production Share Agreement, effective as of August 17, 2005, among the Registrant, North American Production Sharing, Inc., and Industrias Unidas de B.C., S.A. de C.V. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 25, 2005). | |
|
10.20
|
Sublease between Venture Lighting International, Inc. and the Registrant dated as of November 11, 2005 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 17, 2005). | |
|
10.21
|
Amended and Restated Loan and Security Agreement between the Registrant and Silicon Valley Bank dated December 30, 2005 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on January 6, 2006). | |
|
10.22†
|
Consulting Agreement between the Registrant and David N. Ruckert dated as of February 3, 2006 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 15, 2006). | |
|
10.23*
|
Equipment Purchase and Product Supply Agreement entered into as of May 25, 2006 between the Registrant and Deposition Sciences, Inc. (incorporated by reference to Exhibit 10.1 to Amendment No. 2 to the Registrant’s Quarterly Report on Form 10-Q filed on March 6, 2009). | |
|
10.24
|
Modification to Sublease between the Registrant and Keystone Ruby, LLC. (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 11, 2006). | |
|
10.25
|
Amendment No. 1 to Amended and Restated Loan and Security Agreement between the Registrant and Silicon Valley Bank dated September 25, 2006 (incorporated by reference from Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2006). | |
|
10.26†
|
First Amendment to Consulting Agreement between the Registrant and David N. Ruckert dated as of February 3, 2007 (incorporated by reference to Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K filed on March 16, 2007). | |
|
10.27†
|
Form of Indemnification Agreement for directors and officers of the Registrant (incorporated by reference to Exhibit 10.31 of the Registrant’s Annual Report on Form 10-K filed on March 16, 2007). | |
|
10.28
|
Amendment No. 4 to Amended and Restated Loan and Security Agreement between Silicon Valley Bank and the Registrant dated as of October 1, 2007 (incorporated by reference to Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K filed on March 17, 2008). | |
|
10.29
|
Amendment No. 5 to Amended and Restated Loan and Security Agreement between Silicon Valley Bank and Registrant dated as of January 29, 2008 (incorporated by reference to Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K filed on March 17, 2008). | |
|
10.30†
|
Management Agreement between Barry R. Greenwald and the Registrant dated as of October 19, 2007 (incorporated by reference to Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K filed on March 17, 2008). | |
|
10.31
|
Form of Securities Purchase Agreement dated as of March 14, 2008 (incorporated by reference to Exhibit 1.1 to the Registrant’s Current Report on Form 8-K filed on March 19, 2008). | |
|
10.32
|
Second Amended and Restated Loan and Security Agreement between the Registrant and Silicon Valley Bank dated as of October 15, 2008 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on November 7, 2008). |
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| Exhibit | ||
| Number | Description of Documents | |
|
10.33†
|
1994 Stock Option Plan, amended as of May 24, 2000 (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (Commission File No. 333-52042) filed on December 18, 2000). | |
|
10.34†
|
1994 Director’s Stock Option Plan, amended as of May 12, 1999 (incorporated by reference to Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 (Commission File No. 333-52042) filed on December 18, 2000). | |
|
10.35†
|
2004 Stock Incentive Plan (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (Commission File No. 333-122-686) filed on February 10, 2005). | |
|
10.36†
|
2008 Incentive Stock Plan (incorporated by reference to Appendix D to the Registrant’s Definitive Proxy Statement filed on August 8, 2008). | |
|
10.37
|
Fourth Loan Modification and Forbearance Agreement to Second Amended and Restated Loan and Security Agreement between Registrant and Silicon Valley Bank dated as of August 25, 2009 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 13, 2009). | |
|
10.38
|
Fifth Loan Modification and Forbearance Agreement to Second Amended and Restated Loan and Security Agreement between Registrant and Silicon Valley Bank dated as of September 13, 2009 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on November 13, 2009). | |
|
10.39
|
Sixth Loan Modification and Forbearance Agreement to Second Amended and Restated Loan and Security Agreement between Registrant and Silicon Valley Bank dated as of October 5, 2009 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on November 13, 2009). | |
|
10.40
|
Member Interest Purchase Agreement among the Registrant and TLC Investments, LLC, Jamie Hall, and Robert E. Wilson dated December 31, 2009 (incorporated by reference to Exhibit 10.40 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.41
|
Convertible Promissory Note from the Registrant to TLC Investments, LLC, Jamie Hall, and Robert E. Wilson dated December 31, 2009 (incorporated by reference to Exhibit 10.41 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.42
|
Warrant Acquisition Agreement between the Registrant and Woodstone Engery, LLC dated December 31, 2009 (incorporated by reference to Exhibit 10.42 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.43
|
Form of Bonding Support Agreement dated as of December 29, 2009 (incorporated by reference to Exhibit 10.43 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.44
|
Form of Warrant Acquisition Agreement for bonding support dated as of December 29, 2009 (incorporated by reference to Exhibit 10.44 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.45†
|
Form of Agreement of Confidentiality and Non-Competition for employees including officers (incorporated by reference to Exhibit 10.45 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.46
|
Purchase Agreement between the Registrant and Lincoln Park Capital Fund, LLC dated March 17, 2010 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 19, 2010). | |
|
10.47
|
Registration Rights Agreement between the Registrant and Lincoln Park Capital Fund, LLC dated March 17, 2010 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 19, 2010). | |
|
10.48
|
Note Purchase Agreement between the Registrant and EF Energy Partners LLC dated March 30, 2010 (incorporated by reference to Exhibit 10.48 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.49
|
Secured Subordinated Promissory Note from the Registrant to EF Energy Partners LLC dated March 30, 2010 (incorporated by reference to Exhibit 10.49 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.50
|
Warrant Acquisition Agreement among the Registrant and the investors named therein dated March 30, 2010 (incorporated by reference to Exhibit 10.50 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.51
|
Form of Management Continuity Agreement for Executive Officers (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 13, 2010). | |
|
10.52
|
2008 Incentive Stock Plan (as amended November 19, 2008 and February 25, 2010) (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 filed on September 8, 2010). | |
|
10.53
|
Form of Notice of Stock Option Grant for 2008 Stock Incentive Plan (incorporated by reference to Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 filed on September 8, 2010). | |
|
21.1
|
Subsidiaries of the Registrant (filed with this Report). | |
|
23.1
|
Consent of Plante & Moran, PLLC, Independent Registered Public Accounting Firm (filed with this Report). | |
|
23.2
|
Consent of Grant Thornton, LLP, Independent Registered Public Accounting Firm (filed with this Report). | |
|
24.1
|
Power of Attorney (filed with this Report). | |
|
31.1
|
Rule 13a-14(a) Certification by Chief Executive Officer (filed with this Report). | |
|
31.2
|
Rule 13a-14(a) Certification by Chief Financial Officer (filed with this Report). | |
|
32.1
|
Section 1350 Certification of Chief Executive Officer (filed with this Report). | |
|
32.2
|
Section 1350 Certification of Chief Financial Officer (filed with this Report). |
| * | Confidential treatment has been granted with respect to certain portions of this agreement. | |
| † | Management contract or compensatory plan or arrangement. |
75
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereto duly
authorized.
| ENERGY FOCUS, INC. (Registrant) |
||||
| By: | /s/ JOSEPH G. KAVESKI | |||
| Joseph G. Kaveski
Chief Executive Officer Date: March 31, 2011 |
||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed
below by the following persons on behalf of the Registrant and in the capacities indicated on March
31, 2011.
| Signature | Title | |
/s/ JOSEPH G. KAVESKI
|
Chief Executive Officer and Director | |
Joseph G. Kaveski
|
(Principal Executive Officer) | |
/s/ JOHN M. DAVENPORT
|
President and Director | |
John M. Davenport |
||
/s/ FRANK LAMANNA
|
interim Chief Accounting Officer | |
Frank Lamanna
|
(principal accounting officer) | |
*/s/ R. LOUIS SCHNEEBERGER
|
Director | |
R. Louis Schneeberger |
||
*/s/ J. JAMES FINNERTY
|
Director | |
J. James Finnerty | ||
*/s/ MICHAEL A. KASPER
|
Director | |
Michael A. Kasper |
||
*/s/ PAUL VON PAUMGARTTEN
|
Lead Director | |
Paul von Paumgartten |
||
*/s/ DAVID ANTHONY
|
Director | |
David Anthony |
| * | The undersigned, by signing his name, signs this Report on March 31, 2011 on behalf of the above officers and directors pursuant to a Power of Attorney executed by them and filed as an exhibit to this Report. |
By: /s/ JOSEPH G. KAVESKI
Joseph G. Kaveski, Attorney-in-Fact.
76
Table of Contents
EXHIBIT INDEX
| Exhibit Number | Description of Documents | |
|
2.1
|
Agreement and Plan of Merger between Fiberstars, Inc., a California corporation, and Fiberstars, Inc., a Delaware corporation (incorporated by reference to Appendix C to the Registrant’s Definitive Proxy Statement filed on May 1, 2006). | |
|
3.1
|
Certificate of Incorporation of the Registrant (incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement filed on May 1, 2006). | |
|
3.2
|
Certificate of Designation of Series A Participating Preferred Stock of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on November 27, 2006). | |
|
3.3
|
Bylaws of the Registrant (incorporated by reference to Appendix C to the Registrant’s Current Report on Form 8-K filed on November 27, 2006). | |
|
3.4
|
Certificate of Ownership and Merger, Merging Energy Focus, Inc., a Delaware corporation, into Fiberstars, Inc., a Delaware corporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 10, 2007). | |
|
4.1
|
Form of Warrant for the purchase of shares of common stock (incorporated by reference to Exhibit 99.3 to the Registrant’s Current Report on Form 8-K filed on June 19, 2003). | |
|
4.2
|
Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on November 27, 2006) | |
|
4.3
|
Rights Agreement dated as of October 25, 2006 between the Registrant and Mellon Investor Services, LLC, as rights agent (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on November 27, 2006). | |
|
4.4
|
Form of Warrant for the purchase of shares of common stock (incorporated by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on November 27, 2006). | |
|
4.5
|
Form of Warrant for the purchase of shares of common stock (incorporated by reference to Exhibit 1.2 to the Registrant’s Current Report on Form 8-K filed on March 19, 2008). | |
|
4.6
|
Amendment No. 1 to Rights Agreement between the Registrant and Mellon Investment Services, LLC, as Rights Agent, dated as of March 12, 2008 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on March 19, 2009). | |
|
4.7
|
Amendment No. 2 to the Rights Agreement between the Registrant and Mellon Investment Services, LLC, as Rights Agent, dated as of December 31, 2009 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on March 3, 2010). | |
|
4.8
|
Common Stock Purchase Warrant No. 2009SRCW-01 for the purchase of 600,000 shares of common stock dated December 31, 2009 in the name of Woodstone Energy, LLC (incorporated by reference to Exhibit 4.8 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
4.9
|
Form of Common Stock Purchase Warrant for the purchase of shares of common stock dated as of December 29, 2009 (incorporated by reference to Exhibit 4.9 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
4.10
|
Form of Common Stock Purchase Warrant No. 2010LPCW-01 for the purchase of 350,000 shares of common stock (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on March 19, 2010). | |
|
4.11
|
Form of Common Stock Purchase Warrant for the purchase of shares of common stock dated as of March 30, 2010 (incorporated by reference to Exhibit 4.11 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.1†
|
1994 Employee Stock Purchase Plan, amended as of December 7, 2000 (incorporated by reference to Exhibit 99.3 to the Registrant’s Registration Statement on Form S-8 (Commission File No. 333-52042) filed on December 18, 2000). | |
|
10.2
|
Form of Agreement between the Registrant and independent sales representatives (incorporated by reference to Exhibit 10.20 to the Registrant’s Registration Statement on Form SB-2 (Commission File No. 33-79116-LA)). | |
|
10.3*
|
Distribution Agreement dated March 21, 1995 between the Registrant and Mitsubishi International Corporation (incorporated by reference to Exhibit 10.18 to the Registrant’s Annual Report on Form 10-KSB for the year ended December 31, 1994). | |
|
10.4*
|
Three -Year Supply Agreement dated November 30, 2000 between the Registrant and Mitsubishi International Corporation (incorporated by reference to Exhibit 10.30 to the Registrant’s Annual Report on Form 10-K405 filed on April 2, 2001). | |
|
10.5
|
Securities Purchase Agreement dated June 17, 2003 among the Registrant and the investors named therein (incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed on June 19, 2003). | |
|
10.6†
|
Form of Indemnification Agreement for officers of the Registrant (incorporated by reference to Exhibit 10.42 to the Registrant’s Annual Report on Form 10-K filed on March 30, 2004). | |
|
10.7
|
Form of Indemnification Agreement for directors of the Registrant (incorporated by reference to Exhibit 10.44 to the Registrant’s Annual Report on Form 10-K filed on March 30, 2004). | |
|
10.8
|
Production Share Agreement dated October 9, 2003 among the Registrant, North American Production Sharing, Inc., and Industrias Unidas de B.C., S.A. de C.V. (incorporated by reference to Exhibit 10.45 to the Registrant’s Annual Report on Form 10-K filed on March 30, 2004). |
77
Table of Contents
| Exhibit Number | Description of Documents | |
|
10.9†
|
Consulting Agreement effective as of December 15, 2004 between the Registrant and Gensler Architecture, Design, and Planning, P.C. (incorporated by reference to Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2006). | |
|
10.10†
|
Consulting Agreement effective as of December 15, 2004 between the Registrant and Jeffrey H. Brite (incorporated by reference to Exhibit 10.29 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2006). | |
|
10.11
|
Loan and Security Agreement between Silicon Valley Bank and the Registrant dated August 15, 2005 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on August 18, 2005). | |
|
10.12†
|
Employment Agreement between the Registrant and John M. Davenport dated July 1, 2005 (incorporated by reference from Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2005). | |
|
10.13†
|
Severance Agreement between the Registrant and David N. Ruckert dated September 16, 2005 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2005). | |
|
10.14*
|
Fiberstars Development Agreement between the Registrant and Advanced Lighting Technologies, Inc. dated September 19, 2005 (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2005) | |
|
10.15*
|
ADLT Development Agreement between the Registrant and Advanced Lighting Technologies, Inc. dated September 19, 2005 (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2005). | |
|
10.16*
|
Equipment Purchase and Supply Agreement between the Registrant and Deposition Sciences, Inc. dated September 19, 2005 (incorporated by reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2005). | |
|
10.17
|
Cross-License Agreement between the Registrant and Advanced Lighting Technologies, Inc. dated September 19, 2005 (incorporated by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2005). | |
|
10.18
|
Master Services Agreement between the Registrant and Advanced Lighting Technologies, Inc. dated September 19, 2005 (incorporated by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Qfiled on November 14, 2005). | |
|
10.19
|
First Amendment to Production Share Agreement, effective as of August 17, 2005, among the Registrant, North American Production Sharing, Inc., and Industrias Unidas de B.C., S.A. de C.V. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 25, 2005). | |
|
10.20
|
Sublease between Venture Lighting International, Inc. and the Registrant dated as of November 11, 2005 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 17, 2005). | |
|
10.21
|
Amended and Restated Loan and Security Agreement between the Registrant and Silicon Valley Bank dated December 30, 2005 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on January 6, 2006). | |
|
10.22†
|
Consulting Agreement between the Registrant and David N. Ruckert dated as of February 3, 2006 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 15, 2006). | |
|
10.23*
|
Equipment Purchase and Product Supply Agreement entered into as of May 25, 2006 between the Registrant and Deposition Sciences, Inc. (incorporated by reference to Exhibit 10.1 to Amendment No. 2 to the Registrant’s Quarterly Report on Form 10-Q filed on March 6, 2009). | |
|
10.24
|
Modification to Sublease between the Registrant and Keystone Ruby, LLC. (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 11, 2006). | |
|
10.25
|
Amendment No. 1 to Amended and Restated Loan and Security Agreement between the Registrant and Silicon Valley Bank dated September 25, 2006 (incorporated by reference from Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 14, 2006). | |
|
10.26†
|
First Amendment to Consulting Agreement between the Registrant and David N. Ruckert dated as of February 3, 2007 (incorporated by reference to Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K filed on March 16, 2007). | |
|
10.27†
|
Form of Indemnification Agreement for directors and officers of the Registrant (incorporated by reference to Exhibit 10.31 of the Registrant’s Annual Report on Form 10-K filed on March 16, 2007). | |
|
10.28
|
Amendment No. 4 to Amended and Restated Loan and Security Agreement between Silicon Valley Bank and the Registrant dated as of October 1, 2007 (incorporated by reference to Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K filed on March 17, 2008). | |
|
10.29
|
Amendment No. 5 to Amended and Restated Loan and Security Agreement between Silicon Valley Bank and Registrant dated as of January 29, 2008 (incorporated by reference to Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K filed on March 17, 2008). | |
|
10.30†
|
Management Agreement between Barry R. Greenwald and the Registrant dated as of October 19, 2007 (incorporated by reference to Exhibit 10.39 to the Registrant’s Annual Report on Form 10-K filed on March 17, 2008). | |
|
10.31
|
Form of Securities Purchase Agreement dated as of March 14, 2008 (incorporated by reference to Exhibit 1.1 to the Registrant’s Current Report on Form 8-K filed on March 19, 2008). | |
|
10.32
|
Second Amended and Restated Loan and Security Agreement between the Registrant and Silicon Valley Bank dated as of October 15, 2008 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on November 7, 2008). |
78
Table of Contents
| Exhibit Number | Description of Documents | |
|
10.33†
|
1994 Stock Option Plan, amended as of May 24, 2000 (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (Commission File No. 333-52042) filed on December 18, 2000). | |
|
10.34†
|
1994 Director’s Stock Option Plan, amended as of May 12, 1999 (incorporated by reference to Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 (Commission File No. 333-52042) filed on December 18, 2000). | |
|
10.35†
|
2004 Stock Incentive Plan (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (Commission File No. 333-122-686) filed on February 10, 2005). | |
|
10.36†
|
2008 Incentive Stock Plan (incorporated by reference to Appendix D to the Registrant’s Definitive Proxy Statement filed on August 8, 2008). | |
|
10.37
|
Fourth Loan Modification and Forbearance Agreement to Second Amended and Restated Loan and Security Agreement between Registrant and Silicon Valley Bank dated as of August 25, 2009 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 13, 2009). | |
|
10.38
|
Fifth Loan Modification and Forbearance Agreement to Second Amended and Restated Loan and Security Agreement between Registrant and Silicon Valley Bank dated as of September 13, 2009 (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on November 13, 2009). | |
|
10.39
|
Sixth Loan Modification and Forbearance Agreement to Second Amended and Restated Loan and Security Agreement between Registrant and Silicon Valley Bank dated as of October 5, 2009 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on November 13, 2009). | |
|
10.40
|
Member Interest Purchase Agreement among the Registrant and TLC Investments, LLC, Jamie Hall, and Robert E. Wilson dated December 31, 2009 (incorporated by reference to Exhibit 10.40 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.41
|
Convertible Promissory Note from the Registrant to TLC Investments, LLC, Jamie Hall, and Robert E. Wilson dated December 31, 2009 (incorporated by reference to Exhibit 10.41 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.42
|
Warrant Acquisition Agreement between the Registrant and Woodstone Engery, LLC dated December 31, 2009 (incorporated by reference to Exhibit 10.42 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.43
|
Form of Bonding Support Agreement dated as of December 29, 2009 (incorporated by reference to Exhibit 10.43 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.44
|
Form of Warrant Acquisition Agreement for bonding support dated as of December 29, 2009 (incorporated by reference to Exhibit 10.44 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.45†
|
Form of Agreement of Confidentiality and Non-Competition for employees including officers (incorporated by reference to Exhibit 10.45 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.46
|
Purchase Agreement between the Registrant and Lincoln Park Capital Fund, LLC dated March 17, 2010 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 19, 2010). | |
|
10.47
|
Registration Rights Agreement between the Registrant and Lincoln Park Capital Fund, LLC dated March 17, 2010 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 19, 2010). | |
|
10.48
|
Note Purchase Agreement between the Registrant and EF Energy Partners LLC dated March 30, 2010 (incorporated by reference to Exhibit 10.48 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.49
|
Secured Subordinated Promissory Note from the Registrant to EF Energy Partners LLC dated March 30, 2010 (incorporated by reference to Exhibit 10.49 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.50
|
Warrant Acquisition Agreement among the Registrant and the investors named therein dated March 30, 2010 (incorporated by reference to Exhibit 10.50 to the Registrant’s Annual Report on Form 10-K filed on March 31, 2010). | |
|
10.51
|
Form of Management Continuity Agreement for Executive Officers (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 13, 2010). | |
|
10.52
|
2008 Incentive Stock Plan (as amended November 19, 2008 and February 25, 2010) (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 filed on September 8, 2010). | |
|
10.53
|
Form of Notice of Stock Option Grant for 2008 Stock Incentive Plan (incorporated by reference to Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 filed on September 8, 2010). | |
|
21.1
|
Subsidiaries of the Registrant (filed with this Report). | |
|
23.1
|
Consent of Plante & Moran, PLLC, Independent Registered Public Accounting Firm (filed with this Report). | |
|
23.2
|
Consent of Grant Thornton, LLP, Independent Registered Public Accounting Firm (filed with this Report). | |
|
24.1
|
Power of Attorney (filed with this Report). | |
|
31.1
|
Rule 13a-14(a) Certification by Chief Executive Officer (filed with this Report). | |
|
31.2
|
Rule 13a-14(a) Certification by Chief Financial Officer (filed with this Report). | |
|
32.1
|
Section 1350 Certification of Chief Executive Officer (filed with this Report). | |
|
32.2
|
Section 1350 Certification of Chief Financial Officer (filed with this Report). |
| * | Confidential treatment has been granted with respect to certain portions of this agreement. | |
| † | Management contract or compensatory plan or arrangement. |
79