TCP International Holdings Ltd. - FORM 10-Q - May 8, 2015

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EXCEL - IDEA: XBRL DOCUMENT - TCP International Holdings Ltd.Financial_Report.xls
EX-10.2 - EXHIBIT 10.2 - TCP International Holdings Ltd.exhibit102.htm
EX-10.1 - EXHIBIT 10.1 - TCP International Holdings Ltd.exhibit101.htm
EX-31.2 - EXHIBIT 31.2 - TCP International Holdings Ltd.exhibit31233115.htm
EX-31.1 - EXHIBIT 31.1 - TCP International Holdings Ltd.exhibit31133115.htm
EX-32.1 - EXHIBIT 32.1 - TCP International Holdings Ltd.exhibit32133115.htm
EX-32.2 - EXHIBIT 32.2 - TCP International Holdings Ltd.exhibit32233115.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2015
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-36521
TCP INTERNATIONAL HOLDINGS LTD.
(Exact name of registrant as specified in its charter)
Switzerland
 
Not Applicable
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Alte Steinhauserstrasse 1
6330 Cham, Switzerland
(Address of principal executive offices)
(330) 995-6111
(Registrant’s telephone number, including area code)
  
 
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data 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  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated filer
 
¨
  
Accelerated filer
 
¨
 
 
 
 
 
 
 
Non-Accelerated filer
 
x  (Do not check if a smaller reporting company)
  
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  ¨    No  ý
As of May 3, 2015, 28,046,304 shares of common stock were outstanding.


TCP INTERNATIONAL HOLDINGS LTD.
10-Q Table of Contents


PART I—FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements.
TCP INTERNATIONAL HOLDINGS LTD. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
(Amounts in thousands, except per share data)
 
March 31,
2015
 
December 31,
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
57,967

 
$
31,354

Restricted cash
6,885

 
7,367

Accounts receivable, less allowance for doubtful accounts of $1,158 and $1,428 at March 31, 2015 and December 31, 2014, respectively
62,154

 
95,089

Inventories
126,801

 
122,342

Prepaids and other current assets
15,663

 
28,217

Deferred income taxes
14,152

 
17,557

Total current assets
283,622

 
301,926

Property, plant and equipment, net of accumulated depreciation of $43,569 and $41,826 at March 31, 2015 and December 31, 2014, respectively
70,925

 
72,037

Land rights, net
4,085

 
4,126

Deferred costs
16,360

 
16,145

Intangible assets, net of accumulated amortization of $1,069 and $1,009 at March 31, 2015 and December 31, 2014, respectively
2,127

 
2,345

Deferred income taxes, long-term
7,360

 
7,094

Other long-term assets
1,629

 
1,737

Total assets
$
386,108

 
$
405,410

Liabilities and Shareholders’ Equity
 
 
 
Current liabilities:
 
 
 
Short-term loans and current portion of long-term debt
$
85,003

 
$
74,637

Accounts payable
117,763

 
129,194

Accrued expenses and other current liabilities
58,285

 
77,826

Total current liabilities
261,051

 
281,657

Long-term debt, net of current portion
5,288

 
5,340

Income taxes payable, long-term
8,076

 
7,891

Legal settlements, net of current portion
24,404

 
24,311

Other long-term liabilities
501

 
508

Total liabilities
299,320

 
319,707

Commitments and contingencies (Note 8)

 

Shareholders’ equity:
 
 
 
Common stock, CHF 1.00 par value; 41,107 shares authorized; 28,201 issued and 28,046 outstanding at March 31, 2015 and 27,732 issued and outstanding at December 31, 2014
30,587

 
30,101

Additional paid-in capital
69,333

 
68,063

Treasury shares, at cost (155 shares at March 31, 2015)
(418
)
 
—

Accumulated other comprehensive income
10,272

 
9,290

Retained deficit
(22,986
)
 
(21,751
)
Total shareholders’ equity
86,788

 
85,703

Total liabilities and shareholders’ equity
$
386,108

 
$
405,410

See accompanying notes to unaudited condensed consolidated financial statements.

1


TCP INTERNATIONAL HOLDINGS LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive (Loss) Income
(Unaudited)
(Amounts in thousands, except per share data)
 
 
Three Months Ended March 31,
 
2015
 
2014
Net sales
$
98,775

 
$
101,117

Cost of goods sold
74,617

 
76,330

Gross profit
24,158

 
24,787

Selling, general and administrative expenses
21,000

 
16,963

Litigation settlements
90

 
100

Operating income
3,068

 
7,724

Other expense (income):
 
 
 
Interest expense
1,651

 
2,307

Interest income
(89
)
 
(27
)
Foreign exchange losses (gains), net
550

 
(674
)
Income before income taxes
956

 
6,118

Income tax expense
2,191

 
2,197

Net (loss) income
$
(1,235
)
 
$
3,921

Other comprehensive (loss) income:
 
 
 
Foreign currency translation adjustments
982

 
(656
)
Comprehensive (loss) income
$
(253
)
 
$
3,265

Net (loss) income per share-basic and diluted
$
(0.04
)
 
$
0.19

See accompanying notes to unaudited condensed consolidated financial statements.

2


TCP INTERNATIONAL HOLDINGS LTD. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
 
 
Three Months Ended March 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(1,235
)
 
$
3,921

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
2,131

 
2,190

Deferred income tax expense
2,969

 
790

Share-based compensation expense
1,756

 
—

Loss on disposal of equipment
15

 
18

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
33,758

 
432

Inventories
(5,082
)
 
3,002

Prepaid expenses and other assets
12,910

 
2,132

Accounts payable
(8,272
)
 
(11,860
)
Accrued and other liabilities
(19,059
)
 
(10,117
)
Net cash provided by (used in) operating activities
19,891

 
(9,492
)
Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(3,824
)
 
(4,084
)
Decrease (increase) in restricted cash
455

 
(2,062
)
Repayment of related party finance receivables
—

 
84

Other investing activities, net
—

 
2

Net cash used in investing activities
(3,369
)
 
(6,060
)
Cash flows from financing activities:
 
 
 
Borrowings under foreign short-term bank loans
52,877

 
43,627

Repayments of foreign short-term bank loans
(28,884
)
 
(32,994
)
(Repayment) borrowings on line of credit agreement, net
(13,432
)
 
6,372

Repayments of long-term debt
(51
)
 
(67
)
Payment of related party finance liability
—

 
(74
)
Payment of debt issuance costs
(245
)
 
—

Net cash provided by financing activities
10,265

 
16,864

Effect of exchange rate changes on cash and cash equivalents
(174
)
 
(194
)
Increase in cash and cash equivalents
26,613

 
1,118

Cash and cash equivalents at beginning of period
31,354

 
21,903

Cash and cash equivalents at end of period
$
57,967

 
$
23,021

Supplemental disclosure of non-cash activities:
 
 
 
Purchase of property and equipment included in accounts payable
$
3,067

 
$
6,417

Deferred offering costs not yet paid
$
—

 
$
347

See accompanying notes to unaudited condensed consolidated financial statements.

3


TCP INTERNATIONAL HOLDINGS LTD. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(Amounts in thousands, except per share data)
(1)
Nature of Operations
TCP International Holdings Ltd. (TCP or the Company), together with its subsidiaries, designs, develops, manufactures and delivers high quality energy-efficient lamps, fixtures and internet-based lighting control solutions. The Company’s broad portfolio of LED and compact fluorescent lamps (CFLs), fixtures and internet-based lighting solutions are offered through thousands of retail and consumer and industrial distributors throughout the United States, Canada, Asia, Latin America and Europe/Middle East/Africa (EMEA).
(2)
Significant Accounting Policies
(a)
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company included herein have been prepared pursuant accounting principles generally accepted in the United States of America (U.S. GAAP) for interim reporting. Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted pursuant to Article 10 of Regulation S-X of the U.S. Securities and Exchange Commission (SEC). The accompanying consolidated balance sheet at December 31, 2014, has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for a complete set of annual financial statements.
Financial statements prepared in accordance with U.S. GAAP require management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and other disclosures. In the opinion of management, these unaudited condensed consolidated financial statements include all normal and recurring adjustments necessary for a fair presentation of the financial position and the results of our operations and cash flows for the interim periods presented.
The results of operations for any interim period are not necessarily indicative of the results of operations for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes to consolidated financial statements as of and for the year ended December 31, 2014, included in the Company’s Annual Report on Form 10-K filed on April 15, 2015.
 (b)
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. As of March 31, 2015 and December 31, 2014, $52,476 and $31,056, respectively, of the Company’s cash and cash equivalents were held outside the United States.
(c)
Fair Value Measurements
As of March 31, 2015 and December 31, 2014, the Company did not have any assets or liabilities that were required to be measured at fair value on a recurring basis. Cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and short-term borrowings and loans are carried at historical costs, which approximate their fair value due to their relatively short-term maturities. The fair value of the Company’s long-term debt was $5,648 and $5,718 at March 31, 2015 and December 31, 2014, respectively. The fair value of the Company’s long-term debt is based on a discounted cash flow analysis that utilizes Level 2 inputs. These inputs include observable market-based interest rates on debt with similar creditworthiness, terms and maturities. 

4


(d)
Earnings Per Share
Basic net (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Diluted net (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period and potentially dilutive common share equivalents, except in cases where the effect of including the common share equivalents would be antidilutive. Potential common share equivalents consist of common shares issuable upon vesting of restricted share units (RSUs) calculated using the treasury stock method. For the three months ended March 31, 2015, 664 common shares underlying RSUs were antidilutive and excluded from diluted average shares outstanding. For the three months ended March 31, 2014, there were no RSUs outstanding.
The following table presents the calculation of basic and diluted net (loss) income per share for the three months ended March 31, 2015 and 2014: 
 
Three Months Ended March 31,
 
2015
 
2014
Numerator:
 
 
 
Net (loss) income
$
(1,235
)
 
$
3,921

Denominator:
 
 
 
Weighted average shares outstanding
27,837

 
20,553

Dilutive effect of RSUs
—

 
—

Diluted average shares outstanding
27,837

 
20,553

Net (loss) income per share, basic
(0.04
)
 
0.19

Net (loss) income per share, diluted
(0.04
)
 
0.19

 
(e)
Recently Issued Accounting Pronouncements
Accounting Standards Adopted in 2015
In April 2015, the FASB issued ASU No. 2015-3, Simplifying the Presentation of Debt Issuance Costs, which requires that all costs incurred to issue debt be presented in the balance sheet as a direct deduction from the carrying value of the debt. Prior to the issuance of this ASU, debt issuance costs were required to be presented in the balance sheet as an asset. Upon adoption, the standard requires prior period financial statements to be retrospectively adjusted. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 with early adoption permitted in certain circumstances. The Company adopted this pronouncement as of March 31, 2015. As a result of adopting this pronouncement, the Company recorded $35 of net debt issuance costs at March 31, 2015, as a deduction to short-term loans and current portion of long-term debt, and reclassified $176 of debt issuance costs at December 31, 2014, from prepaids and other current assets to short-term loans and current portion of long-term debt in its condensed consolidated balance sheets. The adoption of this pronouncement did not have an impact on the Company's condensed consolidated statements of comprehensive (loss) income and cash flows.
Accounting Standards Not Yet Adopted
In May 2014, the FASB issued ASU No. 2014-9, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method nor has it evaluated the effect that ASU 2014-9 will have on the consolidated financial statements.
In August 2014, FASB issued ASU No. 2014-15, Preparation of Financial Statements – Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern.    Under U.S. GAAP, continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity's liquidation becomes imminent. Even when an entity's liquidation is not imminent, there may be conditions or events that raise substantial doubt about the

5


entity's ability to continue as a going concern. In those situations, financial statements should continue to be prepared under the going concern basis of accounting, but the amendments in this ASU should be followed to determine whether to disclose information about the relevant conditions and events.  This ASU is effective for annual periods ending after December 15, 2016. Early application is permitted. The Company does not believe that the adoption of this ASU would require additional disclosure within its condensed consolidated financial statements.
(3)
Share-based Compensation
Share-based compensation awards under our 2014 Omnibus Incentive Plan (the 2014 Plan) are valued at fair value, as determined using the closing price of the Company's shares on the New York Stock Exchange on the date of grant. The Company recognizes share-based compensation expense on a straight-line basis over the requisite service period of each award, net of estimated forfeitures.
For the three months ended March 31, 2015, share-based compensation expense of $1,756 was recorded through selling, general and administrative expenses. As of March 31, 2015, unrecognized compensation expense was $4,332, which is expected to be recognized over a remaining weighted average period of 10 months.
The following table summarizes additional information concerning unvested employee RSUs: 
 
Units
 
Weighted
Average Grant
Date Fair Value
Unvested at December 31, 2014
1,124

 
$
9.09

Vested
(455
)
 
9.05

Forfeited
(11
)
 
8.27

Unvested at March 31, 2015
658

 
$
9.13

The total vesting date fair value of employee RSUs that vested during the three months ended March 31, 2015, was $1,247.
The 2014 Plan provides for nonemployee directors of the Company to receive an automatic annual grant of restricted share units worth approximately $60 based on the fair market value of the Company’s common shares on the date of each annual meeting of shareholders. A pro-rata number of restricted share units are granted to directors appointed between annual meetings of shareholders. The Company granted 14 restricted share units to nonemployee directors during 2014.
(4)
Inventories
Inventories consisted of the following: 
 
March 31,
2015
 
December 31,
2014
Raw materials
$
17,721

 
$
18,577

Work in process
17,237

 
12,361

Finished goods
91,843

 
91,404

Total inventories
$
126,801

 
$
122,342


6


(5)
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
 
March 31,
2015
 
December 31,
2014
Accrued payroll and related expenses
$
23,040

 
$
27,931

Accrued legal settlements
9,174

 
8,843

Accrued rebates
2,609

 
9,551

Income taxes payable
1,505

 
6,559

Accrued product warranties
1,176

 
1,186

Other
20,781

 
23,756

Total accrued expenses and other current liabilities
$
58,285

 
$
77,826

(6)
Financing Agreements
Debt consisted of the following:
 
March 31,
2015
 
December 31,
2014
Short-term loans:
 
 
 
Revolving line of credit, LIBOR rate loans
$
—

 
$
3,432

Revolving line of credit, prime rate loans
—

 
10,000

Short-term bank loans, net of debt issuance costs of $211 and $176 at March 31, 2015 and December 31, 2014, respectively
84,799

 
61,001

 
84,799

 
74,433

Long-term debt:
 
 
 
Mortgage note payable
5,457

 
5,502

Capital leases
35

 
42

 
5,492

 
5,544

Total debt
90,291

 
79,977

Less short-term portion
(85,003
)
 
(74,637
)
Long-term portion
$
5,288

 
$
5,340

Revolving Line of Credit: The remaining borrowing capacity under the revolving line of credit was $37,302 at March 31, 2015. Interest on the London Interbank Offered Rate (LIBOR) rate loans and prime rate loans was 3.4% and 5.5%, respectively, at March 31, 2015. Interest on the LIBOR rate loans and prime rate loans was 3.4% and 5.5%, respectively, at December 31, 2014. Additionally, a commitment fee of 0.4% per annum is due quarterly for any unused capacity under the revolving line of credit.
As of March 31, 2015, the Company was in violation of the fixed charge ratio covenant within its Revolving Credit and Security Agreement as a result of the expiration of modifications to the fixed charge ratio to exclude payments related to the Geo Foundation litigation. The lender has waived this event of default.
Short-term Bank Loans: These loans primarily are comprised of short-term notes with various financial institutions in China with maturities ranging from April 2015 to March 2016. The original term for all of the loans was one year or less. Such loans are generally rolled over for an additional 12 months upon maturity. The weighted average interest rate on these loans was 4.1% and 4.3% as of March 31, 2015 and December 31, 2014, respectively.
(7)
Concentrations of Customer Risk
Net sales to Walmart and The Home Depot accounted for 23.9% and 21.9%, respectively, of consolidated net sales for the three months ended March 31, 2015. Net sales to Walmart and The Home Depot accounted for 26.4% and 18.3%, respectively, of consolidated net sales for the three months ended March 31, 2014.

7


Walmart and The Home Depot accounted for 21.8% and 11.8%, respectively, of total accounts receivable at March 31, 2015 and Walmart and The Home Depot accounted for 18.4% and 20.5%, respectively, of total accounts receivable at December 31, 2014. The Company does not have any off-balance-sheet credit exposure related to its customers.
(8)
Commitments and Contingencies
Legal Matters
GE Lighting Solutions, LLC
In January 2013, GE Lighting Solutions, LLC filed a lawsuit in the U.S. District Court for the Northern District of Ohio, naming the Technical Consumer Products, Inc., a wholly owned subsidiary of the Company, as a defendant. The litigation alleges that Technical Consumer Products, Inc., by importing, making, selling, offering to sell, and/or using eleven specific LED lamps, is infringing on two GE patents related to LED lamp heat dissipation. To date, GE has not specified a monetary amount for its alleged damages but has indicated that it will seek a reasonable royalty for its two patents. Following decisions by the Court limiting the scope of the case to the sale of accused products after January 1, 2013, the Company has recorded a liability of $1,390 and $1,300 at March 31, 2015 and December 31, 2014, respectively, for the probable resolution of this matter. The Company believes that it is reasonably possible that the settlement of this matter may exceed the recorded liability based on the royalty rates demanded by GE during early, informal settlement discussions that could lead to a claim for royalties up to $5,500.
Laura Hauser vs. Technical Consumer Products, Inc.
On February 26, 2015, Laura Hauser filed a complaint in the Court of Common Pleas of Cuyahoga County, Ohio, against the Company, its wholly-owned subsidiary Technical Consumer Products, Inc., and Ellis Yan, alleging that Mr. Yan mistreated Ms. Hauser in connection with her employment as the General Counsel and Secretary of the Company. In addition to asserting a number of tort claims against Mr. Yan, Ms. Hauser asserted a claim against the Company for respondeat superior. Ms. Hauser has not formally specified the alleged damages she is seeking for this matter. The Company believes Ms. Hauser's claim against the Company is without merit and intends to vigorously defend itself. As this litigation is in the early onset of discovery, the Company is unable to determine the probability and amount of loss, if any, related to this litigation.
On February 26, 2015, Ms. Hauser also filed a complaint with the U.S. Department of Labor-OSHA alleging that the Company committed retaliatory employment practices in violation of the whistleblower provisions of the Sarbanes-Oxley Act and the Consumer Product Safety Act (Laura Hauser v. TCP International Holdings Ltd. et al). Ms. Hauser filed an amended complaint on March 16, 2015, against the Company and Mr. Yan asserting that the parties reduced Ms. Hauser’s responsibilities and placed her on administrative leave in part due to alleged protected activities. On March 16, 2015, OSHA initiated an investigation regarding Ms. Hauser's claims. The Company believes Ms. Hauser’s claims lack merit and will fully cooperate with OSHA's investigation.
Securities Litigation
Following press reports of the Hauser litigation filed in Cuyahoga County, Ohio, putative shareholders filed two securities class action complaints in the United States District Court for the Northern District of Ohio, a securities class action complaint in the United States District Court for the Southern District of New York and a securities class action complaint in the Court of Common Pleas of Cuyahoga County, Ohio. The putative shareholders assert a number of alleged securities violations against the Company, certain current and former officers and directors of the Company, and the underwriters of the Company's IPO, including violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, and violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The claims generally involve alleged material misstatements and omissions in connection with the IPO prospectus and registration statement and seek an unspecified amount of damages. The Company plans to seek consolidation of the securities class action complaints filed in the Northern District of Ohio and the Southern District of New York. The Company believes these claims lack merit and intends to vigorously defend itself. As this litigation is in the early onset of discovery, the Company is unable to determine the probability and amount of loss, if any, related to this litigation.
Other
In the normal course of business, the Company is subject to various other legal claims, actions, and complaints. The Company recorded a liability for certain asserted claims that the Company believed were probable and estimable of $80 and $25 at March 31, 2015 and December 31, 2014, respectively.
The Company records a liability when it believes that it is probable that a loss has been incurred and the amount can be reasonably estimated. The Company evaluates developments in on-going legal matters that could affect the amount of

8


liability that has been previously accrued at each reporting period, and makes adjustments as appropriate. The Company expenses legal fees in the period in which they are incurred. Although the Company believes it has substantial defenses in these various matters, litigation is inherently unpredictable, and excessive verdicts do occur. The Company could incur judgments or enter into settlements of claims in the future that could have a material adverse effect on its results of operations, financial position and cash flows in any particular period.
Refund of U.S. Customs Import Tariffs: In October 2012, U.S. Customs and Boarder Protection (U.S. Customs) issued a ruling stipulating the import tariff classification on certain of the Company’s LED lamps, thereby raising the duty rate on such lamps to 6.0% ad valorem. In January 2013, the Company filed a Ruling Reconsideration with U.S. Customs and, in June 2013, began filing monthly Submissions of Protest for import entries retroactively to February 2012. In April 2014, the Company began receiving refunds relating to the protested entries and in July 2014, the Company received a notification of acceptance of its Ruling Reconsideration that affirmed a lower import tariff on the future import of certain of its LED lamps. Based on the U.S. Customs’ revocation ruling and the favorable ruling on the Company’s protests, the Company believes that it may continue to receive refunds from pending protests with U.S. Customs over the next 9 months related to the overpayment of LED tariffs that could total $1,340 in the aggregate. As the ultimate outcome of the pending protests cannot be determined with precision, no amount for the possible collection of future refunds has been recognized at March 31, 2015. For the three months ended March 31, 2015, the Company has received refunds of $1,042, which have been recorded as a reduction of cost of goods sold within the condensed consolidated statements of comprehensive (loss) income.
Other Matters: The Company has recorded a liability for unpaid indirect taxes in China assumed as part of a prior acquisition of one of its subsidiaries that remain outstanding. Based on current tax regulations in China, the Company may be liable for interest on this unpaid tax balance. At March 31, 2015, the Company believes it is reasonably possible, but not probable, that up to $4,264 of interest could be assessed for these unpaid taxes, and therefore no liability for interest in connection with these taxes has been recorded at March 31, 2015.
(9)
Segment and Geographic Information
The Company operates as a single reportable segment. The chief operating decision maker reviews financial information on a consolidated basis for purposes of allocating resources and assessing performance. Net sales are attributed to geographic areas based on the location of the customer. Net sales and property, plant and equipment by geographic area and net sales by product line are presented below: 
 
Three Months Ended March 31,
 
2015
 
2014
Net sales by geographical area:
 
 
 
United States
$
81,412

 
$
81,624

Canada
3,452

 
3,647

EMEA
6,024

 
5,859

Asia
4,684

 
6,659

Latin America
3,203

 
3,328

Total net sales
$
98,775

 
$
101,117

 
 
 
 
Net sales by product line:
 
 
 
CFL
$
52,555

 
$
59,405

LED
40,611

 
36,322

Linear and fixtures
2,089

 
3,687

Other
3,520

 
1,703

Total net sales
$
98,775

 
$
101,117

 

9


 
March 31,
2015
 
December 31,
2014
Property, plant and equipment, net:
 
 
 
United States
$
12,994

 
$
12,927

Asia
57,411

 
58,457

EMEA
512

 
643

Latin America
8

 
10

Total property, plant and equipment, net
$
70,925

 
$
72,037

(10)
Income Taxes
Our effective income tax rate of 229.2% for the three months ended March 31, 2015, was higher than the U.S. federal income tax rate primarily due to a $1,275 shortfall charged to income tax expense from the issuance of common shares underlying RSUs with a fair value upon vesting that was less than the fair value at grant date, as well as net operating losses with no benefit in certain European operating companies.
Our effective income tax rate of 35.9% for the three months ended March 31, 2014, differs from U.S. federal income tax rate as the favorable impact of earnings in lower tax rate jurisdictions was offset by non-deductible expenses in China related to certain employment costs and interest on uncertain tax positions.
(11)
Equity
The following table presents changes in shareholders’ equity:
 
Common stock
 
Additional
paid-in capital
 
Treasury Shares
 
Accumulated
other
comprehensive
income
 
Retained
deficit
 
Total
equity
 
Shares
 
Amount
Balances at December 31, 2014
27,732

 
$
30,101

 
$
68,063

 
$
—

 
$
9,290

 
$
(21,751
)
 
$
85,703

Net loss
—

 
—

 
—

 
—

 
—

 
(1,235
)
 
(1,235
)
Share-based compensation expense
—

 
—

 
1,756

 
—

 
—

 
—

 
1,756

Issuance of common shares upon vesting of restricted share units
469

 
486

 
(486
)
 
(418
)
 
—

 
—

 
(418
)
Currency translation adjustment
—

 
—

 
—

 
—

 
982

 
—

 
982

Balances at March 31, 2015
28,201

 
$
30,587

 
$
69,333

 
$
(418
)
 
$
10,272

 
$
(22,986
)
 
$
86,788

(12)
Subsequent Events
On April 15, 2015, Ellis Yan, the Company's Chief Executive Officer, entered into a Mutual Separation Agreement whereby he will not renew his employment agreement upon its expiration on June 30, 2015. Mr. Yan will remain a Director and continue to serve as Chairman of the Board of Directors. Under the terms of his Mutual Separation Agreement, Mr. Yan will receive severance comprised of continuing salary for three years. In addition, Mr. Yan is entitled to either continuation of medical, dental and health benefit plans or reimbursement of premiums for similar coverage. The Company expects to record severance expense of approximately $2,100 in the second quarter of 2015 following Mr. Yan's termination of employment, which will be paid over a 3-year period.

10


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion of our financial condition and results of operations in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on April 15, 2015. In addition to historical condensed consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Quarterly Report on Form 10-Q, particularly in Risk Factors included in Part II, Item 1A.
Overview
We are a leading global provider of energy efficient LED and CFL lighting technologies. We design, develop, manufacture and deliver high quality energy efficient lamps, fixtures and internet-based lighting control solutions. Our internally developed driver, optical system, thermal management and power management technologies deliver a high standard of efficiency and light quality. Our broad portfolio of advanced LED and CFL lamps and fixtures enables us to address a wide range of applications required by our retail and commercial and industrial (C&I) customers. We have established the largest number of Energy Star® compliant lighting products for LEDs and CFLs combined. The lighting market is characterized by rapid product innovation and, as a result, we have maintained integrated product design and manufacturing capabilities to allow us to quickly respond to the rapidly evolving demands of our customers. Our products are currently offered through thousands of retail and C&I distributors. Since our inception in 1993, we have sold more than one billion energy efficient lighting products.
Currently, we sell the majority of our products in the United States and Canada. Our net sales in the United States and Canada are principally made through our retail channel, most notably through The Home Depot and Walmart, as well as through various C&I distributors, including HD Supply, Regency, Rexel, CED and Grainger. In addition, we have significant sales, marketing and distribution infrastructure outside of the United States and Canada, especially in EMEA, Asia and Latin America.
Key Metrics and Factors Affecting Our Results of Operations
Our results of operations during the three months ended March 31, 2015 and 2014 were most affected by the following key factors:
Impact of changing product mix. CFL lamp sales historically have represented the majority of our overall product mix, having comprised 53.2% and 58.8% of net sales for the three months ended March 31, 2015 and 2014, respectively. The decline in CFL sales as a percentage of our net sales principally is the result of the successful expansion of our LED products, which grew from 35.9% of our net sales for the three months ended March 31, 2014 to 41.1% of net sales for three months ended March 31, 2015. LED products traditionally have had higher gross margins than our CFL products.
Composition of channel mix. We sell principally through two channels: retail and C&I. Sales through the retail channel represent the largest portion of our business, accounting for 54.8% and 51.4% of our net sales for the three months ended March 31, 2015 and 2014, respectively. We are actively engaged in expanding our C&I channel, which accounted for 43.6% and 46.2% of our net sales for the three months ended March 31, 2015 and 2014, respectively. From a channel perspective, our C&I customers generally require a more specialized product offering and purchase in much smaller volumes than do our retail customers. Accordingly, we typically are able to obtain higher gross margins for lighting products sold in our C&I channel compared with our retail channel.
Product Validation Review. Consistent with our commitment to high quality products, in the first quarter of 2015 we chose to conduct additional levels of quality control on our products. We engaged an outside testing firm to support these efforts, which, while ongoing, have affirmed the quality and safety of our product line.  However, these additional levels of quality control caused significant delays in deliveries to our customers and resulted in a reduction of net sales for the three months ended March 31, 2015 compared with the same period in 2014. Separately, the Audit Committee’s investigation, described in Item 3 - "Legal Proceeding," in our Annual Report on Form 10-K filed April 15, 2015, resulted in increased expenses due to the involvement of independent testing, legal and advisory firms. 
Adjusted EBITDA and Adjusted EPS
We present the non-GAAP financial measures “Adjusted EBITDA” and "Adjusted EPS" as supplemental measures of our performance. These non-GAAP financial measures are not measures of financial performance or liquidity calculated in accordance with accounting principles generally accepted in the United States, referred to herein as U.S. GAAP, and should be

11


viewed as a supplement to, not a substitute for, our results of operations and balance sheet information presented on the basis of U.S. GAAP.
We define EBITDA as net (loss) income before interest expense, income taxes, depreciation and amortization, and Adjusted EBITDA as EBITDA before net foreign exchange losses (gains), litigation settlements, share-based compensation expense and other nonrecurring items.
We define Adjusted EPS as net (loss) income per share, diluted, from continuing operations excluding net foreign exchange losses (gains), share-based compensation expense and other nonrecurring items.
Adjusted EBITDA and Adjusted EPS are not necessarily comparable to similarly titled measures reported by other companies. Adjusted EBITDA may exclude certain financial information that some may consider important in evaluating our financial performance. Adjusted EBITDA and Adjusted EPS may not be indicative of historical operating results, and we do not intend for either of them to be predictive of future results of operations. We believe that our use of Adjusted EBITDA and Adjusted EPS as metrics assists our board, management and investors in comparing our operating performance on a consistent basis. Factors in this determination include removing the impact of our capital structure (specifically interest expense, net), asset base (specifically depreciation and amortization) and tax structure, as well as certain items that affect inter-period comparability, such as variability due to unrealized foreign exchange losses (gains), litigation settlements, non-cash share-based compensation expense and other nonrecurring items, which affect results in a given period or periods.
The following table presents a reconciliation of EBITDA and Adjusted EBITDA to net (loss) income, which is the most directly comparable U.S. GAAP measure, for the three months ended March 31, 2015 and 2014. 
 
Three Months Ended March 31,
 
2015
 
2014
Net (loss) income
$
(1,235
)
 
$
3,921

Adjustments:
 
 
 
Interest expense, net
1,562

 
2,280

Income tax expense
2,191

 
2,197

Depreciation and amortization
2,131

 
2,190

EBITDA
4,649

 
10,588

Adjustments:
 
 
 
Foreign exchange losses (gains), net
550

 
(674
)
Litigation settlements
90

 
100

Share-based compensation expense
1,756

 
—

Refund of U.S. Customs import tariffs
(1,042
)
 
—

Adjusted EBITDA
$
6,003

 
$
10,014


12


The following table presents a reconciliation of Adjusted net (loss) income and Adjusted EPS to net (loss) income and net (loss) income per share, diluted, which are the most directly comparable U.S. GAAP measures, for the three months ended March 31, 2015 and 2014.
 
Three Months Ended March 31, 2015
 
Three Months Ended March 31, 2014
 
Net
Loss
Per Share (Diluted)
 
Net Income
Per Share (Diluted)
Net (loss) income and net (loss) income per share, diluted
$
(1,235
)
$
(0.04
)
 
$
3,921

$
0.19

Adjustments, net of tax:
 
 
 
 
 
Foreign exchange losses (gains), net
595

0.02

 
(522
)
(0.03
)
Litigation settlements
57

—

 
63

—

Share-based compensation expense
1,187

0.04

 
—

—

Refund of U.S. Customs import tariffs
(662
)
(0.02
)
 
—

—

Adjusted net (loss) income and Adjusted EPS
$
(58
)
$
—

 
$
3,462

$
0.16

Results of Operations
Comparison of the Three Months Ended March 31, 2015 and 2014
 
 
Three Months Ended March 31,
 
2015
 
2014
 
(in thousands)
 
Amount
 
As a % of
Sales
 
Amount
 
As a % of
Sales
Net sales
$
98,775

 
100.0
 %
 
$
101,117

 
100.0
 %
Cost of goods sold
74,617

 
75.5
 %
 
76,330

 
75.5
 %
Gross profit
24,158

 
24.5
 %
 
24,787

 
24.5
 %
Selling, general and administrative expenses
21,000

 
21.3
 %
 
16,963

 
16.8
 %
Litigation settlements
90

 
n/m

 
100

 
n/m

Operating income
3,068

 
3.1
 %
 
7,724

 
7.6
 %
Other expenses:
 
 
 
 
 
 
 
Interest expense, net
1,562

 
1.6
 %
 
2,280

 
2.3
 %
Foreign exchange losses (gains), net
550

 
0.6
 %
 
(674
)
 
(0.7
)%
Income before income taxes
956

 
1.0
 %
 
6,118

 
6.1
 %
Income tax expense
2,191

 
2.2
 %
 
2,197

 
2.2
 %
Net (loss) income
$
(1,235
)
 
(1.3
)%
 
$
3,921

 
3.9
 %
Other Financial Data:
 
 
 
 
 
 
 
Adjusted EBITDA
$
6,003

 
6.1
 %
 
$
10,014

 
9.9
 %

13


Net sales. The following table shows our net sales by region and by product line:
 
Three Months Ended March 31,
2015
 
2014
(in thousands)
 
Amount
 
As a % of
Sales
 
Amount
 
As a % of
Sales
United States and Canada
$
84,864

 
85.9
%
 
$
85,271

 
84.3
%
Asia
4,684

 
4.8
%
 
6,659

 
6.6
%
EMEA
6,024

 
6.1
%
 
5,859

 
5.8
%
Latin America
3,203

 
3.2
%
 
3,328

 
3.3
%
Total net sales
$
98,775

 
100.0
%
 
$
101,117

 
100.0
%
 
 
Three Months Ended March 31,
2015
 
2014
(in thousands)
 
Amount
 
As a % of
Sales
 
Amount
 
As a % of
Sales
CFL
$
52,555

 
53.2
%
 
$
59,405

 
58.8
%
LED
40,611

 
41.1
%
 
36,322

 
35.9
%
Linear and fixtures
2,089

 
2.1
%
 
3,687

 
3.6
%
Other
3,520

 
3.6
%
 
1,703

 
1.7
%
Total net sales
$
98,775

 
100.0
%
 
$
101,117

 
100.0
%
Net sales of $98.8 million for the three months ended March 31, 2015 decreased by $2.3 million, or 2.3%, compared with the three months ended March 31, 2014. Net sales in our retail channel of $54.1 million increased $2.1 million, or 4.0%, and net sales in our C&I channel of $43.1 million decreased $3.6 million, or 7.8%, compared with the three months ended March 31, 2014.
Sales of our LED product line increased $4.3 million, or 11.8%. The increase primarily is attributable to our continued business focus on growing the LED product line that resulted in an increase in LED sales of $3.1 million with Walmart and $2.8 million with C&I distributors in the United States and Canada, partially offset by lower sales in Asia.
Sales of our CFL product line decreased by $6.9 million, or 11.5%. The decrease mainly is due to lower sales of $3.1 million with C&I distributors and $1.2 million with Walmart in the United States and Canada, as well as a decrease in sales of $1.4 million in Asia largely due to the termination of the Chinese government subsidy program in 2014.
Gross profit. Gross profit and gross profit percentage were consistent with the prior year. Our gross profit percentage for the three months ended March 31, 2015 benefited from favorable product mix due to higher LED sales and a $1.0 million refund of LED import duties, compared with the three months ended March 31, 2014, that benefited from the recovery of inventory provisions from the sale of excess product.
Selling, general and administrative expenses. Selling, general and administrative expenses increased by $4.0 million, or 23.8%, primarily due to $1.8 million of share-based compensation expenses associated with restricted share units granted in June and September 2014 and a $1.8 million increase in professional fees. The increase in professional fees largely is due to legal fees associated with recently filed litigation as disclosed in Note 8 to the condensed consolidated financial statements, as well as the investigation conducted by our Audit Committee and our product validation review.
Litigation settlements. Litigation settlements is comprised of estimated settlement costs and adjustments to accrual estimates to resolve ongoing litigation. Refer to Note 8 to the condensed consolidated financial statements.

14


Other expenses. Other expense increased by $0.5 million due to foreign currency losses of $0.6 million for the three months ended March 31, 2015 compared with foreign currency gains of $0.7 million for the three months ended March 31, 2014, partially offset by lower interest expense of $0.7 million. The foreign exchange losses for the three months ended March 31, 2015 were primarily attributable to a weakening British pound sterling, which resulted in the appreciation of U.S. dollar-denominated intercompany payables in certain of our European subsidiaries and a strengthening Swiss franc, which devalued our U.S. dollar-denominated cash and intercompany receivables in Switzerland. These foreign currency losses were partially offset by foreign currency gains due to a weakening Chinese yuan, which resulted in the appreciation of U.S. dollar-denominated third-party and intercompany receivables in Asia. The decrease in interest expense largely resulted from the repayment of short-term bank loans in Asia during the fourth quarter of 2014.
Effective income tax rate. Our effective income tax rate increased to 229.2% in the three months ended March 31, 2015 from 35.9% in the same period last year. Our effective income tax rate of 229.2% was higher than the U.S. federal income tax rate primarily due a $1.3 million shortfall charged to income tax expense from the issuance of common shares underlying RSUs with a fair value upon vesting that was less than the fair value at grant date, as well as net operating losses with no benefit in certain of our European operating companies. Our effective income tax rate of 35.9% for the three months ended March 31, 2014 differs from U.S. federal income tax rate as the favorable impact of earnings in lower tax rate jurisdictions was offset by non-deductible expenses in China related to certain employment costs and interest on uncertain tax positions.
Liquidity and Capital Resources
At March 31, 2015, we had $58.0 million in cash and cash equivalents, excluding restricted cash, compared with $31.4 million at December 31, 2014. At March 31, 2015, $52.5 million of our cash and cash equivalents, excluding restricted cash, was held outside of the United States.
We had no borrowings outstanding under our revolving line of credit at March 31, 2015. As of March 31, 2015, we were in violation of the fixed charge ratio covenant within our Revolving Credit and Security Agreement as a result of the expiration of modifications to the fixed charge ratio to exclude payments related to the Geo Foundation litigation. The lender agreed to waive this event of default.
Our short-term bank loans with a maturity of one year or less increased $23.8 million, primarily to finance our anticipated working capital requirements in the second quarter of 2015. For the three months ended March 31, 2015, our average short-term bank loan balance was $73.6 million, with the highest month-end balance of $84.8 million as of March 31, 2015. We had $16.6 million of bankers’ acceptances outstanding with our suppliers and maintain restricted cash balances of $6.9 million as collateral for these bankers’ acceptances at March 31, 2015.
We believe our existing cash and cash equivalents, short-term debt borrowings and the existing line of credit, along with the proceeds from our initial public offering, will be sufficient to meet our working capital requirements for at least the next twelve months.


15


Cash Flows
Following is a summary of our cash flows for the three months ended March 31, 2015 and 2014:
 
 
Three Months Ended March 31,
 
2015
 
2014
Net cash provided by (used in) operating activities
$
19,891

 
$
(9,492
)
Net cash used in investing activities
(3,369
)
 
(6,060
)
Net cash provided by financing activities
10,265

 
16,864

Effect of exchange rate changes on cash and cash equivalents
(174
)
 
(194
)
Increase in cash and cash equivalents
$
26,613

 
$
1,118

Net Cash Used in Operating Activities
Net cash provided by operating activities was $19.9 million for the three months ended March 31, 2015, compared with net cash used in operating activities of $9.5 million for the three months ended March 31, 2014. Cash provided in the three months ended March 31, 2015, was due to a decrease in accounts receivable of $33.8 million and a decrease in prepaid expenses and other assets of $12.9 million primarily due to the collection of VAT refunds in Asia. These cash inflows partially were offset by a decrease of $19.1 million in accrued and other liabilities largely due to the payment of customer rebates, employee bonuses and income taxes, as well as a $8.3 million decrease in accounts payable and a $5.1 million increase in inventory.
Cash used in the three months ended March 31, 2014 was due to a decrease in accounts payable of $11.9 million attributable to timing of payments and lower purchase volume, and a decrease in accrued and other liabilities of $10.1 million largely due to payment of customer rebates, employee bonuses and income taxes. These uses of cash partially were offset by earnings of $3.9 million, a decrease in inventory of $3.0 million due to our efforts to reduce inventory levels and a decrease in prepaid expense and other assets of $2.1 million mainly from the collection of VAT refunds.
Net Cash Used in Investing Activities
Net cash used in investing activities was $3.4 million for the three months ended March 31, 2015, compared with $6.1 million for the three months ended March 31, 2014, a decrease of $2.7 million. The decrease in cash used for investing activities in the three months ended March 31, 2015, was primarily due to a decrease in our restricted cash balances related to our use of bankers’ acceptances to pay our suppliers from December 31, 2014 to March 31, 2015, compared with an increase in restricted cash from December 31, 2013 to March 31, 2014.
Net Cash Provided by Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2015, principally was attributable to net bank borrowings of $10.6 million largely to finance our anticipated working capital requirements in the second quarter of 2015. Net cash provided by financing activities for the three months ended March 31, 2014, principally was due to net bank borrowings of $17.0 million to finance our increase in working capital, largely related to the growth in inventory to support the expansion of our LED offerings.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, other than operating leases entered into in the ordinary course of our business, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that may be material to investors.
Capital Expenditures
There have been no material changes to the Company’s capital expenditure commitments during the three months ended March 31, 2015.

16


Contractual Obligations
There have been no material changes to our contractual obligations during the three months ended March 31, 2015, other than the decrease in the revolving line of credit and the increase in short-term bank loans described in Liquidity and Capital Resources included in Part I, Item 2 included herein.
Critical Accounting Policies and Estimates
There have been no material changes to the Company’s critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K filed April 15, 2015.
Recent Accounting Pronouncements
Refer to Note 2 to the Condensed Consolidated Financial Statements included in Part I, Item 1 included herein for a discussion of recent accounting pronouncements and their effect on us.


17


Forward-Looking Statements
The Company has made forward-looking statements in this Quarterly Report on Form 10-Q within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties that may cause actual results to differ materially from those that we expect. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “anticipates,” “believes,” “contemplates,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “target” or “will” or the negative of these words or other similar terms or expressions that concern the Company’s expectations, strategy, plans or intentions. The Company claims the protection of the Safe Harbor for Forward-Looking Statements contained in the Private Securities Litigation Reform Act of 1995 for all forward-looking statements.
Forward-looking statements are not guarantees of performance. The following important factors, in addition to those discussed elsewhere in this Quarterly Report on Form 10-Q, could affect our the future results and could cause those results or other outcomes to differ materially from those expressed or implied our forward-looking statements:
 
•
changes in the competitive and technological environment in our industry, particularly with respect to LED and CFL technologies;
•
changes in legislation that phases out inefficient lamp technologies;
•
our relationship with retail and third-party distributors;
•
the cost and availability of raw materials, including phosphor, and components for our lighting products;
•
regulatory requirements and approvals for our current and future lighting products;
•
global economic conditions, which affect end user demand for our lighting products;
•
changes in China’s economic, political and social conditions, Chinese labor supply and Chinese labor regulations;
•
fluctuations in the value of the foreign currencies in countries in which we have operations, including China (yuan), Canada (Canadian dollar), the Netherlands (Euro), United Kingdom (pound sterling), Brazil (Real) and Switzerland (Swiss franc) versus the U.S. dollar;
•
our ability to protect our intellectual property and avoid infringing on others’ intellectual property;
•
our expected treatment under Swiss and U.S. federal tax legislation and the impact that Swiss tax and corporate legislation may have on our operations;
•
the outcome of ongoing litigation; and
•
effectiveness of our remediation plan for our material weakness.
Because forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by such forward-looking statements. Undue reliance should not be placed on such statements, which speak only as of the date of this document or the date of any document that may be incorporated by reference into this document.
Consequently, readers of this Quarterly Report on Form 10-Q should consider these forward-looking statements only as the Company’s current plans, estimates and beliefs. The Company does not undertake and specifically declines any obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect future events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The Company undertakes no obligation to update or revise any forward-looking statements in this Quarterly Report on Form 10-Q to reflect any new events or any change in conditions or circumstances.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to several financial risks, including, among others, market risk (changes in exchange rates, changes in interest rates and market prices), concentration risk and commodity risk. For a full discussion of market risks at year-end, refer to Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2014, incorporated by reference herein.
Interest rate risk. We are currently exposed to interest rate risk related to our fixed-rate bank debt in Asia due to their short-term maturity and our intention to refinance these borrowings. As of March 31, 2015, we had $84.8 million of

18


outstanding short-term bank loans primarily with various Chinese banks. The weighted average interest rate on these loans as of March 31, 2015, was 4.1%. Potential movement of the weighted average interest rate of +/-1%, on a theoretical refinancing of these loans, would increase or decrease interest expense and cash paid for interest on an annualized basis by $0.8 million based on the balance outstanding at March 31, 2015.
Concentration risk. We are exposed to concentration risk due to our concentration of business activity with The Home Depot and Walmart, which were our only customers that individually exceeded 10% of net sales for either the three months ended March 31, 2015 and 2014. Net sales to Walmart and The Home Depot accounted for 23.9% and 21.9%, respectively, of consolidated net sales for the three months ended March 31, 2015. Net sales to Walmart and The Home Depot accounted for 26.4% and 18.3%, respectively, of consolidated net sales for the three months ended March 31, 2014.
Commodity risk. The manufacturing of our products relies heavily on the availability and price of certain commodity materials including petroleum based plastics, copper, and rare earth metals, principally phosphors. As of March 31, 2015 the cost of phosphors of was approximately ¥253/kg ($51/kg) compared with ¥243/kg ($38/kg) as of December 31, 2014.
Item 4. Controls and Procedures.
(a)
Disclosure controls and procedures.
As required by Rule 13a-15(b) and Rule 15d-15(e) of the Securities Exchange Act of 1934, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of December 31, 2014, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on this evaluation, management concluded as of March 31, 2015 our disclosure controls and procedures were ineffective due to a material weakness existing in our internal control over financial reporting as of December 31, 2014 (described below), which has not been fully remediated as of March 31, 2015.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis. The following material weakness related to our control environment existed as of March 31, 2015:
•
Our Chief Executive Officer's actions were inconsistent with setting an appropriate tone at the top by failing to adhere to the Company's established policies and procedures. Our Chief Executive Officer bypassed reporting lines established to enable the execution of authorities and responsibilities, which facilitate the flow of information to manage the activities of the Company and ensures that financial reporting matters could be adequately evaluated in a timely manner.
The control environment deficiency described above could have resulted in a failure to prevent or detect a material misstatement in our financial statements due to the omission of information or inappropriate conclusions regarding information required to be recorded, processed, summarized, and reported in the Company’s SEC reports. Notwithstanding the identified material weakness, management believes the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.
Remediation
To address the material weakness identified in our control environment, the Company is taking the following action to remediate the material weakness:
•
Our Chief Executive Officer, Ellis Yan, agreed to not renew his employment agreement upon its expiration on June 30, 2015. As of such date, Mr. Yan will no longer be an executive, officer or employee of the Company or any of its subsidiaries, although he will remain a director of the Company and serve as its Chairman. Our board of directors is commencing a search for a Chief Executive Officer and expects to have a replacement by the end of 2015.
•
Mr. Yan entered into an agreement with the Company in which he has agreed, through the date of termination of his service as an employee of the Company, to obtain the prior approval of the Company’s board of directors before taking certain specified actions on behalf of the Company.

19


•
We are conducting a thorough review of our organizational structure and the roles and responsibilities within each functional group, and are looking to add executive resources within our operations and engineering departments and elsewhere, as appropriate, by the end of 2015.
•
The Company has begun taking action to improve internal communication regarding its policies and procedures, and the dissemination of information among the various functional areas that are key to the accurate and timely preparation of SEC reports.
We plan to continue to review and make necessary changes to our internal control environment, as well as policies and procedures, to improve the overall effectiveness of internal control over financial reporting. Although we expect to complete our remediation plan during 2015, we cannot estimate how long it will take to complete the process or the costs of actions required. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluation of our internal control over financial reporting. Prior to the completion of our remedial measures, there remains risk that the processes and procedures on which we currently rely will fail to be sufficiently effective, which could result in material misstatement of our financial position or results of operations and require a restatement. See “Risks Related to Our Business" in Item 1A of our Annual Report on Form 10-K file April 15, 2015.  
(b)
Changes in internal control over financial reporting.
Other than the material weakness identified above, there have not been any changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) that occurred during the quarter ended March 31, 2015 that had materially affected, or were reasonably likely to materially affect, the Company’s internal control over financial reporting.


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PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
Refer to Note 8 of the Condensed Consolidated Financial Statements included in Part I, Item I of this Quarterly Report on Form 10-Q for a discussion of legal proceedings.
Item 6. Exhibits.
See Exhibit Index following the signature page for exhibits filed with this Quarterly Report on Form 10-Q.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
TCP INTERNATIONAL HOLDINGS LTD.
By:
 
/s/ Brian Catlett
 
 
Brian Catlett
Chief Financial Officer and Treasurer
(Principal Financial Officer and Principal Accounting Officer)
Date: May 8, 2015

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EXHIBIT
INDEX
  
DESCRIPTION
 
 
 
10.1
 
Executive Employment Agreement between Technical Consumer Products, Inc. and Brian Catlett, dated February 1, 2014
 
 
 
10.2
 
Executive Employment Agreement between Technical Consumer Products, Inc. and Laura Hauser, dated May 1, 2013
 
 
 
31.1
  
Certification of Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2
  
Certification of Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1
  
Certification of Chief Executive Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2
  
Certification of Chief Financial Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS*
  
XBRL Instance Document.
 
 
 
101.SCH*
  
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL*
  
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.DEF*
  
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
101.LAB*
  
XBRL Taxonomy Extension Labels Linkbase Document.
 
 
 
101.PRE*
  
XBRL Taxonomy Extension Presentation Linkbase Document.
 
*
XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.



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TCP International Holdings Ltd. Reports