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EX-31.1 - EXHIBIT 31.1 - LIGHTING SCIENCE GROUP CORPex31-1.htm
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EX-32.1 - EXHIBIT 32.1 - LIGHTING SCIENCE GROUP CORPex32-1.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended March 31, 2016

 

 

OR

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                 to                

 

Commission File No. 000-20354

 

LIGHTING SCIENCE GROUP CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

23-2596710

(State or other jurisdiction of incorporation)

(IRS Employer Identification No.)

   

 

 

1350 Division Road, Suite 102, West Warwick, RI

02893

(Address of principal executive offices)

(Zip Code)

 

(321) 779-5520 

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether 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 ☐ 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 ☐   No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See 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

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

 

The number of shares outstanding of the registrant’s Common Stock, par value $0.001 per share, as of May 6, 2016, was 210,303,256 shares.

 

 
 

 

 

LIGHTING SCIENCE GROUP CORPORATION
AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 2016

 

 

Table of Contents

 

  Page 

PART I  

 

   

Item 1.   Financial Statements (Unaudited)

 1

   

Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015  

 1

   

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2016 and 2015  

 2

   

Condensed Consolidated Statement of Stockholders’ Deficit for the Three Months Ended March 31, 2016  

 3

   

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015  

 4

   

Notes to the Condensed Consolidated Financial Statements (Unaudited)  

 5

   

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 17

   

Item 4.   Controls And Procedures

 25

   

PART II  

 

   

Item 6.   Exhibits

 26

   

SIGNATURES  

 27

 

 
 

 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

LIGHTING SCIENCE GROUP CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) 

   

March 31,

   

December 31,

 
   

2016

   

2015

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 1,692,086       647,526  

Restricted cash

    3,000,000       3,000,000  

Accounts receivable, net

    10,492,644       7,673,352  

Inventories

    17,211,837       21,449,721  

Prepaid expenses

    1,104,781       1,248,530  

Total current assets

    33,501,348       34,019,129  
                 

Property and equipment, net (includes accumulated depreciation of $11.9 million and $11.7 million as of March 31, 2016 and December 31, 2015, respectively)

    668,712       856,690  

Intangible assets, net

    3,146,238       3,024,894  

Pegasus Commitment

    208,800       214,400  

Other long-term assets

    113,620       118,448  
                 

Total assets

  $ 37,638,718     $ 38,233,561  
                 

Liabilities and Stockholders’ Deficit

               

Current liabilities:

               

Lines of credit

  $ 11,036,462     $ 6,169,856  

Current portion of long-term debt

    10,129       28,877  

Accounts payable

    8,927,707       13,192,756  

Accrued expenses

    6,864,989       7,276,037  

Total current liabilities

    26,839,287       26,667,526  
                 

Note payable

    27,113,466       26,583,685  

Liabilities under derivative contracts

    4,245,943       4,172,809  

Total other liabilities

    31,359,409       30,756,494  
                 

Total liabilities

    58,198,696       57,424,020  
                 

Series H Redeemable Convertible Preferred Stock, $.001 par value, authorized 135,000 shares, 113,609 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively

    227,220,149       227,220,149  

Series I Redeemable Convertible Preferred Stock, $.001 par value, authorized 90,000 shares, 62,365 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively

    124,736,627       124,736,627  

Series J Redeemable Convertible Preferred Stock, $.001 par value, authorized 85,100 shares, 83,062 and 80,062 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively

    166,124,000       160,124,000  

Series K Redeemable Preferred Stock, $.001 par value, authorized 40,000 shares, 20,106 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively

    20,106,030       20,106,030  
      538,186,806       532,186,806  

Commitments and contingencies

               
                 

Stockholders' deficit:

               

Common stock, $.001 par value, authorized 975,000,000 shares, 212,807,131 and 212,803,446 shares issued as of March 31, 2016 and December 31, 2015, respectively

    212,807       212,804  

Additional paid-in capital

    279,022,714       281,485,826  

Accumulated deficit

    (832,136,331 )     (827,416,083 )

Accumulated other comprehensive loss

    (2,088,474 )     (1,902,312 )

Treasury stock, 2,505,000 shares as of March 31, 2016 and December 31, 2015 , at cost

    (3,757,500 )     (3,757,500 )

Total stockholders’ deficit

    (558,746,784 )     (551,377,265 )

Total liabilities and stockholders’ deficit

  $ 37,638,718     $ 38,233,561  

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 
1

 

 

LIGHTING SCIENCE GROUP CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

 

   

For the Three Months Ended March 31,

 
   

2016

   

2015

 
                 

Revenue

  $ 17,098,013     $ 19,371,545  

Cost of goods sold

    13,619,103       16,441,297  

Gross profit

    3,478,910       2,930,248  
                 

Operating expense:

               

Selling, distribution and administrative

    5,076,064       5,095,581  

Research and development

    1,080,999       1,181,313  

Restructuring expense

    -       83,704  

Depreciation and amortization

    221,073       506,072  

Total operating expenses

    6,378,136       6,866,670  

Loss from operations

    (2,899,226 )     (3,936,422 )
                 

Other income (expense):

               

Interest expense

    (1,612,446 )     (1,462,360 )

Related party interest expense

    (138,300 )     (138,300 )

Increase in fair value of liabilities under derivative contracts

    (78,734 )     (8,100,772 )

Other income, net

    11,018       36,764  

Total other income (expense)

    (1,818,462 )     (9,664,668 )
                 

Loss before income tax expense

    (4,717,688 )     (13,601,090 )
                 

Income tax expense

    2,560       -  
                 

Net loss

    (4,720,248 )     (13,601,090 )
                 

Foreign currency translation gain (loss)

    (186,162 )     45,391  
                 

Comprehensive loss

  $ (4,906,410 )   $ (13,555,699 )
                 

Basic and diluted net loss per weighted average common share attributable to controlling stockholders

  $ (0.02 )   $ (0.07 )

Basic and diluted net loss per weighted average common share attributable to noncontrolling stockholders

  $ (0.02 )   $ (0.07 )
                 

Basic and diluted weighted average number of common shares outstanding attributable to controlling stockholders

    327,637,170       287,758,558  

Basic and diluted weighted average number of common shares outstanding attributable to noncontrolling stockholders

    98,060,244       97,668,138  

 

The accompanying notes are an integral part of the condensed consolidated financial statements. 

 

 
2

 

 

LIGHTING SCIENCE GROUP CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(Unaudited)

 

                                   

Accumulated

                 
                                   

Other

                 
   

Common Stock

   

Additional

   

Accumulated

   

Comprehensive

                 
   

Shares

   

Amount

   

Paid-in Capital

   

Deficit

   

Loss

   

Treasury Stock

   

Total

 

Balance December 31, 2015

    212,803,446     $ 212,804     $ 281,485,826     $ (827,416,083 )   $ (1,902,312 )   $ (3,757,500 )   $ (551,377,265 )

Issuance of restricted stock and options for directors' compensation

    -       -       11,903       -       -       -       11,903  

Stock based compensation expense

                    544,651       -       -       -       544,651  

Stock issued under equity compensation plans

    3,685       3       334       -       -       -       337  

Deemed dividends on Series J Redeemable Convertible Preferred Stock, net of fees of $20,000

    -       -       (3,807,957 )     -       -       -       (3,807,957 )

Issuance of Series J Warrants

    -       -       787,957       -       -       -       787,957  

Net loss

    -       -       -       (4,720,248 )     -       -       (4,720,248 )

Foreign currency translation adjustment

    -       -       -       -       (186,162 )     -       (186,162 )

Balance March 31, 2016

    212,807,131     $ 212,807     $ 279,022,714     $ (832,136,331 )   $ (2,088,474 )   $ (3,757,500 )   $ (558,746,784 )

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 
3

 

 

LIGHTING SCIENCE GROUP CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   

For the Three Months Ended March 31,

 
   

2016

   

2015

 
                 

Cash flows from operating activities:

               

Net loss

  $ (4,720,248 )   $ (13,601,090 )

Adjustments to reconcile net loss to net cash used in operating activities:

               

Depreciation and amortization

    221,073       506,072  

Issuance of restricted stock for directors' compensation

    11,903       11,101  

Stock based compensation expense

    544,651       905,396  

Non-cash sales incentive

    -       64,285  

Allowance for doubtful accounts receivable

    (18,321 )     35,725  

Write-down of inventory

    -       94,595  

Provision for losses on non-cancelable purchase commitments

    -       176,857  

Increase in fair value of derivative contracts

    78,734       8,100,772  

Amortization of debt issuance costs

    356,989       333,847  

Medley discount accretion

    194,768       194,768  

Interest accrued on Medley Term Loan

    155,133       155,457  

Changes in operating assets and liabilities:

               

Accounts receivable

    (2,801,122 )     262,155  

Inventories

    4,237,884       (5,466,179 )

Prepaid expenses

    143,349       1,136,362  

Other current and long-term assets

    4,828       (130,079 )

Accounts payable

    (4,265,486 )     (9,052,644 )

Accrued expenses and other liabilities

    (410,003 )     (920,378 )

Net cash used in operating activities

    (6,265,868 )     (17,192,978 )

Cash flows from investing activities:

               

Purchases of property and equipment

    (9,675 )     (2,835 )

Capitalized patents

    (144,766 )     (91,889 )

Net cash used in investing activities

    (154,441 )     (94,724 )

Cash flows from financing activities:

               

Net proceeds from draws on lines of credit and other short-term borrowings

    4,689,497       4,955,792  

Payment of short and long-term debt

    (18,748 )     (9,573 )

Debt issuance costs

    -       (112,217 )

Proceeds from issuance of common stock under equity compensation plans

    282       252  

Proceeds from issuance of Series J Redeemable Convertible Preferred Securities and Warrants

    3,000,000       11,525,000  

Fees incurred on issuance of preferred stock

    (20,000 )     (134,817 )

Net cash provided by financing activities

    7,651,031       16,224,437  
                 

Effect of exchange rate changes on cash

    (186,162 )     3,351  
                 

Net increase (decrease) in cash

    1,044,560       (1,059,914 )

Cash and cash equivalents balance at beginning of period

    647,526       1,609,297  

Cash and cash equivalents balance at end of period

  $ 1,692,086     $ 549,383  
                 

Supplemental disclosures:

               

Interest paid during the period

  $ 994,676     $ 1,380,181  
                 

Non-cash investing and financing activities:

               

Deemed dividends on Series J Redeemable Convertible Preferred Stock

  $ (3,807,957 )   $ (15,298,260 )

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

 
4

 

 

LIGHTING SCIENCE GROUP CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

 

Note 1. Description of Business and Basis of Presentation

 

Overview

 

Lighting Science Group Corporation (the “Company”) was incorporated in Delaware in 1988 and designs, develops and markets general illumination products that exclusively use light emitting diodes (“LEDs”) as their light source. The Company’s product portfolio includes LED-based retrofit lamps (replacement bulbs) used in existing light fixtures and sockets as well as purpose built LED-based luminaires (light fixtures) for many common indoor and outdoor residential, commercial, industrial and public infrastructure lighting applications. The Company assembles and manufactures its products through its contract manufacturers in Asia.

 

Basis of Financial Statement Presentation

 

The accompanying unaudited condensed consolidated financial statements are presented pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) in accordance with the disclosure requirements for the quarterly report on Form 10-Q and therefore do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to fairly state the results for the interim periods presented. The condensed consolidated balance sheet as of December 31, 2015 is derived from the Company’s audited financial statements. Operating results for the three months ended March 31, 2016 are not necessarily indicative of the results of the Company that may be expected for the year ending December 31, 2016. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2015 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on April 14, 2016.

 

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the accompanying consolidated financial statements.

 

Note 2. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenue and expenses. Such estimates include the valuation of accounts receivable, inventories, intangible assets and other long-lived assets, legal contingencies, and customer incentives, among others. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an on-going basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency and energy markets and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

 

Restricted Cash

 

As of March 31, 2016 and December 31, 2015, as required by the Company’s five-year term loan (as amended from time to time, the “Medley Term Loan”) with Medley Capital Corporation (“Medley”), the Company was required to maintain a minimum restricted cash balance of $3.0 million to collateralize the Medley Term Loan. Changes in the restricted cash balance were reflected as a financing activity in the consolidated statements of cash flows.

 

 
5

 

 

Accounts Receivable

 

The Company records accounts receivable at the invoiced amount when its products are shipped to customers or upon the completion of specific milestone billing requirements. The Company’s receivable balance is recorded net of allowances for amounts not expected to be collected from customers. This allowance for doubtful accounts is the Company’s best estimate of probable credit losses in the Company’s existing accounts receivable. Estimates used in determining the allowance for doubtful accounts are based on historical collection experience, aging of receivables and known collectability issues. The Company writes off accounts receivable when it becomes apparent, based upon age or customer circumstances that such amounts will not be collected. The Company reviews its allowance for doubtful accounts on a quarterly basis. Recovery of bad debt amounts previously written off is recorded as a reduction of bad debt expense in the period the payment is collected. Generally, the Company does not require collateral for its accounts receivable and does not regularly charge interest on past due amounts. As of March 31, 2016 and December 31, 2015, the Company’s allowance for doubtful accounts was $470,000 and $475,000, respectively.

 

As of March 31, 2016 and December 31, 2015, $6.9 million and $4.2 million, respectively, of eligible accounts receivable were pledged as collateral for the three-year asset based revolving credit facility (as amended from time to time, the “FCC ABL”) entered into on April 25, 2014 with FCC, LLC d/b/a First Capital (“First Capital”). First Capital sold the FCC ABL to ACF FinCo I LP (“Ares”) in May 2015, and the FCC ABL is hereinafter referred to as the “Ares ABL”.

 

Revenue Recognition

 

The Company records revenue when its products are shipped and title passes to customers. When sales of products are subject to certain customer acceptance terms, revenue from such sales is recognized once these terms have been met. The Company also provides its customers with limited rights of return for non-conforming shipments or product warranty claims.

 

Product Warranties

 

The Company generally provides a five-year limited warranty covering defective materials and workmanship of its products and such warranty may require the Company to repair, replace or reimburse the purchaser for the purchase price of the product. The estimated costs related to warranties are accrued at the time products are sold based on various factors, including the Company’s stated warranty policies and practices, the historical frequency of claims and the cost to repair or replace its products under warranty. The following table summarizes changes in the warranty provision for the three months ended March 31, 2016:

 

Warranty provision as of December 31, 2015

  $ 3,285,424  

Additions to provision

    233,757  

Less warranty costs

    (309,140 )
         

Warranty provision as of March 31, 2016

  $ 3,210,041  

 

Fair Value Measurements

 

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

 

 

Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

 

 

Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.

 

 

Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.

 

Fair Value of Financial Instruments

 

Cash and cash equivalents, accounts receivable, accounts payable, amounts due under lines of credit and other short term borrowings, accrued expenses and note payable are carried at amounts that approximate their fair value due to the short-term maturity of these instruments and/or variable, market driven interest rates.

 

 
6

 

 

The liabilities under derivative contracts, which represent warrants to purchase shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) were initially recorded at fair value and subsequently reflected at their fair value at the end of each reporting period. The fair value of the warrant issued to The Home Depot, Inc. (the “THD Warrant”) is determined using the Monte Carlo valuation method and will be adjusted at each reporting date until the underlying shares have been earned for each year. Such adjustments will be recorded as a reduction in the related revenue (sales incentive) from The Home Depot, Inc. (“The Home Depot”). Once a portion of the THD Warrant vests it is recorded at its fair value at the end of each subsequent reporting period.

 

Recently Adopted Accounting Pronouncements

 

In April 2015, the FASB issued ASU 2015-03 that intends to simplify the presentation of debt issuance costs. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. ASU 2015-03 is effective for public business entities for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The cost of issuing debt will no longer be recorded as a separate asset, except when incurred before receipt of the funding from the associated debt liability. The Company retrospectively adopted ASU 2015-03 as of January 1, 2016. The adoption of this guidance did not have a material impact on the condensed consolidated financial statements or notes to condensed consolidated financial statements.

 

In November 2015, the FASB issued ASU No 2015-17 to simplify the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be classified as non-current in the balance sheet. The new guidance is effective for the annual period ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company retrospectively adopted ASU 2015-17 as of January 1, 2016. The adoption of this guidance did not have a material impact on the condensed consolidated financial statements or notes to condensed consolidated financial statements.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In May 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-09, which will replace most existing revenue recognition guidance in U.S. generally accepted accounting principles and is intended to improve and converge the financial reporting requirements for revenue from contracts with customers with International Financial Reporting Standards (“IFRS”). The core principle of ASU 2014-09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU 2014-09 also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 allows for both retrospective and prospective methods of adoption and is effective for periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14 which provides a one-year deferral of the revenue recognition standard’s effective date. Public business entities are required to apply the revenue recognition standard to annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. Early application is permitted but not before the original effective date for public business entities (annual reporting periods beginning after December 15, 2016). The option to use either a retrospective or cumulative-effective transition method did not change. The Company is currently evaluating the method of adoption and the impact that the adoption of ASU 2014-09 will have on its consolidated financial statements.

 

In August 2014, the FASB issued ASU 2014-15 requiring management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. The standard also provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new guidance is effective for the annual period ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is currently evaluating the method of adoption and the impact that the adoption of ASU 2014-15 will have on its consolidated financial statements.

 

In July 2015, the FASB issued ASU 2015-11, “Inventory (Topic 330).” This update requires an entity to measure inventory within the scope of the update at the lower of cost and net realizable value. This update is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company is currently evaluating the method of adoption and the impact that the adoption of ASU 2015-11 will have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 introduces a lessee model that brings most leases on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in ASC 606, the FASB's new revenue recognition standard (e.g., those related to evaluating when profit can be recognized). Furthermore, ASU 2016-02 addresses other concerns related to the current leases model. For example, ASU 2016-02 eliminates the requirement in current U.S. GAAP for an entity to use bright-line tests in determining lease classification. The standard also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. The Company is required to adopt ASU 2016-02 for periods beginning after December 15, 2018, including interim periods, with early adoption permitted. The Company is currently evaluating the method of adoption and the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements.

 

 
7

 

 

Reclassification

 

Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported net loss or stockholders’ deficit.

 

Note 3. Liquidity and Capital Resources 

 

As shown in the condensed consolidated financial statements, the Company has experienced significant historical net losses as well as negative cash flows from operations since its inception, resulting in an accumulated deficit of $832.1 million and stockholders’ deficit of $558.7 million as of March 31, 2016. As of March 31, 2016, the Company had cash and cash equivalents of $1.7 million and an additional $3.0 million in restricted cash subject to a cash collateral dominion agreement pursuant to the Medley Term Loan. The Company’s cash expenditures primarily relate to procurement of inventory, payment of salaries, employee benefits and other operating costs.

 

The Company’s primary sources of liquidity have historically been borrowings from Ares under the Ares ABL, from Medley under the Medley Term Loan and from other previous lenders, as well as sales of Common Stock and Convertible Preferred Stock (as defined below) to, and short-term loans from, affiliates of Pegasus Capital Advisors, L.P. (“Pegasus Capital”), including Pegasus Partners IV, L.P. (“Pegasus Fund IV”), LSGC Holdings, LLC (“LSGC Holdings”), LSGC Holdings II, LLC (“Holdings II”), LSGC Holdings III, LLC (“Holdings III”) and PCA LSG Holdings, LLC (“PCA Holdings” and collectively with Pegasus Capital, Pegasus Fund IV, LSGC Holdings, Holdings II, Holdings III and their affiliates, “Pegasus”). Pegasus is the Company’s controlling stockholder. While Pegasus has led a majority of the Company’s capital raises, certain offerings of Convertible Preferred Stock also involved and/or were led by parties other than Pegasus.

 

The Company obtained the five-year, $30.5 million Medley Term Loan from Medley on February 19, 2014, pursuant to a Term Loan Agreement (as amended from time to time the “Medley Loan Agreement”). Pursuant to the Medley Loan Agreement, the Company is required to achieve a minimum quarterly fixed charge coverage ratio for the preceding 12-month period and to maintain certain minimum EBITDA levels. In connection with the Medley Term Loan, the Company issued a warrant to purchase 5,000,000 shares of Common Stock to each of Medley and Medley Opportunity Fund II LP (the “Medley Warrants”).

 

The Company also obtained a three-year revolving credit facility with a maximum line amount of $22.5 million from Ares on April 25, 2014, pursuant to a Loan and Security Agreement (as amended from time to time, the “Ares ABL Agreement”). As of March 31, 2016, the Company had $11.0 million in borrowings outstanding under the Ares ABL Agreement and additional borrowing capacity of $2.7 million. The maximum borrowing capacity under the Ares ABL Agreement is based on a formula of eligible accounts receivable and inventory. The Ares ABL Agreement also requires the Company to achieve a minimum quarterly fixed charge coverage ratio for the preceding 12-month period.

 

On January 30, 2015, September 11, 2015 and February 23, 2016, the Company issued 11,525, 10,000 and 3,000 units of its securities (“Series J Securities”), respectively, to Holdings III. On September 30, 2015, the Company issued 62 Series J Securities to certain existing preferred stockholders upon exercise of their preemptive rights under the certificates of designation governing the Convertible Preferred Stock. In each case, the Series J Securities were issued at a purchase price of $1,000 per Series J Security, and the Company received aggregate gross proceeds of approximately $24.6 million in connection with these issuances. Each Series J Security consists of (i) one share of Series J Convertible Preferred Stock (“Series J Preferred Stock”) and (ii) a warrant to purchase 2,650 shares of Common Stock, at an exercise price of $0.001 per share (the “Series J Warrants”).

 

The Company continues to face challenges in its efforts to achieve profitability and positive cash flows from operations. The Company’s ability to continue to meet its obligations in the ordinary course of business is dependent upon establishing profitable operations, which may be supplemented by any additional funds that the Company may raise through public or private financing or increased borrowing capacity.

 

 
8

 

 

In 2015, the Company’s largest customer, The Home Depot, performed a periodic product line review relating to its entire private label LED lighting product offering. Following the line review, the Company entered into a new supplier buying agreement with The Home Depot, which is expected to go into full effect in the second quarter of 2016. Pursuant to this new supplier buying agreement, The Home Depot has elected to purchase certain products previously supplied by the Company directly from overseas suppliers. Such products represented a significant percentage of the Company’s sales to The Home Depot in 2015 and 2014. The Company was, however, selected to supply certain new products to The Home Depot and will continue to supply certain other products to The Home Depot under its prior agreement. In addition, the terms of the new supplier buying agreement with The Home Depot permit the Company to pursue opportunities to sell products to specified big box and other retailers, which was prohibited under its prior agreement. Notwithstanding the new supplier buying agreement, as was the case under the Company’s prior agreement with The Home Depot, The Home Depot is not required to purchase any minimum amount of products from the Company. As a result of the line review, the Company expects 2016 sales to The Home Depot and, as a result, revenue, to be significantly less than what it was in 2015. However, because the Company cannot reasonably estimate the extent to which such reduced revenue may be offset by sales of the new products to The Home Depot or by any potential new sales to other retailers, the Company cannot determine at this time the overall impact that the results of The Home Depot line review will have on the Company’s financial condition and operations in the future.

 

As a result of the Company’s historical losses, the Company believes it will likely need to raise additional capital to fund its operations. Sources of additional capital may not be available in an amount or on terms that are acceptable to the Company, if at all. The Company’s complex capital structure, including its obligations to the holders of the outstanding shares of its Convertible Preferred Stock and the new series of preferred stock designated as Series K (“Series K Preferred Stock”), may make it more difficult to raise additional capital from new or existing investors or lenders. If the Company is not able to raise such additional capital, the Company may need to restructure or refinance its existing obligations, which restructuring or refinancing would require the consent and cooperation of the Company’s creditors and certain stockholders. In such event, the Company may not be able to complete a restructuring or refinancing on terms that are acceptable to the Company, if at all. If the Company is unable to obtain sufficient capital when needed, the Company’s business, compliance with its credit facilities and future prospects may be adversely affected.

 

Pegasus has committed to provide financial support to the Company of up to $5.25 million, as needed, to fund its operations and debt service requirements through April 2017. The amount of this commitment will be reduced by the amount of any capital provided by other parties (except for draws under the Ares ABL) that is not repayable by the Company on or before April 14, 2017. Such commitment, which in no way amounts to a guarantee of the Company’s obligations, may be provided through a variety of mechanisms, which may or may not be similar to those previously employed. Furthermore, in exchange for such support, Pegasus, as the Company’s controlling stockholder, may request that the Company take certain actions related to operations, capital structure or otherwise, which, if accepted, could have a negative effect on its business and results of operations. In addition, Pegasus may seek other terms and consideration that would require, and may not receive, approval by the independent committee of the Company’s board of directors. Management believes that, subject to certain conditions, the Company will have sufficient capital to fund its operations for the next 12 months. Such conditions include, among other things, (1) maintaining the Company’s lower cost structure implemented over the last three years, (2) replacing a significant portion of the decline in revenue anticipated as a result of The Home Depot’s line review and (3) if necessary, Pegasus fulfilling its commitment as described above.

 

RW LSG Holdings LLC (“Riverwood Holdings”) and Pegasus each have the right to cause the Company to redeem their shares of Series H Convertible Preferred Stock (“Series H Preferred Stock”) and Series I Convertible Preferred Stock (“Series I Preferred Stock” and, collectively with the Series H Preferred Stock and the Series J Preferred Stock, the “Convertible Preferred Stock”), respectively, at any time on or after March 27, 2017. If either Riverwood Holdings or Pegasus elects to cause the Company to redeem its shares of Series H Preferred Stock or Series I Preferred Stock, all other holders of the applicable series will similarly have the right to request the redemption of their shares of Convertible Preferred Stock. In addition, Portman Limited (“Portman”) and affiliates of Zouk Holdings Limited, acting together, have a contractual right to require the Company to redeem their respective shares of Series H Preferred Stock on or after March 27, 2017, subject to certain conditions and limitations. The Company is also required to redeem the outstanding shares of its Series J Preferred Stock (a) subject to certain limited exceptions, immediately prior to the redemption of the Series H Preferred Stock, Series I Preferred Stock or any other security that ranks junior to the Series J Preferred Stock and (b) on November 14, 2019, at the election of the holders of Series J Preferred Stock (a “Special Redemption”). Holders of Convertible Preferred Stock would also have the right to require the Company to redeem such shares upon the uncured material breach of the Company’s obligations under its outstanding indebtedness or the uncured material breach of the terms of the certificates of designation governing the Convertible Preferred Stock. Depending on whether the Appeal Bond (as defined below) has been drawn or fully released, the Series K Certificate of Designation requires us to redeem the outstanding shares of Series K Preferred Stock in the event of a liquidation, dissolution or winding up of the Company or an earlier change of control or “junior security redemption,” which includes events triggering a redemption of the outstanding shares of Convertible Preferred Stock. As of March 31, 2016, in the event the Company was required to redeem all of its outstanding shares of Convertible Preferred Stock and Series K Preferred Stock (collectively, the “Preferred Stock”), the Company’s maximum payment obligation would have been $538.2 million. The Company would be required to repay its outstanding obligations under the Medley Term Loan and the Ares ABL prior to the redemption of any shares of Preferred Stock. As of March 31, 2016, the Company had $38.1 million of aggregate borrowings outstanding under these credit facilities that it would be required to repay prior to any redemption of Preferred Stock.

 

 
9

 

 

Any redemption of the Preferred Stock would be limited to funds legally available therefor under Delaware law. The certificates of designation governing the Preferred Stock provide that if there is not a sufficient amount of cash or surplus available to pay for a redemption of Preferred Stock, then the redemption must be paid out of the remaining assets of the Company. In addition, the certificates of designation governing the Preferred Stock provide that the Company is not permitted or required to redeem any shares of Preferred Stock for so long as such redemption would result in an event of default under the Company’s credit facilities.

 

As of March 31, 2016, based solely on a review of the Company’s balance sheet, the Company did not have legally available funds under Delaware law to satisfy a redemption of its Preferred Stock. In addition, based solely on the Company’s projected balance sheet as of March 27, 2017, the Company does not believe that it will have legally available funds on or before March 27, 2017 to satisfy any such redemption of the Preferred Stock.

 

The certificate of designation governing the Series H Preferred Stock also provides that upon the occurrence of a “control event,” the Company must take any and all actions required and permitted to fix the size of its board of directors to a size that would permit Riverwood Holdings (as the primary investor of the Series H Preferred Stock) to appoint a majority of the directors to the board until the Company satisfies or otherwise cures the obligations giving rise to the control event. A control event occurs if, among other things, Riverwood Holdings exercises its optional redemption right under the certificate of designation governing the Series H Preferred Stock and the Company is unable to redeem Riverwood Holdings’ shares of Series H Preferred Stock. If Riverwood Holdings were to exercise its optional redemption right and a control event were to occur, Riverwood Holdings could take control of the board of directors.

 

The certificate of designation governing the Series J Preferred Stock provides that if the Company does not have sufficient capital available to redeem the Series J Preferred Stock in connection with a Special Redemption of the Series J Preferred Stock, the Company will be required to issue a non-interest bearing note or notes (payable 180 days after issuance) in the principal amount of the liquidation amount of any shares of Series J Preferred Stock not redeemed by the Company in connection with such Special Redemption, subject to certain limitations imposed by Delaware law governing distributions to stockholders.

 

As discussed further in Note 14, one of the Company’s stockholders, Geveran Investments Limited (“Geveran”), filed a lawsuit against the Company and certain other defendants seeking, among other things, rescissionary damages in connection with its $25.0 million investment in the Company. On November 30, 2015, the Circuit Court of the Ninth Judicial Circuit in and for Orange County, Florida, the court presiding over the lawsuit, entered an Order Granting Plaintiff’s Motion for Partial Summary Judgment Under its First Cause of Action for Violation of the Florida Securities and Investment Protection Act (the “Summary Judgment Order”). Accordingly, the Company, with the assistance of Pegasus Fund IV, posted an appeal bond in the amount of $20.1 million (the “Appeal Bond”) in support of the Company’s appeal of the Summary Judgment Order. As contemplated by the Preferred Stock Subscription and Support Agreement dated September 11, 2015 (the “Subscription and Support Agreement”) among the Company, Holdings III and Pegasus Partners IV, L.P. (“Pegasus Fund IV”), Pegasus Fund IV agreed to assist the Company in securing the Appeal Bond on the terms set forth in a General Indemnity Agreement and related side letter to be entered into by and among the Company, Pegasus Fund IV and the issuer of the Appeal Bond (the “Appeal Bond Agreements”). The Company executed the Appeal Bond Agreements with Pegasus Fund IV and the issuer of the Appeal Bond on December 4, 2015, and on December 7, 2015, in consideration of Pegasus Fund IV’s entry into the Appeal Bond Agreements and as security for the potential payments to be made to the issuer of the Appeal Bond for draws upon the Appeal Bond, the Company issued 20,106.03 units of its securities (the “Series K Securities”) to Pegasus Fund IV, with each Series K Security consisting of (a) one share of Series K Preferred Stock and (b) a warrant to purchase 735 shares of Common Stock. The number of Series K Securities issued to Pegasus Fund IV was determined based on the quotient obtained by dividing (x) the aggregate amount of the bonds, undertakings, guarantees and/or contractual obligations underlying Pegasus Fund IV’s initial commitment with respect to the Appeal Bond by (y) $1,000. Although the Company cannot predict the ultimate outcome of this lawsuit, it believes the court’s summary judgment award in favor of Geveran was in error and that it has strong defenses against Geveran’s claims. However, in the event that the Company is not successful on appeal, it could be liable for the full amount of Geveran’s $25.0 million investment, as well as interest, attorneys’ fees and court costs. Accordingly, the Summary Judgment Order and the Appeal Bond could have a material adverse effect on the Company’s liquidity and its ability to raise capital in the future.

 

 
10

 

 

Note 4. Detail of Certain Balance Sheet Accounts

 

Inventories

 

Inventories consisted of finished goods as of March 31, 2016 and December 31, 2015. As of March 31, 2016 and December 31, 2015, inventories were stated net of inventory reserves of $6.9 million. The Company considered a number of factors in estimating the required inventory reserves, including (i) the focus of the business on the next generation of the Company’s products, which utilize lower cost technologies, (ii) the strategic focus on core products to meet the demands of key customers and (iii) the expected demand for the Company’s current generation of products, which is approaching the end of its lifecycle upon the introduction of the next generation of products.

 

Property and Equipment, Net

 

Property and equipment, net consisted of the following as of the dates indicated:

 

   

March 31, 2016

   

December 31, 2015

 
                 

Leasehold improvements

  $ 171,808     $ 171,808  

Office furniture and equipment

    290,348       290,348  

Computer hardware and software

    7,888,114       7,878,439  

Tooling, production and test equipment

    4,219,956       4,219,956  

Trailers

    45,996       45,996  

Construction-in-process

    -       -  

Total property and equipment

    12,616,222       12,606,547  

Accumulated depreciation

    (11,947,510 )     (11,749,857 )

Total property and equipment, net

  $ 668,712     $ 856,690  

 

Depreciation related to property and equipment was $198,000 and $487,000 for the three months ended March 31, 2016 and 2015, respectively.

 

Note 5. Intangible Assets

 

Intangible assets that have finite lives are amortized over their useful lives. The Company’s intangible assets as of March 31, 2016 and December 31, 2015 are detailed below:

 

   

Cost, Less

Impairment

Charges

   

Accumulated

Amortization

   

Net Book

Value

 

Estimated

Remaining

Useful Life (years)

March 31, 2016:

                             

Technology and intellectual property

  $ 3,477,322     $ (331,084 )   $ 3,146,238  

0.9

to 20.0
                               

December 31, 2015:

                             

Technology and intellectual property

  $ 3,332,556     $ (307,662 )   $ 3,024,894  

0.9

to 20.0

 

Total intangible asset amortization expense was $23,000 and $20,000 for the three months ended March 31, 2016 and 2015, respectively.

 

 
11

 

 

Note 6. Debt Issuance Costs

 

The Company capitalizes its costs related to the issuance of long-term debt and amortizes these costs using the effective interest rate method over the life of the loan. Amortization of debt issuance costs and the accelerated write-off of debt issuance costs in connection with refinancing activities are recorded as a component of interest expense. The Company had net debt issuance costs of $3.0 million and $3.3 million as of March 31, 2016 and December 31, 2015, respectively. The Company amortized $400,000 and $334,000 of debt issuance costs for the three months ended March 31, 2016 and 2015, respectively.

 

Note 7. Lines of Credit and Note Payable

 

Facility

 

March 31, 2016

   

December 31, 2015

 
                 

Ares ABL, revolving line of credit, net of debt issuance costs of $516,000 and $693,000 as of March 31, 2016 and December 31, 2015, respectively.

  $ 11,036,462     $ 6,169,856  
                 

Medley Term Loan, net of debt issuance costs of $2.5 million and $2.6 million as of March 31, 2016 and December 31, 2015, respectively

    27,113,466       26,583,685  
                 
    $ 38,149,928     $ 32,753,541  

 

Ares ABL

 

On April 25, 2014, the Company, entered into the Ares ABL, which provides the Company with a maximum borrowing capacity of $22.5 million, calculated based on a formula of eligible accounts receivable and inventory. On January 30, 2015 and September 11, 2015, the Company entered into amendments to the Ares ABL relating to, among other things, the Appeal Bond Agreements, the calculation of EBITDA for purposes of determining compliance with the fixed charge coverage ratio covenant for certain periods, and the interest margin payable under the Ares ABL. As of March 31, 2016, the Company had $11.0 million outstanding under the Ares ABL and additional borrowing capacity of $2.7 million. As of March 31, 2016, eligible collateral included $6.9 million of accounts receivable and $10.0 million of inventory. Borrowings under the Ares ABL bear interest at a floating rate equal to one-month LIBOR plus 5.5% per annum. As of March 31, 2016, the interest rate on the Ares ABL was 5.94%.

 

Medley Term Loan

 

On February 19, 2014, the Company entered into the Medley Term Loan, which provided the Company with a $30.5 million term loan facility. On January 30, 2015 and September 11, 2015, the Company entered into amendments to the Medley Term Loan relating to, among other things, the minimum EBITDA covenant levels with respect to certain periods, the Appeal Bond Agreements, and the treatment of proceeds from certain issuances of Series J Securities. The Medley Term Loan bears interest at a floating rate equal to three-month LIBOR plus 12% per annum, and as of March 31, 2016, the interest rate on the Medley Term Loan was 12.64%. Additionally, $3.0 million of the Medley Term Loan was funded directly into a deposit account to which Medley has exclusive access, to further secure the loan. The outstanding principal balance and all accrued and unpaid interest on the Medley Term Loan are due and payable on February 19, 2019. As of March 31, 2016 the balance of the Medley Term Loan was $27.1 million. The Company recognized $195,000 of interest expense for the accretion of the discounts to the balance of the Medley Term Loan related to the commitment fees and the Medley Warrants for the three months ended March 31, 2016 and 2015. The Company also recognized $155,000 of accrued interest for the three months ended March 31, 2016 and 2015 for the accretion of the discounts to the balance of the Medley Term Loan related to the commitment fees and the Medley Warrants.

 

 
12

 

 

Note 8. Fair Value Measurements

 

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2016, according to the valuation techniques the Company used to determine their fair values (see the notes to the Company's audited consolidated financial statements as of and for the year ended December 31, 2015, for definitions of capitalized forms):

 

   

Fair Value Measurement as of March 31, 2016

 
   

Quoted Price in

Active Markets for

Identical Assets

   

Significant Other

Observable Inputs

   

Significant

Unobservable Inputs

 
   

Level 1

   

Level 2

   

Level 3

 

Assets (Recurring):

                       

Pegasus Commitment

  $ -     $ -     $ 208,800  
                         

Liabilities (Recurring):

                       

Riverwood Warrants

  $ -     $ -     $ 1,745,927  

September 2012 Warrants

    -       -       208,800  

Pegasus Warrant

    -       -       965,000  

THD Warrant

    -       -       80,151  

Medley Warrants

    -       -       591,050  

Pegasus Guaranty Warrants

    -       -       655,015  
    $ -     $ -     $ 4,245,943  

 

The following table is a reconciliation of the beginning and ending balances for assets and liabilities that were accounted for at fair value on a recurring basis using Level 3 inputs, as defined in Note 2 above, for the three months ended March 31, 2016:

 

           

Realized and unrealized

   

Purchases, sales,

   

Transfers in

         
   

Balance

   

gains (losses) included

   

issuances and

   

or out of

   

Balance

 
   

December 31, 2015

   

in net loss

   

settlements

   

Level 3

   

March 31, 2016

 

Pegasus Commitment

  $ 214,400     $ (5,600 )   $ -     $ -     $ 208,800  

Riverwood Warrants

    (1,747,737 )     1,810       -       -       (1,745,927 )

September 2012 Warrants

    (214,400 )     5,600       -       -       (208,800 )

Pegasus Warrant

    (966,000 )     1,000       -       -       (965,000 )

THD Warrant

    (63,635 )     (16,516 )     -       -       (80,151 )

Medley Warrants

    (565,776 )     (25,274 )     -       -       (591,050 )

Pegasus Guaranty Warrants

    (615,261 )     (39,754 )     -       -       (655,015 )

Total

  $ (3,958,409 )   $ (78,734 )   $ -     $ -     $ (4,037,143 )

 

The following table is a reconciliation of the beginning and ending balances for assets and liabilities that were accounted for at fair value on a recurring basis using Level 3 inputs, as defined above, for the three months ended March 31, 2015:

 

           

Realized and unrealized

   

Purchases, sales,

   

Transfers in

         
   

Balance

   

gains (losses) included

   

issuances and

   

or out of

   

Balance

 
   

December 31, 2014

   

in net loss

   

settlements

   

Level 3

   

March 31, 2015

 

Pegasus Commitment

  $ 720,000     $ (380,800 )   $ -     $ -     $ 339,200  

Riverwood Warrants

    (2,352,027 )     (3,484,618 )     -       -       (5,836,645 )

September 2012 Warrants

    (720,000 )     380,800       -       -       (339,200 )

Pegasus Warrant

    (1,300,000 )     (1,926,000 )     -       -       (3,226,000 )

THD Warrant

    (43,928 )     (367,146 )     -       -       (411,074 )

Medley Warrants

    (577,065 )     (1,172,189 )     -       -       (1,749,254 )

Pegasus Guaranty Warrants

    (643,924 )     (1,215,104 )     -       -       (1,859,028 )

Total

  $ (4,916,944 )   $ (8,165,057 )   $ -     $ -     $ (13,082,001 )

 

Note 9. Stockholders’ Equity

 

For the three months ended March 31, 2016 and 2015, the Company recorded expense of $12,000 and $11,000, respectively, related to stock compensation for awards to the Company’s directors.

 

On June 12, 2014, the Board approved the formation of a Scientific Advisory Board (the “SAB”) and issued restricted stock awards to each of the five members of the SAB as part of their compensation package. For the three months ended March 31, 2016 and 2015, the Company recorded expense of $0 and $33,000, respectively, related to restricted stock awards to the Company’s SAB.

 

 
13

 

 

Warrants for the Purchase of Common Stock

 

As of March 31, 2016, the following warrants for the purchase of Common Stock were outstanding:

 

Warrant Holder

 

Reason for Issuance

 

Number of

Common Shares

  Exercise Price  

Expiration Date

                       

Investors in rights offering

 

Series D Warrants

    1,192,048   $2.65 to $2.66  

March 3, 2022 through April 19, 2022

                       

The Home Depot

 

Purchasing agreement

    6,569,697     $0.95    

December 31, 2016 through 2018

                       

RW LSG Management Holdings LLC

 

Riverwood Warrants

    12,664,760    

Variable

   

May 25, 2022

                       

Certain other investors

 

Riverwood Warrants

    5,427,751    

Variable

   

May 25, 2022

                       

Cleantech Europe II (A) LP

 

September 2012 Warrants

    3,406,041     $0.72    

September 25, 2022

                       

Cleantech Europe II (B) LP

 

September 2012 Warrants

    593,959     $0.72    

September 25, 2022

                       

Portman Limited

 

September 2012 Warrants

    4,000,000     $0.72    

September 25, 2022

                       

Aquillian Investments LLC

 

Private Placement Series H

    830,508     $1.18    

September 25, 2017

                       

Pegasus

 

Pegasus Warrant

    10,000,000    

Variable

   

May 25, 2022

                       

Investors in Series J Follow-On Offering

 

Series J Warrants

    220,114,300     $0.001    

January 3, 2019 through February 23, 2021

                       

Medley

 

Medley Warrants

    10,000,000     $0.95    

February 19, 2024

                       

Pegasus

 

Pegasus Guaranty Warrants

    10,000,000     $0.50    

February 19, 2024

                       

Pegasus

 

Series K Warrants

    14,777,932     $0.12    

December 31, 2025

                       
          299,576,996            

 

Note 10: Earnings (Loss) Per Share

 

In 2012, the Company determined that two classes of Common Stock had been established for financial reporting purposes only, with Common Stock attributable to controlling stockholders representing shares beneficially owned and controlled by Pegasus and the Common Stock attributable to noncontrolling stockholders representing the minority interest stockholders. For the three months ended March 31, 2016 and 2015, the Company computed net loss per share of noncontrolling stockholders and controlling stockholders of Common Stock using the two-class method. Net loss from operations is initially allocated based on the underlying common shares held by controlling and noncontrolling stockholders. The allocation of the net losses attributable to the Common Stock attributable to controlling stockholders is then reduced by the amount of the deemed dividends.

 

The following table sets forth the computation of basic and diluted net loss per share of Common Stock:

 

   

For the Three Months Ended March 31,

 
   

2016

   

2015

 
   

Controlling Stockholders

   

Noncontrolling Stockholders

   

Controlling Stockholders

   

Noncontrolling Stockholders

 

Basic and diluted net income (loss) per share:

                               

Net loss attributable to common stock

  $ (3,632,930 )   $ (1,087,318 )   $ (10,154,538 )   $ (3,446,552 )

Deemed dividends related to the Series J Preferred Stock attributable to all shareholders

    (2,930,787 )     (877,170 )     (11,421,641 )     (3,876,619 )

Undistributed net loss

  $ (6,563,717 )   $ (1,964,488 )   $ (21,576,179 )   $ (7,323,171 )
                                 

Basic and diluted weighted average number of common shares outstanding

    327,637,170       98,060,244       287,758,558       97,668,138  
                                 

Basic and diluted net loss per common share

  $ (0.02 )   $ (0.02 )   $ (0.07 )   $ (0.07 )

 

Basic earnings per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the applicable period. The Series J Warrants have an exercise price of $0.001 per share of Common Stock, and are included in the weighted average number of shares of Common Stock outstanding as there are no conditions that must be satisfied before such warrant may be exercised into the shares of Common Stock underlying such warrants. Diluted earnings per share is computed in the same manner as basic earnings per share except the number of shares is increased to assume exercise of potentially dilutive stock options, unvested restricted stock and contingently issuable shares using the treasury stock method and convertible preferred shares using the if-converted method, unless the effect of such increases would be anti-dilutive. The Company had 270.8 million and 204.0 million common stock equivalents for the three months ended March 31, 2016 and 2015, respectively, which were not included in the diluted net loss per common share as the common stock equivalents were anti-dilutive, as a result of being in a net loss position.

 

 
14

 

 

Note 11: Related Party Transactions

 

Pegasus Capital is an affiliate of Pegasus IV and LSGC Holdings, which are the Company’s largest stockholders. Pegasus beneficially owned approximately 90.3% of the Common Stock as of March 31, 2016.

 

On February 23, 2016, the Company issued 3,000 Series J Securities to Holdings III pursuant to the Subscription and Support Agreement among the Company, Pegasus Fund IV and Holdings III for aggregate gross proceeds of $3.0 million.

 

Note 12. Restructuring Expense

 

 

As of March 31, 2016, the accrued liability associated with the restructuring and other related charges consisted of the following:

 

   

Workforce

   

Excess

   

Other

         
   

Reduction

   

Facilities

   

Exit Costs

   

Total

 

Accrued liability as of December 31, 2015

  $ 139,385     $ 241,493     $ 12,880     $ 393,758  

Charges

    -       -       -       -  

Payments

    (44,654 )     -       -       (44,654 )

Accrued liability as of March 31, 2016

  $ 94,731     $ 241,493     $ 12,880     $ 349,104  

 

The remaining accrual of $349,104 as of March 31, 2016 is expected to be paid during the year ending December 31, 2016.

 

Note 13. Concentrations of Credit Risk

 

For the three months ended March 31, 2016 and 2015, revenue from sales to one customer represented 91% and 80% of the Company’s total revenue, respectively.

 

As of March 31, 2016 and December 31, 2015, the Company had one customer whose accounts receivable balance represented 77% and 70% of accounts receivable, net of allowances, respectively.

 

Note 14. Commitments and Contingencies

 

Legal Proceedings

 

The Company is subject to the possibility of loss contingencies arising in its business and such contingencies are accounted for in accordance with ASC Topic 450, "Contingencies.” In determining loss contingencies, the Company considers the possibility of a loss as well as the ability to reasonably estimate the amount of such loss or liability. An estimated loss is recorded when it is considered probable that a liability has been incurred and when the amount of loss can be reasonably estimated. In the ordinary course of business, the Company is routinely a defendant in or party to various pending and threatened legal claims and proceedings. The Company believes that any liability resulting from these various claims will not have a material adverse effect on its results of operations or financial condition; however, it is possible that extraordinary or unexpected legal fees could adversely impact the Company’s financial results during a particular period. During its ordinary course of business, the Company enters into obligations to defend, indemnify and/or hold harmless various customers, officers, directors, employees, and other third parties. These contractual obligations could give rise to additional litigation costs and involvement in court proceedings.

 

On June 22, 2012, Geveran filed a lawsuit against the Company and several others in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida. On October 30, 2012, the court entered an order transferring the lawsuit to the Ninth Judicial Circuit in and for Orange County, Florida. The action, styled Geveran Investments Limited v. Lighting Science Group Corp., et al., Case No. 12-17738 (07), names the Company as a defendant, as well as Pegasus Capital and nine other entities affiliated with Pegasus Capital; Richard Weinberg, our former Director and former interim Chief Executive Officer and a former partner of Pegasus Capital; Gregory Kaiser, a former Chief Financial Officer; J.P. Morgan Securities, LLC (“J.P. Morgan”); and two employees of J.P. Morgan. Geveran seeks rescission of its $25.0 million investment in the Company, as well as recovery of interest, attorneys’ fees and court costs, jointly and severally against the Company, Pegasus Capital, Mr. Weinberg, Mr. Kaiser, J.P. Morgan and the two J.P. Morgan employees, for alleged violations of Florida securities laws. Geveran alternatively seeks unspecified money damages, as well as recovery of court costs, for alleged common law negligent misrepresentation against these same defendants.

 

 
15

 

 

On August 28, 2014, the court issued an Order Granting Plaintiff’s Motion for Partial Summary Judgment under its First Cause of Action for Violation of the Florida Securities and Investor Protection Act. On November 25, 2015, the court entered judgment against the defendants, including the Company, on a joint and several basis, in the amount of approximately $40.2 million.

 

On December 4, 2015, the Company, along with the other defendants, filed a Notice of Appeal to the Florida Fifth District Court of Appeal and posted a bond securing the judgment in the amount of approximately $20.1 million. Defendant J.P. Morgan also posted a separate bond in the amount of approximately $20.1 million, resulting in total bonding of approximately $40.2 million. On March 29, 2016, the trial court judge determined that the posted bonds were sufficient security to stay execution of the judgment pending the appeal.

 

Although we cannot predict the ultimate outcome of this lawsuit, we believe the court’s summary judgment award in favor of Geveran was in error, that we will prevail on the appeal and the judgment will be overturned, and that the case will be remanded to the trial court for further proceedings. Were that to occur, we believe we have strong defenses against Geveran’s claims. However, in the event that we are not successful on appeal, we could be liable for the full amount of the $40.2 million judgment, plus post judgment interest. Such an outcome would have a material adverse effect on our financial position.

 

The Company believes that, subject to the terms and conditions of the relevant policies (including retention and policy limits), directors’ and officers’ insurance coverage will be available to cover the substantial majority of its legal fees and costs in this matter. However, insurance coverage may not be available for, or such coverage may not be sufficient to fully pay, a judgment or settlement in favor of Geveran. Based upon the terms of an indemnification agreement, the Company has also paid, and may be required to pay in the in the future, reasonable legal expenses incurred by J.P. Morgan and its affiliates in this lawsuit in connection with the engagement of J.P. Morgan as placement agent for the private placement with Geveran. Such payments are not covered by the Company’s insurance coverage. The engagement letter executed with J.P. Morgan provides that the Company will indemnify J.P. Morgan and its affiliates from liabilities relating to J.P. Morgan’s activities as placement agent, unless such activities are finally judicially determined to have resulted from J.P. Morgan’s bad faith, gross negligence or willful misconduct.

 

The Company is also a defendant in action brought by GE Lighting Solutions LLC (“GE Lighting”) in Federal District Court for the Northern District of Ohio in or about January 2013. GE Lighting asserts a claim of patent infringement against the Company under U.S Patent No. 6,787,999, entitled LED-Based Modular Lamp, and U.S. Patent No. 6,799,864, entitled High Power LED Power Pack for Spot Module Illumination, and seeks monetary damages and an injunction. We have denied liability. On August 5, 2015, the court granted the Company’s summary judgment motion invalidating the two GE Lighting patents at issue for indefiniteness, and dismissing GE Lighting’s patent infringement claims against the Company and the other defendants. On September 2, 2015, GE Lighting filed an appeal with the U.S. Court of Appeals for the Federal Circuit. A ruling from the appellate court is not expected until late 2016 early 2017. If GE Lighting were to prevail on its appeal, the case would likely be remanded to the trial court for further proceedings. Were that to occur, we believe that we have strong defenses against GE Lighting’s claims. However, if GE Lighting’s appeal is successful, there is no assurance that we will be successful in defending against this action. The outcome, if unfavorable, could have a material adverse effect on our financial position. Even if the outcome is favorable, this litigation could result in substantial additional costs to us, could be a distraction to management and could harm our financial position.

 

In April 2015, LSG filed a lawsuit against several former employees and a company they formed seeking damages and injunctive relief arising out of the defendants’ misappropriation of our trade secrets and other intellectual property.  Pursuant to the terms of a settlement agreement entered into in December 2015, certain of the individual defendants agreed not to use or disclose our intellectual property and to reimburse us for $200,000 in costs, and the defendants’ company agreed to pay us a commission equal to the greater of (i) $1.7 million and (ii) 5% of such company’s gross sales of biological and agricultural products during the three-year period ending January 2019.

 

In addition, the Company may be a party to a variety of legal actions, such as employment and employment discrimination-related suits, employee benefit claims, breach of contract actions, tort claims, shareholder suits, including securities fraud, intellectual property related litigation, and a variety of legal actions relating to its business operations. In some cases, substantial punitive damages may be sought. The Company currently has insurance coverage for certain of these potential liabilities. Other potential liabilities may not be covered by insurance, insurers may dispute coverage or the amount of insurance may not be sufficient to cover the damages awarded. In addition, certain types of damages, such as punitive damages, may not be covered by insurance and insurance coverage for all or certain forms of liability may become unavailable or prohibitively expensive in the future.

 

 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This section and other parts of this Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements within the meaning of U.S. federal securities laws. Forward-looking statements are any statements that look to future events and include, but are not limited to, statements regarding our future liquidity, financial performance and capital expenditures; the sufficiency of our existing cash and cash equivalents to meet our working capital and capital expenditure needs over the next 12 months; our ability to successfully identify new customers and business opportunities and retain or expand our relationship with current customers; our ability to manage uncertainty with respect to product demand, product costs and end of life-cycle planning; our ability to execute on our strategic plan and realize benefits from initiatives related to streamlining our operations, cost-cutting measures and the introduction of new products; our ability to attract and retain key personnel; our ability to maintain and enhance the quality, safety and efficacy of our products; general economic and business conditions in our markets and our ability to improve our gross profit and achieve profitable growth; and the outcome in any pending and future litigation. In addition, forward-looking statements also consist of statements involving trend analyses and statements including such words as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “might,” “plans,” “predicts” and similar terms and variations thereof. These forward-looking statements speak only as of the date of this Form 10-Q and are subject to business and economic risks. As such, our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 14, 2016 (the “Form 10-K”) and the condensed consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. We assume no obligation to revise or update any forward-looking statements for any reason except as required by law.

 

Company Overview

 

We are an innovator and global provider of light emitting diode (“LED”) lighting technology. We design, develop and market advanced, environmentally sustainable and differentiated illumination solutions that exclusively use LEDs as their light source. Our product portfolio includes LED-based retrofit lamps (replacement bulbs) used in existing light fixtures as well as purpose-built LED-based luminaires (light fixtures). Our lamps and luminaires are used for many common indoor and outdoor residential, commercial, industrial and public infrastructure lighting applications and include LED lighting technology whose color is tuned to achieve specific biological effects. We believe our proprietary technology, unique designs and key relationships throughout the LED lighting supply chain position us favorably to capitalize on the expanding acceptance of LEDs as a lighting source.

 

Our strategic plan for the next three fiscal years consists of creating strong biologically correct lighting brands in the consumer, residential, commercial and industrial markets. We believe that developing innovative and differentiated brands will deliver strong financial returns and a more loyal user base that is less price sensitive. We intend to continue to implement a nimble and agile “go-to-market” business model and manufacturing and product development system to streamline the processes used to introduce new products. We also intend to continue focusing on developing breakthrough innovation and on becoming a market maker in targeted value-added, high-margin segments within the lighting market. Finally, we plan to reduce our cost structure, preserve cash flow and strengthen liquidity to enhance our financial position.

 

Over the past few years, we have focused on expanding and optimizing our global supply chain to meet forecasted demand for our products while addressing the inefficiencies that have compressed our gross profit and overall financial performance in prior periods such as costs incurred to expedite the production or delivery of component parts. We anticipate long-term gross profit improvement as we continue to execute on our initiatives. We completed one of our most critical initiatives in 2014 with the transition of the manufacturing of our high volume lamps from Mexico and Satellite Beach to our contract manufacturing partners in Asia, from which we source the majority of our components. In 2015, we opened a new distribution center in Seattle, Washington in order to reduce the transit time for products from Asia and to provide us with an additional port through which we can import goods. A labor dispute at the Port of Los Angeles in 2015 caused work slowdowns and, as a result, affected the timing and predictability of our deliveries. We believe that our additional distribution facility will help to better maintain the continuity of our supply chain and improve our supply-to-cash cycle time.

 

LED Lighting Industry Trends

 

There are a number of industry factors that affect our business and results of operations including, among others:

 

 

Rate and extent of adoption of LED lighting products. Our potential for growth will be driven by the rate and extent of adoption of LED lighting within the general illumination market and our ability to affect this rate of adoption through the offering of competitive lighting solutions. Although LED lighting is relatively new, its adoption has grown in recent years. Innovations and advancements in LED lighting technology that improve product performance and reduce product cost continue to enhance the value proposition of LED lighting for general illumination and expand its potential commercial applications.

 

 

External legislation and subsidy programs concerning energy efficiency. The United States and many countries in the European Union and elsewhere have already instituted, or have announced plans to institute, government regulations and programs designed to encourage or mandate increased energy efficiency in lighting. These actions include in certain cases banning the sale after specified dates of certain forms of incandescent lighting, which is advancing the adoption of more energy efficient lighting solutions such as LEDs. In addition, the growing demand for electricity is increasingly driving utilities and governmental agencies to provide financial incentives such as rebates for energy efficient lighting technologies in an effort to mitigate the need for investments in new electrical generation capacity. While this trend is generally positive for us, from time to time there have been political efforts in the United States to change or limit the effectiveness of these regulations.

 

 

Intellectual property. LED market participants rely on patented and non-patented proprietary information relating to product development, manufacturing capabilities and other core competencies of their business. Protection and licensing of intellectual property is critical. Therefore, LED lighting industry participants often take steps such as additional patent applications, confidentiality and non-disclosure agreements as well as other security measures. To enforce or protect intellectual property rights, market participants commonly commence or threaten litigation.


 
17

 

 

 

Intense and constantly evolving competitive environment. Competition in the LED lighting market is intense. Many companies have made significant investments in LED lighting development and production equipment. Traditional lighting companies and new entrants are investing in LED based lighting products as LED adoption has gained momentum. Product pricing pressures are significant and market participants often undertake pricing strategies to gain or protect market share, enhance sales of their previously manufactured products and open new applications to LED based lighting solutions. To remain competitive, market participants must continuously increase product performance and reduce costs.

 

Financial Results

 

The following table sets forth our revenue, cost of goods sold and gross profit for the three months ended March 31, 2016 and 2015:

 

   

 

 
   

2016

   

2015

 
                 

Revenue

  $ 17,098,013     $ 19,371,545  

Cost of goods sold

    13,619,103       16,441,297  
                 

Gross profit

  $ 3,478,910     $ 2,930,248  
                 

GAAP gross profit percentage

    20.3 %     15.1 %

 

Our revenue is primarily derived from sales of our LED-based retrofit lamps and luminaires. Our revenue decreased by $2.3 million during the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. This decrease in revenue was due to a decrease in sales to commercial customers of $2.0 million and a $365,000 decrease in sales to The Home Depot, Inc. (“The Home Depot”).

 

We continue to pursue new relationships with retailers and original equipment manufacturers (“OEMs”) to help increase and diversity our sales. In addition, we have increased the roster of distributors and independent sales agents that sell our products and added experienced professionals to our direct sales force to increase the frequency and impact of our activities with key national accounts that are targets for potential adoption of LED lighting.

 

Our gross profit is principally driven by the mix and quantity of products we sell. Our financial results are dependent upon the operating costs associated with our supply chain, including materials, labor and freight, and the level of our selling, distribution and administrative, research and development and other operating expenses. We continuously seek to improve our existing products and to bring new products to market. As a result, many of our products have short life cycles and, therefore, product life cycle planning is critical. At times we may purchase excess components and other materials used in the manufacture and assembly of our products or we may manufacture finished products in excess of demand. In addition, components, materials and products may become obsolete earlier than expected. These circumstances may require us to record inventory reserves and provisions for expected losses on non-cancellable purchase commitments. When these circumstances are present, we may also incur additional expense as we adjust our supply chain and product life-cycle planning.

 

During the three months ended March 31, 2016, our gross profit improved to 20.3% compared to 15.1% for the three months ended March 31, 2015. This improvement was due to changes in the mix of products sold (more sales from higher margin inventory), as well as lower charges for inventory reserves and for warranty expenses. 

 

Non-GAAP Financial Measures

 

Although our condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), we believe the following non-GAAP financial measures provide additional information that is useful to the assessment of our operating performance and trends. As part of our on-going review of financial information related to our business, we regularly use non-GAAP measures, particularly non-GAAP adjusted gross profit and non-GAAP adjusted operating expense as a percentage of revenue, as we believe they provide meaningful insight into our business and useful information with respect to the results of our operations. These non-GAAP financial measures are not in accordance with, nor are they a substitute for, the comparable GAAP financial measures and are intended to supplement our financial results that are prepared in accordance with GAAP. The adjusted presentation below is used by management to measure our business performance and we believe it provides useful information regarding the trend in gross profit percentage based on revenue from sales of our products to customers.

 

We define non-GAAP adjusted cost of goods sold as costs of goods sold less provisions for inventory write-offs. Non-GAAP adjusted gross profit was 20.3% of revenue for the three months ended March 31, 2016 compared to 16.5% for the three months ended March 31, 2015.

 

We define non-GAAP adjusted operating expenses as total operating expenses less non-cash expenses for stock based compensation, restructuring expenses and depreciation and amortization. Non-GAAP adjusted operating expenses for the three months ended March 31, 2016 increased 4.5% while revenue decreased 11.7% compared to the three months ended March 31, 2015. Non-GAAP adjusted operating expenses represented 32.8% of revenue for the three months ended March 31, 2016 compared to 27.7% of revenue for the three months ended March 31, 2015.

 

 
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Three Months Ended March 31,

 
   

2016

   

2015

 
                 

Revenue

  $ 17,098,013     $ 19,371,545  
                 

Cost of goods sold

    13,619,103       16,441,297  

Deduct:

               

Provisions for inventory write-offs

    -       271,452  
                 

Adjusted cost of goods sold

    13,619,103       16,169,845  
                 

Adjusted gross profit

  $ 3,478,910     $ 3,201,700  
                 

Non-GAAP adjusted gross profit percentage

    20.3 %     16.5 %
                 

Total operating expense

  $ 6,378,136     $ 6,866,670  

Less:

               

Issuance of restricted stock and stock options for directors compensation

    11,903       11,101  

Non-cash stock option and restricted stock compensation expense

    544,706       905,396  

Restructuring expense

    -       83,704  

Depreciation and amortization

    221,073       506,072  
                 

Total operating expenses, excluding stock based compensation, restructuring and depreciation and amortization

  $ 5,600,454     $ 5,360,397  
                 

GAAP operating expenses as a percentage of revenue

    37.3 %     35.4 %
                 

Non-GAAP adjusted operating expenses as a percentage of revenue

    32.8 %     27.7 %

 

During 2014 and 2013, we adapted our supply chain and logistics processes to improve our ability to provide more efficient service to our customers and focus our efforts on developing innovative products. We continued to make improvements in our forecasting and finished goods inventory management, continued the transition of our manufacturing processes to lower cost contract manufacturers in Asia and continued to enhance our new product innovation process.

 

We believe that the changes we initiated improved our management and manufacturing infrastructure, expanded our ability to source components and manufacture our products internationally and positioned us for organic growth. We believe these improvements will position us to capitalize on the innovative, science based and creative engineering talent at our Florida research and development facility, which we believe provides us with a competitive advantage. In addition to developing products targeted at mainstream retail and commercial lighting, we are seeking to expand our product offerings to compete across multiple industry verticals.

 

 
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Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and consolidated results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. Our actual results may differ from these estimates. On an on-going basis, we evaluate our estimates based upon historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates may change as new events occur, additional information is obtained and our operating environment changes. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our financial statements. 

 

We believe that our critical accounting policies relate to our more significant estimates and judgments used in the preparation of our condensed consolidated financial statements. Our Annual Report on Form 10-K for the year ended December 31, 2015 contains a discussion of these critical accounting policies. There have been no significant changes in our critical accounting policies since December 31, 2015. See also Note 2 to our unaudited condensed consolidated financial statements for the three months ended March 31, 2016 as set forth herein.

 

 
20

 

 

Results of Operations

 

Three Months Ended March 31, 2016 Compared to the Three Months Ended March 31, 2015

 

The following table sets forth statement of operations data expressed as a percentage of total revenue for the periods indicated:

 

   

Three Months Ended March 31,

   

Variance

   

Percentage of Revenue

 
   

2016

   

2015

       $    

%

   

2016

   

2015

 
                                                 

Revenue

  $ 17,098,013     $ 19,371,545       (2,273,532 )     -11.7 %     100.0 %     100.0 %

Cost of goods sold

    13,619,103       16,441,297       (2,822,194 )     -17.2 %     79.7 %     84.9 %

Selling, distribution and administrative

    5,076,064       5,095,581       (19,517 )     *       29.7 %     26.3 %

Research and development

    1,080,999       1,181,313       (100,314 )     *       6.3 %     6.1 %

Restructuring expense

    -       83,704       (83,704 )     *       0.0 %     0.4 %

Depreciation and amortization

    221,073       506,072       (284,999 )     -56.3 %     1.3 %     2.6 %

Interest expense, including related party

    (1,750,746 )     (1,600,660 )     (150,086 )     *       -10.2 %     -8.3 %

Increase in fair value of liabilities under derivative contracts

    (78,734 )     (8,100,772 )     8,022,038       -99.0 %     -0.5 %     -41.8 %

Other expense, net

    11,018       36,764       (25,746 )     *       0.1 %     0.2 %

Income tax expense

    2,560       -       2,560       *       0.0 %     0.0 %

Net income (loss)

  $ (4,720,248 )   $ (13,601,090 )     8,880,842       -65.3 %     -27.6 %     -70.2 %

 

* Variance is not meaningful

 

Revenue

 

Revenue decreased $2.3 million, or 11.7%, to $17.1 million for the three months ended March 31, 2016 from $19.4 million for the three months ended March 31, 2015. The decrease in revenue was primarily a result of a $365,000 decrease in sales to The Home Depot and a $2.0 million decrease in sales to commercial customers during the three months ended March 31, 2016 as compared to sales during the three months ended March 31, 2015.

 

Cost of Goods Sold

 

Cost of goods sold decreased $2.8 million, or 17.2%, to $13.6 million for the three months ended March 31, 2016 from $16.4 million for the three months ended March 31, 2015. The decrease in cost of goods sold was primarily due to the reduction in revenue, as well as lower levels of inventory reserves and warranty provisions taken in the three months ended March 31, 2016 compared with the three months ended March 31, 2015. Cost of goods sold as a percentage of revenue decreased for the three months ended March 31, 2016 to 79.7% (or a gross profit percentage of 20.3%) as compared to 84.9% (or a gross profit percentage of 15.1%) for the three months ended March 31, 2015.

 

Depreciation and Amortization

 

Depreciation and amortization expense decreased $285,000, or 56.3%, to $221,000 for the three months ended March 31, 2016 from $506,000 for the three months ended March 31, 2015. The decrease in depreciation and amortization expense was primarily a result of our continued use of property and equipment, which we have elected not to replace as part of our cost cutting initiative.

 

Increase in Fair Value of Liabilities under Derivative Contracts

 

The change in the fair value of liabilities under derivative contracts is driven by changes in the trading price of our common stock, par value $0.001 per share (“Common Stock”) and changes in risk-free interest rates. The increase in fair value of liabilities under derivative contracts for the three months ended March 31, 2016 was $79,000, compared to an increase of $8.1 million for the three months ended March 31, 2015, representing a decline of 99.0%, or $8.0 million. The change was due to the relatively small change in the price of our Common Stock between the three months ended March 31, 2016 compared with the three months ended March 31, 2015.   

 

Liquidity and Capital Resources

 

We have experienced significant historical net losses as well as negative cash flows from operations, resulting in an accumulated deficit of $832.1 million and stockholders’ deficit of $558.7 million as March 31, 2016. As of March 31, 2016, we had cash and cash equivalents of $1.7 million and an additional $3.0 million in restricted cash subject to a cash collateral dominion agreement pursuant to our five-year term loan (the “Medley Term Loan”) with Medley Capital Corporation (“Medley”). Our cash expenditures primarily relate to procurement of inventory and payment of salaries, benefits and other operating costs. Our primary sources of liquidity have historically been borrowings from various lenders and sales of Common Stock and Convertible Preferred Stock (as defined below) to, and short-term loans from, affiliates of Pegasus Capital Advisors, L.P. (“Pegasus Capital”), including Pegasus IV, L.P. (“Pegasus Fund IV”), LSGC Holdings LLC, LSGC Holdings II, LSGC Holdings III, LLC (“Holdings III”) and PCA LSG Holdings LLC (“PCA Holdings”). While Pegasus Capital and its affiliates (collectively, “Pegasus”) have led the majority of our capital raises, the offerings of our Convertible Preferred Stock also involved and/or were led by parties other than Pegasus.

 

 
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We obtained the five-year, $30.5 million Medley Term Loan from Medley on February 19, 2014 pursuant to a Term Loan Agreement (as amended, the “Medley Loan Agreement”). Pursuant to the Medley Loan Agreement, we are required to achieve a minimum quarterly fixed charge coverage ratio for the preceding 12-month period and to maintain certain minimum EBITDA levels.

 

We also obtained a three-year revolving credit facility with a maximum line amount of $22.5 million from Ares on April 25, 2014 pursuant to a Loan and Security Agreement (as amended, the “Ares ABL Agreement”). As of March 31, 2016, we had $11.0 million in borrowings outstanding under the Ares ABL Agreement and additional borrowing capacity of $2.7 million. The maximum borrowing capacity under the Ares ABL Agreement is based on a formula of eligible accounts receivable and inventory. The Ares ABL Agreement also requires us to achieve a minimum quarterly fixed charge coverage ratio for the preceding 12-month period.

 

On January 30, 2015, September 11, 2015 and February 23, 2016, we issued 11,525, 10,000 and 3,000 units of our securities (“Series J Securities”), respectively, to Holdings III. On September 30, 2015, we issued 62 Series J Securities to certain existing preferred stockholders upon exercise of their preemptive rights under the certificates of designation governing the Series H Convertible Preferred Stock (the “Series H Preferred Stock”), Series I Convertible Preferred Stock (the “Series I Preferred Stock”) and Series J Convertible Preferred Stock (the “Series J Preferred Stock” and, collectively with the Series H Preferred Stock and Series I Preferred Stock, the “Convertible Preferred Stock”). In each case, the Series J Securities were issued at a purchase price of $1,000 per Series J Security and in accordance with the terms of separate subscription agreements with each of the preemptive rights purchasers and Holdings III. We received aggregate gross proceeds of approximately $21.6 million and $3.0 million in connection with the issuances of Series J Securities during 2015 and the three months ended March 31, 2016, respectively. Each Series J Security consists of (a) one share of Series J Preferred Stock and (b) a warrant to purchase 2,650 shares of our Common Stock (a “Series J Warrant”) at an exercise price of $0.001 per share of Common Stock.

 

We continue to face challenges in our efforts to achieve profitability and positive cash flows from operations. Our ability to continue to meet our obligations in the ordinary course of business is dependent upon establishing profitable operations, which may be supplemented by any additional funds that we may raise through public or private financing or increased borrowing capacity.

 

In 2015, our largest customer, The Home Depot, performed a periodic product line review relating to its entire private label LED lighting product offering. Following the line review, we entered into a new supplier buying agreement with The Home Depot, which is expected to go into full effect in the second quarter of 2016. Pursuant to this supplier buying agreement, The Home Depot has elected to purchase certain products previously supplied by us directly from overseas suppliers. Such products represented a significant percentage of our sales to The Home Depot in 2015 and 2014. We were, however, selected to supply certain new products to The Home Depot and will continue to supply certain other products to The Home Depot under our prior agreement. In addition, the terms of the new supplier buying agreement with The Home Depot permit us to pursue opportunities to sell products to specified “big box” and other retailers, which was prohibited under our prior agreement. Notwithstanding the new supplier buying agreement, as was the case under our prior agreement with The Home Depot, The Home Depot is not required to purchase any minimum amount of products from us. As a result of the line review, we expect 2016 sales to The Home Depot and, as a result, revenue, to be significantly less than they were in 2015. However, because we cannot reasonably estimate the extent to which such reduced revenue may be offset by sales of the new products to The Home Depot or by any potential new sales to other retailers, we cannot determine at this time the overall impact that the results of The Home Depot line review will have on our financial condition and operations in the future.

 

As a result of our historical losses, we believe we will likely need to raise additional capital to fund our on-going operations. Sources of additional capital may not be available in an amount or on terms that are acceptable to us, if at all. Our complex capital structure, including our obligations to the holders of the outstanding shares of Convertible Preferred Stock and the series of preferred stock designated as Series K (the “Series K Preferred Stock”), may make it more difficult to raise additional capital from new or existing investors or lenders. If we are not able to raise such additional capital, we may need to restructure or refinance our existing obligations, which restructuring or refinancing would require the consent and cooperation of our creditors and certain stockholders. In such event, we may not be able to complete a restructuring or refinancing on terms that are acceptable to us, if at all. If we are unable to obtain sufficient capital when needed, our business, compliance with our credit facilities and future prospects may be adversely affected.

 

 
22

 

 

Pegasus has committed to provide financial support to us of up to $5.25 million, as needed, to fund our operations and debt service requirements through April 2017. The amount of this commitment will be reduced by the amount of any capital provided by other parties (except for draws under the Ares ABL) that is not repayable by us on or before April 14, 2017. Such commitment, which in no way amounts to a guarantee of our obligations, may be provided through a variety of mechanisms, which may or may not be similar to those previously employed. Furthermore, in exchange for such support, Pegasus, as our controlling stockholder, may request that we take certain actions related to operations, capital structure or otherwise, which, if accepted, could have a negative effect on our business and results of operations. In addition, Pegasus may seek other terms and consideration that would require, and may not receive, approval by the independent committee of our board of directors. Management believes that, subject to certain conditions, we will have sufficient capital to fund our operations for the next 12 months. Such conditions include, among other things, (1) maintaining our lower cost structure implemented over the last three years, (2) replacing a significant portion of the decline in revenue anticipated as a result of The Home Depot’s line review and (3) if necessary, Pegasus fulfilling its commitment as described above.

 

RW LSG Holdings LLC (“Riverwood Holdings”) and Pegasus each have the right to cause us to redeem their shares of Series H Preferred Stock and Series I Preferred Stock, respectively, at any time on or after March 27, 2017. If either Riverwood Holdings or Pegasus elects to cause us to redeem its shares of Series H Preferred Stock or Series I Preferred Stock, all other holders of the applicable series will similarly have the right to request the redemption of their shares of Series H Preferred Stock or Series I Preferred Stock. In addition, Portman Limited and affiliates of Zouk Holdings Limited, acting together, have a contractual right to require us to redeem their respective shares of Series H Preferred Stock on or after March 27, 2017, subject to certain conditions and limitations. We are also required to redeem the outstanding shares of our Series J Preferred Stock (a) subject to certain limited exceptions, immediately prior to the redemption of the Series H Preferred Stock, Series I Preferred Stock or any other security that ranks junior to, or pari passu with, the Series J Preferred Stock and (b) on November 14, 2019, at the election of the holders of Series J Preferred Stock (a “Special Redemption”). Holders of our Convertible Preferred Stock would also have the right to require us to redeem such shares upon our uncured material breach of our obligations under our outstanding indebtedness or the uncured material breach of the terms of the certificates of designation governing the Convertible Preferred Stock. Further, depending on whether the Appeal Bond (as defined below) has been drawn or fully released, the Series K Certificate of Designation requires us to redeem the outstanding shares of Series K Preferred Stock in the event of a liquidation, dissolution or winding up of the Company or an earlier change of control or “junior security redemption,” which includes events triggering a redemption of the outstanding shares of Convertible Preferred Stock.  As of March 31, 2016, in the event we were required to redeem all of our outstanding shares of Convertible Preferred Stock and Series K Preferred Stock (collectively, the “Preferred Stock”), our maximum payment obligation would have been $538.2 million. We would be required to repay our outstanding obligations under the Medley Term Loan our three-year asset based revolving credit facility with ACF Finco I LP (as amended from time to time, the “Ares ABL”) prior to any redemption of any shares of Preferred Stock. As of March 31, 2016, we had $38.1 million of aggregate borrowings outstanding under these credit facilities that we would be required to repay.

 

Any redemption of the Preferred Stock would be limited to funds legally available therefor under Delaware law. The certificates of designation governing the Preferred Stock provide that if there is not a sufficient amount of cash or surplus available to pay for a redemption of the Preferred Stock, then the redemption must be paid out of the remaining assets of the Company. In addition, the certificates of designation provide that we are not permitted or required to redeem any shares of Preferred Stock for so long as such redemption would result in an event of default under our credit facilities.

 

As of March 31, 2016, based solely on a review of our balance sheet, we did not have legally available funds under Delaware law to satisfy a redemption of our Preferred Stock. In addition, based solely on our projected balance sheet as of March 27, 2017, we do not believe that we will have legally available funds on or before March 27, 2017 to satisfy any such redemption of our Preferred Stock.

 

The certificate of designation governing the Series H Preferred Stock also provides that upon the occurrence of a “control event,” we must take any and all actions required and permitted to fix the size of our board of directors to a size that would permit Riverwood Holdings (as the primary investor of the Series H Preferred Stock) to appoint a majority of the directors to the board until we satisfy or otherwise cure the obligations giving rise to the control event. A control event occurs if, among other things, Riverwood Holdings exercises its optional redemption right under the certificate of designation governing the Series H Preferred Stock and we are unable to redeem Riverwood Holdings’s Convertible Preferred Stock. If Riverwood Holdings were to exercise its optional redemption right and a control event were to occur, Riverwood could take control of our board of directors.

 

The certificate of designation governing the Series J Preferred Stock provides that if we do not have sufficient capital available to redeem the Series J Preferred Stock in connection with a Special Redemption of the Series J Preferred Stock, we will be required to issue a non-interest bearing note or notes (payable 180 days after issuance) in the principal amount of the liquidation amount of any shares of Series J Preferred Stock not redeemed by us in connection with such Special Redemption, subject to certain limitations imposed by Delaware law governing distributions to stockholders.

 

 
23

 

 

As discussed more fully in the Form 10-K, one of our stockholders, Geveran Investments Limited (“Geveran”), filed a lawsuit against us and certain other defendants seeking, among other things, rescissionary damages in connection with its $25.0 million investment in the Company.  On November 30, 2015, the Circuit Court of the Ninth Judicial Circuit in and for Orange County, Florida, the court presiding over the lawsuit, entered an Order Granting Plaintiff’s Motion for Partial Summary Judgment Under its First Cause of Action for Violation of the Florida Securities and Investment Protection Act (the “Summary Judgment Order”). Accordingly, we, with the assistance of Pegasus Fund IV, posted an appeal bond in the amount of $20.1 million (the “Appeal Bond”) to obtain an automatic stay of enforcement as we appeal the Summary Judgment Order in the Geveran case. Although we cannot predict the ultimate outcome of this lawsuit, we believe the court’s Summary Judgment Order was in error and that we have strong defenses against Geveran’s claims. However, in the event that we are not successful on appeal, we could be liable for the full amount of Geveran’s $25 million investment, as well as interest, attorney’s fees and court costs. Accordingly, the Summary Judgment Order and the Appeal Bond could have a material adverse effect on our liquidity and our ability to raise capital in the future. We believe that, subject to the terms and conditions of the relevant policies (including retention and policy limits), directors' and officers' insurance coverage will be available to cover the substantial majority of our legal fees and costs in this matter. However, insurance coverage may not be available for, or such coverage may not be sufficient to fully pay, a judgment or settlement in favor of Geveran. Our engagement letter with J.P. Morgan Securities, LLC ("J.P. Morgan") pursuant to which we engaged J.P. Morgan as placement agent in connection with the private placement to Geveran requires us to indemnify J.P. Morgan and its affiliates from liabilities relating to J.P. Morgan's activities as placement agent, unless such activities are finally judicially determined to have resulted from J.P. Morgan's bad faith, gross negligence or willful misconduct. Based upon the terms of such engagement letter, we have also paid, and may be required to pay in the future, the reasonable legal expenses incurred by J.P. Morgan and its affiliates in this lawsuit. Such payments are not covered by our insurance.

 

Cash Flows

 

The following table summarizes our cash flow activities for the three months ended March 31, 2016 and 2015:

 

    Three Months Ended March 31.  

Cash flow activities:

 

2016

   

2015

 

Net cash used in operating activities

  $ (6,265,868 )   $ (17,192,978 )

Net cash used in investing activities

    (154,441 )     (94,724 )

Net cash provided by financing activities

    7,651,031       16,224,437  

 

Operating Activities

 

Cash used in operating activities is net loss adjusted for certain non-cash items and changes in certain assets and liabilities. Net cash used in operating activities decreased to $6.3 million for the three months ended March 31, 2016 from $17.2 million for the three months ended March 31, 2015. For the three months ended March 31, 2016, net cash used in operating activities included certain non-cash reconciliation items consisting primarily of $707,000 in amortization of debt issuance costs, accretion and interest accrual primarily on the Ares ABL and the Medley Term Loan, $545,000 of stock-based compensation expense and $221,000 in depreciation and amortization. Net cash used in operating activities for the three months ended March 31, 2015 included certain non-cash reconciliation items comprised primarily of an $8.1 million net increase in fair value of derivative contracts, $916,000 of stock-based compensation expense, $684,000 in amortization of debt issuance costs, accretion and interest accrual primarily on the Ares ABL and the Medley Term Loan, $506,000 in depreciation and amortization and $271,000 in inventory write-downs.

 

Changes in working capital also contributed to the decrease in net cash used in operating activities for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. In the aggregate, working capital changes totaled a net use of cash of $3.1 million in the three months ended March 31, 2016 compared to a net use of cash of $14.2 million in the three months ended March 31, 2015. For the three months ended March 31, 2016, the working capital changes consisted primarily of a reduction of accounts payable of $4.3 million and an increase in accounts receivable of $2.8 million, which were partially offset by a $4.2 million decrease in inventory. For the three months ended March 31, 2015, the working capital changes consisted primarily of a decrease in accounts payable of $9.1 million, an increase in inventories of $5.5 million and a decrease in accrued expense and other liabilities of $920,000, which were partially offset by a $1.1 million decrease in prepaid expenses.

 

 
24

 

 

Investing Activities

 

Cash used in investing activities relates to the purchase of property and equipment and capitalized patents. Net cash used in investing activities was $154,000 and $95,000 for the three months ended March 31, 2016 and 2015, respectively. The cash used in investing activities for the three months ended March 31, 2016 was primarily due to capitalized patents of $145,000. The cash used in investing activities for the three months ended March 31, 2015 was primarily due to capitalized patents of $92,000.

 

Financing Activities

 

Cash provided by financing activities has historically been composed of net proceeds from various debt facilities and the issuance of Common Stock and Preferred Stock. Net cash provided by financing activities was $7.7 million and $16.2 million for the three months ended March 31, 2016 and 2015, respectively. The cash provided by financing activities for the three months ended March 31, 2016 included net draws on our lines of credit and other short term borrowings of $4.7 million and proceeds from the issuance of Series J Securities for aggregate proceeds of $3.0 million. The cash provided by financing activities for the three months ended March 31, 2015 included proceeds from the issuance of Series J Securities for aggregate proceeds of $11.5 million and net draws on our lines of credit and other short term borrowings of $5.0 million, partially offset by $135,000 in fees incurred in connection with the issuance of Series J Securities in January 2015.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”)) that are designed to provide reasonable assurance that the information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Senior Vice President and Chief Financial Officer (the “Certifying Officers”), as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

 

We carried out an evaluation under the supervision and with the participation of our management, including the Certifying Officers, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, our management, including the Certifying Officers, concluded that, as of March 31, 2016, our disclosure controls and procedures were not effective at a reasonable assurance level because the ongoing remediation efforts to address the material weaknesses identified in our Annual Report on Form 10-K for the year ended December 31, 2015 have not been fully developed and implemented.

 

Changes in Internal Control over Financial Reporting

 

Subsequent to December 31, 2015, the following change is an action taken to our internal controls, which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:

 

 

We have reemphasized the importance of consistent application of the controls over the spreadsheet formulas used in the inventory valuation and enhanced the training of the personnel responsible for preparing and reviewing the spreadsheet.

 

Our leadership team, together with other senior executives and our board of directors, is committed to achieving and maintaining a strong control environment, high ethical standards and financial reporting integrity. This commitment has been and will continue to be communicated to, and reinforced with, our employees. Under the direction of our board of directors, management will continue to review and make changes to the overall design of our internal control environment, as well as policies and procedures to improve the overall effectiveness of our internal control over financial reporting and our disclosure controls and procedures.

 

Other than the measures discussed above, there were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 
25

 

 

PART II — OTHER INFORMATION

 

Except as listed below, other items in Part II are omitted because the items are inapplicable or require no response.

 

Item 1. Legal Proceedings

 

For a description of material pending legal proceedings, see the discussion set forth under the heading “Legal Proceedings” in Note 14 to our unaudited condensed consolidated financial statements for the three months ended March 31, 2016, which discussion is incorporated by reference herein.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

On February 23, 2016, we issued 3,000 Series J Securities to Holdings III for gross proceeds of $3.0 million, with each Series J Security consisting of (a) one share of Series J Preferred Stock and (b) a Series J Warrant. We issued the Series J Securities pursuant to the Preferred Stock Subscription and Support Agreement dated September 11, 2015 with Holdings III and Pegasus Fund IV.

 

Each share of Series J Preferred Stock is convertible at any time, at the election of the holder thereof, into the number of shares of Common Stock (the “Optional Conversion Shares”) equal to the quotient obtained by dividing (i) $1,000 by (ii) the $0.95 conversion price of the Series J Preferred Stock, subject to adjustment in accordance with the terms set forth in the certificate of designation governing the Series J Preferred Stock.

 

Upon the consummation of a qualified public offering (“QPO”) where (i) the gross proceeds received by us and any selling stockholders in the offering are no less than $100 million and (ii) our market capitalization immediately after consummation of the offering is no less than $500 million, each outstanding share of Series J Preferred Stock will automatically convert into the number of shares of Common Stock equal to the greater of (a) the number of Optional Conversion Shares or (b) the quotient obtained by dividing (x) $2,000 (subject to adjustment in accordance with the terms set forth in the certificate of designation governing the Series J Preferred Stock) by (y) the price per share of Common Stock paid by the public in the QPO.

 

We issued the shares of Series J Preferred Stock and the Series J Warrants issued on February 23, 2016 pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and the safe harbors for sales provided by Regulation D promulgated thereunder.

 

Item 6. Exhibits

 

 See “Exhibit Index” for a description of our exhibits.

 

 

 
26

 

 

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.

 

 

 

 

 

 

 

 

LIGHTING SCIENCE GROUP CORPORATION 

 

 

 

 

 

Date: May 16, 2016

 

By

 

 /s/ Edward D. Bednarcik

 

 

 

 

 

 

 

Edward D. Bednarcik

 

 

Chief Executive Officer

   

(Principal Executive Officer)

         

Date: May 16, 2016

 

By

 

 /s/ Mark D. Gorton

 

 

 

 

 

 

 

Mark D. Gorton

 

 

Executive Vice President and Chief Financial Officer

   

(Principal Financial and Accounting Officer)

         

 

 
27

 

 

INDEX TO EXHIBITS

 

Exhibit

Number

 

 

 

Description

 

3.1

 

Amended and Restated Certificate of Incorporation of Lighting Science Group Corporation (previously filed as Exhibit 3.1 to the Annual Report on Form 10-K filed on March 31, 2015, File No. 0-20354, and incorporated herein by reference).

 
       

3.2

 

Amended and Restated Bylaws of Lighting Science Group Corporation (previously filed as Exhibit 3.1 to the Current Report on Form 8-K filed on December 28, 2010, File No. 0-20354, and incorporated herein by reference).

 
       

3.3

 

Certificate of Amendment to Amended and Restated Certificate of Incorporation (previously filed as Exhibit 3.3 to the Annual Report on Form 10-K filed on March 31, 2015, File No. 0-20354, and incorporated herein by reference).

 
       

4.1

 

Specimen Common Stock Certificate (previously filed as Exhibit 4.14 to Amendment No. 1 to the Registration Statement on Form S-1/A filed on January 12, 2010, File No. 333-162966, and incorporated herein by reference).

 
       

4.2

 

Amended and Restated Certificate of Designation of Series H Convertible Preferred Stock filed with the Secretary of State of Delaware on November 14, 2014 (previously filed as Exhibit 4.1 to the Current Report on Form 8-K filed on November 20, 2014, File No. 0-20354, and incorporated herein by reference).

 
       

4.3

 

Amended and Restated Certificate of Designation of Series I Convertible Preferred Stock filed with the Secretary of State of Delaware on November 14, 2014 (previously filed as Exhibit 4.2 to the Current Report on Form 8-K filed on November 20, 2014, File No. 0-20354, and incorporated herein by reference).

 
       

4.4

 

Amended and Restated Certificate of Designation of Series J Convertible Preferred Stock filed with the Secretary of State of Delaware on November 14, 2014 (previously filed as Exhibit 4.3 to the Current Report on Form 8-K filed on November 20, 2014, File No. 0-20354, and incorporated herein by reference).

 
       

4.4.1

 

Certificate of Increase of Series J Convertible Preferred Stock filed with the Secretary of State of Delaware on September 11, 2015 (previously filed as Exhibit 4.1 to the Current Report on Form 8-K filed on September 17, 2015, File No. 0-20354, and incorporated herein by reference).

 
       

4.5

 

Certificate of Designation of Series K Preferred Stock filed with the Secretary of State of Delaware on September 11, 2015 (previously filed as Exhibit 4.2 to the Current Report on Form 8-K filed on September 17, 2015, File No. 0-20354, and incorporated herein by reference).

 
       

4.6

 

Warrant Agreement, dated as of December 22, 2010, by and between Lighting Science Group Corporation and American Stock Transfer & Trust Company, LLC (previously filed as Exhibit 4.1 to the Current Report on Form 8-K filed on January 4, 2011, File No. 0-20354, and incorporated herein by reference).

 

 

 
28

 

 

Exhibit

Number

 

 

Description

 

4.7

 

Warrant to Purchase Common Stock of Lighting Science Group Corporation, dated January 13, 2011 and issued to The Home Depot, Inc. (previously filed as Exhibit 4.1 to the Current Report on Form 8-K filed on January 20, 2011, File No. 0-20354, and incorporated herein by reference).

 
       

4.8

 

Form of Warrant to Purchase Common Stock of Lighting Science Group Corporation, dated June 15, 2012 and issued to RW LSG Management Holdings LLC and certain other investors (previously filed as Exhibit 4.6 to Amendment No. 2 to the Registration Statement on Form S-1/A filed on September 27, 2012, File No. 333-172165, and incorporated herein by reference).

 
       

4.9

 

Warrant, dated as of September 25, 2012 and issued to Cleantech Europe II (A) LP (previously filed as Exhibit 4.1 to the Current Report on Form 8-K filed on September 27, 2012, File No. 0-20354, and incorporated herein by reference).

 
       

4.10

 

Warrant, dated as of September 25, 2012 and issued to Cleantech Europe II (B) LP (previously filed as Exhibit 4.2 to the Current Report on Form 8-K filed on September 27, 2012, File No. 0-20354, and incorporated herein by reference).

 
       

4.11

 

Warrant, dated as of September 25, 2012 and issued to Portman Limited (previously filed as Exhibit 4.3 to the Current Report on Form 8-K filed on September 27, 2012, File No. 0-20354, and incorporated herein by reference).

 
       

4.12

 

Warrant, dated as of September 11, 2013, by and between Lighting Science Group Corporation and LSGC Holdings II LLC (previously filed as Exhibit 4.4 to the Current Report on Form 8-K filed on September 13, 2013, File No. 0-20354, and incorporated herein by reference).

 
       

4.13

 

Warrant, dated as of January 3, 2014, by and between Lighting Science Group Corporation and LSGC Holdings II LLC (previously filed as Exhibit 4.4 to the Current Report on Form 8-K filed on January 8, 2014, File No. 0-20354, and incorporated herein by reference).

 
       

4.14

 

Warrant, dated as of January 3, 2014, by and between Lighting Science Group Corporation and PCA LSG Holdings LLC (previously filed as Exhibit 4.5 to the Current Report on Form 8-K filed on January 8, 2014, File No. 0-20354, and incorporated herein by reference).

 
       

4.15

 

Warrant, dated as of January 3, 2014, by and between Lighting Science Group Corporation and RW LSG Holdings LLC (previously filed as Exhibit 4.6 to the Current Report on Form 8-K filed on January 8, 2014, File No. 0-20354, and incorporated herein by reference).

 
       

4.16

 

Warrant, dated as of January 3, 2014, by and between Lighting Science Group Corporation and PCA LSG Holdings LLC (previously filed as Exhibit 4.7 to the Current Report on Form 8-K filed on January 8, 2014, File No. 0-20354, and incorporated herein by reference).

 
       

4.17

 

Warrant, dated as of January 3, 2014, by and between Lighting Science Group Corporation and LSGC Holdings II, LLC (previously filed as Exhibit 4.8 to the Current Report on Form 8-K filed on January 8, 2014, File No. 0-20354, and incorporated herein by reference).

 

 

 

 
29

 

 

 

 

Exhibit

Number

 

 

Description

 

4.18

 

Warrant, dated as of January 3, 2014, by and between Lighting Science Group Corporation and RW LSG Holdings LLC (previously filed as Exhibit 4.9 to the Current Report on Form 8-K filed on January 8, 2014, File No. 0-20354, and incorporated herein by reference).

 
       

4.19

 

Warrant, dated as of February 19, 2014, by and between Lighting Science Group Corporation and Medley Capital Corporation (previously filed as Exhibit 4.1 to the Current Report on Form 8-K filed on February 25, 2014, File No. 0-20354, and incorporated herein by reference).

 
       

4.20

 

Warrant, dated as of February 19, 2014, by and between Lighting Science Group Corporation and Medley Opportunity Fund II LP (previously filed as Exhibit 4.2 to the Current Report on Form 8-K filed on February 25, 2014, File No. 0-20354, and incorporated herein by reference).

 
       

4.21

 

Warrant, dated as of February 19, 2014, by and between Lighting Science Group Corporation and Pegasus Capital Partners IV, L.P. (previously filed as Exhibit 4.4 to the Current Report on Form 8-K filed on February 25, 2014, File No. 0-20354, and incorporated herein by reference).

 
       

4.22

 

Warrant, dated as of February 19, 2014, by and between Lighting Science Group Corporation and Pegasus Capital Partners V, L.P. (previously filed as Exhibit 4.5 to the Current Report on Form 8-K filed on February 25, 2014, File No. 0-20354, and incorporated herein by reference).

 
       

4.23

 

Warrant to Purchase Common Stock, dated December 7, 2015 and issued to Pegasus Partners IV, L.P. (previously filed as Exhibit 4.23 to the Annual Report on Form 10-K filed on April 14, 2016, File 0-20354, and incorporated herein by reference).

 
       

4.24

 

Amended and Restated Registration Rights Agreement, dated as of January 23, 2009, by and between Lighting Science Group Corporation and Pegasus Partners IV, L.P. (previously filed as Exhibit 4.1 to the Current Report on Form 8-K filed on January 30, 2009, File No. 0-20354, and incorporated herein by reference).

 
       

4.24.1

 

Amendment to Amended and Restated Registration Rights Agreement, dated as of May 25, 2012, by and among Lighting Science Group Corporation, Pegasus Partners IV, L.P. and LSGC Holdings LLC (previously filed as Exhibit 10.5 to the Current Report on Form 8-K filed on June 1, 2012, File No. 0-20354, and incorporated herein by reference).

 
       

4.25

 

Registration Rights Agreement, dated January 14, 2011, between Lighting Science Group Corporation and The Home Depot, Inc. (previously filed as Exhibit 4.2 to the Current Report on Form 8-K filed on January 20, 2011, File No. 0-20354, and incorporated herein by reference).

 
       

4.26

 

Amended and Restated Registration Rights Agreement, dated as of September 25, 2012, by and among Lighting Science Group Corporation, RW LSG Holdings LLC, RW LSG Management Holdings LLC, Portman Limited, Cleantech Europe II (A) LP and Cleantech Europe II (B) LP (previously filed as Exhibit 10.6 to the Current Report on Form 8-K filed on September 27, 2012, File No. 0-20354, and incorporated herein by reference).

 
       

4.27

 

Registration Rights Agreement, dated February 19, 2014 by and between Lighting Science Group Corporation, Medley Capital Corporation and Medley Opportunity Fund II LP (previously filed as Exhibit 4.3 to the Current Report on Form 8-K filed on February 25, 2014, File No. 0-20354, and incorporated herein by reference).

 

 

 
30

 

 

Exhibit

Number

 

  Description  

4.28

 

Registration Rights Agreement, dated November 14, 2014 by and between Lighting Science Group Corporation, Serengeti Lycaon MM L.P. and Serengeti Opportunities MM L.P. (previously filed as Exhibit 10.2 to the Current Report on Form 8-K filed on November 20, 2014, File No. 0-20354, and incorporated herein by reference).

 
       
10.1+   Offer Letter, dated March 4, 2016, between Lighting Science Group Corporation and Mark D. Gorton (previously filed as Exhibit 10.1 to the Current Report on Form 8-K filed on April 1, 2016, File No. 0-20354, and incorporated herein by reference).  
       
31.1*   Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  
       
31.2*   Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  
       
32.1**   Certification of Principal Executive Officer and Principal Financial and Accounting Officer pursuant to 18 U.S.C. Section 1350, 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 Label Linkbase Document.  
       
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document.  

 

 

*         Filed herewith.

**       The certifications attached as Exhibit 32.1 are not deemed “filed” with the SEC and are not to be incorporated by reference into any filing of Lighting Science Group Corporation under the Securities Act or the Exchange Act,  whether made before or after the date of this Annual Report on Form 10-K, regardless of any general incorporation language in such filing.

+         Management contract or compensatory plan or arrangement.