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EX-32.1 - EXHIBIT 32.1 - LIGHTING SCIENCE GROUP CORPex32-1.htm
EX-31.2 - EXHIBIT 31.2 - LIGHTING SCIENCE GROUP CORPex31-2.htm
EX-31.1 - EXHIBIT 31.1 - LIGHTING SCIENCE GROUP CORPex31-1.htm
EX-10.5 - EXHIBIT 10.5 - LIGHTING SCIENCE GROUP CORPex10-5.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, 2017

 

 

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 204, 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☑ Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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 1, 2017, was 217,787,020 shares.

 

 
 

 

 

 

LIGHTING SCIENCE GROUP CORPORATION
AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended March 31, 2017

  

 

Table of Contents

  

  Page
   

PART I – FINANCIAL INFORMATION

1

   
Item 1. Financial Statements (Unaudited) 1
   
Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016  1
   
Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2017 and 2016  2
   
Condensed Consolidated Statements of Stockholders’ Deficit for the Three Months Ended March 31, 2017            3
   
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016            4
   
Notes to the Condensed Consolidated Financial Statements (Unaudited) 5
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 18
   
PART II – OTHER INFORMATION 25
   
Item 1. Legal Proceedings 25
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
   
Item 6. Exhibits 25
   
SIGNATURES 26

 

 
 

 

  

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements 

 

LIGHTING SCIENCE GROUP CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) 

 

   

March 31,

   

December 31,

 
   

2017

   

2016

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 1,755,823       1,911,151  

Restricted cash

    3,000,000       3,000,000  

Accounts receivable, net

    5,775,963       4,112,809  

Inventories

    11,255,124       16,422,382  

Prepaid expenses

    1,229,804       962,516  

Total current assets

    23,016,714       26,408,858  
                 

Property and equipment, net

    611,037       636,238  

Intangible assets, net

    3,571,538       3,496,169  

Pegasus Commitment

    -       40,000  

Other long-term assets

    106,765       107,430  
                 

Total assets

  $ 27,306,054     $ 30,688,695  
                 

Liabilities and Stockholders’ Deficit

               

Current liabilities:

               

Line of credit, net of debt issuance costs

  $ 2,168,296     $ 5,785,020  

Accounts payable

    9,900,546       13,846,007  

Accrued expenses

    7,525,091       7,162,772  

Total current liabilities

    19,593,933       26,793,799  
                 

Note payable, net of debt issuance costs

    29,387,805       28,858,578  

Liabilities under derivative contracts

    2,418,158       1,048,057  

Total other liabilities

    31,805,963       29,906,635  
                 

Total liabilities

    51,399,896       56,700,434  
                 

Series H Redeemable Convertible Preferred Stock, $.001 par value, authorized 135,000 shares, 111,514 shares issued and outstanding as of March 31, 2017 and December 31, 2016

    223,030,110       223,030,110  

Series I Redeemable Convertible Preferred Stock, $.001 par value, authorized 90,000 shares, 57,365 shares issued and outstanding as of March 31, 2017 and December 31, 2016

    114,736,096       114,736,096  

Series J Redeemable Convertible Preferred Stock, $.001 par value, authorized 120,000 shares, 103,062 and 93,062 shares issued and outstanding as of March 31, 2017 and December 31, 2016

    206,124,000       186,124,000  

Series K Redeemable Preferred Stock, $.001 par value, authorized 40,000 shares, 20,106 shares issued and outstanding as of March 31, 2017 and December 31, 2016

    20,106,030       20,106,030  
      563,996,236       543,996,236  

Commitments and contingencies

               
                 

Stockholders' deficit:

               

Common stock, $.001 par value, authorized 975,000,000 shares, 220,292,020 shares issued as of March 31, 2017 and December 31, 2016, respectively

    220,292       220,292  

Additional paid-in capital

    272,326,554       282,614,569  

Accumulated deficit

    (855,431,527 )     (847,632,139 )

Accumulated other comprehensive loss

    (1,447,897 )     (1,453,197 )

Treasury stock, 2,505,000 shares as of March 31, 2017 and December 31, 2016, at cost

    (3,757,500 )     (3,757,500 )

Total stockholders’ deficit

    (588,090,078 )     (570,007,975 )

Total liabilities and stockholders’ deficit

  $ 27,306,054     $ 30,688,695  

 

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,

 
   

2017

   

2016

 
                 

Revenue

  $ 9,337,305     $ 17,098,013  

Cost of goods sold

    7,355,672       13,619,103  

Gross profit

    1,981,633       3,478,910  
                 

Operating expense:

               

Selling, distribution and administrative

    5,254,249       5,076,064  

Research and development

    730,334       1,080,999  

Restructuring expense

    409,199       -  

Depreciation and amortization

    139,397       221,073  

Total operating expenses

    6,533,179       6,378,136  

Loss from operations

    (4,551,546 )     (2,899,226 )
                 

Other income (expense):

               

Interest expense

    (1,705,726 )     (1,612,446 )

Related party interest expense

    (138,300 )     (138,300 )

Increase in fair value of liabilities under derivative contracts

    (1,410,101 )     (78,734 )

Other income, net

    6,692       11,018  

Total other income (expense)

    (3,247,435 )     (1,818,462 )
                 

Loss before income tax expense

    (7,798,981 )     (4,717,688 )
                 

Income tax expense

    407       2,560  
                 

Net loss

    (7,799,388 )     (4,720,248 )
                 

Foreign currency translation loss

    5,300       (186,162 )
                 

Comprehensive loss

  $ (7,794,088 )   $ (4,906,410 )
                 

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

  $ (0.04 )   $ (0.02 )

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

  $ (0.04 )   $ (0.02 )
                 

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

    375,961,974       327,637,170  

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

    105,546,568       98,060,244  

 

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)

 

   

Common Stock

   

Additional

   

Accumulated

   

Accumulated

Other

Comprehensive

                 
   

Shares

   

Amount

   

Paid-in Capital

   

Deficit

   

Loss

   

Treasury Stock

   

Total

 
Balance at December 31, 2016     220,292,020     $ 220,292     $ 282,614,569     $ (847,632,139 )   $ (1,453,197 )   $ (3,757,500 )   $ (570,007,975 )

Issuance of stock options for directors' compensation

    -       -       (10,046 )     -       -       -       (10,046 )

Stock based compensation expense

                    (94,951 )     -       -       -       (94,951 )

Deemed dividends on Series J Redeemable Convertible Preferred Stock

    -       -       (11,228,855 )     -       -       -       (11,228,855 )

Issuance of Series J Warrants

    -       -       1,045,837       -       -       -       1,045,837  

Net loss

    -       -       -       (7,799,388 )     -       -       (7,799,388 )

Foreign currency translation adjustment

    -       -       -       -       5,300       -       5,300  
Balance at March 31, 2017     220,292,020     $ 220,292     $ 272,326,554     $ (855,431,527 )   $ (1,447,897 )   $ (3,757,500 )   $ (588,090,078 )

  

 

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,

 
   

2017

   

2016

 
                 

Cash flows from operating activities:

               

Net loss

  $ (7,799,388 )   $ (4,720,248 )

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

               

Depreciation and amortization

    139,397       221,073  

Issuance of restricted stock and stock options for directors' compensation

    (10,046 )     11,903  

Stock based compensation expense

    (94,951 )     544,651  

Allowance for doubtful accounts receivable

    37,115       (18,321 )

Write-down of inventory

    138,317       -  

Increase in fair value of derivative contracts

    1,410,101       78,734  

Amortization of debt issuance costs

    530,405       356,989  

Medley discount accretion

    194,768       194,768  

Interest accrued on Medley Term Loan

    161,912       155,133  

Changes in operating assets and liabilities:

               

Accounts receivable

    (1,700,697 )     (2,801,122 )

Inventories

    5,028,837       4,237,884  

Prepaid expenses

    (276,465 )     143,349  

Other current and long-term assets

    665       4,828  

Accounts payable

    (3,945,691 )     (4,265,486 )

Accrued expenses and other liabilities

    356,715       (410,003 )

Net cash used in operating activities

    (5,829,006 )     (6,265,868 )

Cash flows from investing activities:

               

Purchases of property and equipment

    (81,772 )     (9,675 )

Capitalized patents

    (107,796 )     (144,766 )

Net cash used in investing activities

    (189,568 )     (154,441 )

Cash flows from financing activities:

               

(Payments) to net proceeds from draws on lines of credit and other short-term borrowings

    (3,912,615 )     4,689,497  

Payment of long-term debt

    -       (18,748 )

Debt issuance and debt amendment costs

    (61,967 )     -  

Proceeds from issuance of common stock under equity compensation plans

    -       282  

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

    10,000,000       3,000,000  

Fees incurred on issuance of preferred stock

    (183,018 )     (20,000 )

Net cash provided by financing activities

    5,842,400       7,651,031  
                 

Effect of exchange rate changes on cash

    20,846       (186,162 )
                 

Net increase (decrease) in cash

    (155,328 )     1,044,560  

Cash and cash equivalents balance at beginning of period

    1,911,151       647,526  

Cash and cash equivalents balance at end of period

  $ 1,755,823     $ 1,692,086  
                 

Supplemental disclosures:

               

Interest paid during the period

  $ 971,050     $ 994,676  
                 

Non-cash investing and financing activities:

               

Deemed dividends on Series J Redeemable Convertible Preferred Stock

  $ 11,228,855     $ 3,807,957  

 

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) that can be 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, 2016 is derived from the Company’s audited financial statements. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results of the Company that may be expected for the year ending December 31, 2017. 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, 2016 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on April 14, 2017.

 

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 condensed consolidated financial statements.

 

Note 2. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of the accompanying condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 judgments. 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, 2017 and December 31, 2016, 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.

 

 
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, 2017 and December 31, 2016, the Company’s allowance for doubtful accounts was $341,000 and $324,000, respectively.

 

As of March 31, 2017, $2.0 million 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, as amended from time to time, is hereinafter referred to as the “Ares ABL”.

 

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.

 

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.

 

 
6

 

 

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 liability for the three months ended March 31, 2017:

 

Warranty liability as of December 31, 2016

  $ 2,598,567  

Additions to liability

    83,999  

Less warranty costs

    (201,772 )

Warranty liability as of March 31, 2017

  $ 2,480,794  

 

Recent Accounting Pronouncements Not Yet Adopted

 

Revenue Recognition

 

In May 2014, the FASB issued ASU 2014-09, which will replace most existing revenue recognition guidance in United States generally accepted accounting principles (“GAAP”) 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 annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. Early application is permitted but not before annual reporting periods beginning after December 15, 2016.

 

Management expects to adopt ASU No. 2014-09 for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting year. While Management is still in its assessment process, the Company generally does not expect the impact of the adoption of this ASU to be significant to its consolidated financial statements, it is still evaluating the impact on the disclosures in the notes to consolidated financial statements. Management currently expects to apply ASU 2014-09 retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application recorded as an adjustment to retained earnings, referred to as the "Modified Retrospective Approach."

 

Leases

 

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 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. Management is currently evaluating the method of adoption of this ASU on the Company’s consolidated financial statements, but expects that it will not have a material impact on the consolidated financial statements since the Company’s lease commitments are not material and are not for extended periods of time.

 

 
7

 

 

Cash Flows

 

In November 2016, the FASB issued ASU 2016-18, which requires that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This update is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. The Company is currently assessing the effect that adoption will have on its consolidated financial statements.

 

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 $855.4 million and stockholders’ deficit of $588.1 million as of March 31, 2017. As of March 31, 2017, the Company had cash and cash equivalents of $1.8 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 and payment of salaries, employee benefits and other operating costs.

 

The Company’s primary sources of liquidity have historically been borrowings from various lenders and sales of the Company’s common stock, par value $0.001 per share (the “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 and has led a majority of the Company’s capital raises.

 

Cash Flows and Operating Results

 

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.

 

The Company’s cash flows were adversely affected by the loss of certain business from its largest customer, The Home Depot, following a 2015 product line review. Although the Company was selected to supply certain new products to The Home Depot under the new supplier buying agreement with The Home Depot that went into full effect in the second quarter of 2016, such new business only partially offset the negative effects of the lost business. 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 under the new supplier agreement.

 

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 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 would be adversely affected.

 

Joint Venture 

 

On March 20, 2017, the Company and its newly formed subsidiary, LSG MLS JV Holdings, Inc. (“LSG JV Holdings”), entered into an operating agreement (the “JV Operating Agreement”) with MLS Co., Ltd. (“MLS”) relating to the formation of Global Value Lighting, LLC (“GVL”). GVL was formed for the purpose of carrying out the manufacturing, marketing, sale and distribution of private label LED lighting products and services to retail and commercial customers in North America and South America (the “Joint Venture”). The Joint Venture is an integral part of the Company’s long-term strategy. As discussed further in Note 15, the Company may be required to make up to $7.65 million in additional capital contributions to GVL prior to May 8, 2018.

 

Outstanding Indebtedness

 

The Medley Term Loan is subject to the terms of the Term Loan Agreement, dated February 19, 2014 (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. As a condition to Medley’s consent to closing of the Joint Venture transaction, the Company is required to repay $5.0 million of the outstanding indebtedness under the Medley Term Loan on or before June 1, 2017. The Company made the mandatory prepayment on May 8, 2017.

 

The Company had a three-year revolving credit facility with a maximum line amount of $22.5 million from Ares, which was governed by the terms of the Loan and Security Agreement, dated April 25, 2014 (as amended from time to time, the “Ares ABL Agreement”). As of March 31, 2017, the Company had $2.2 million in borrowings outstanding under the Ares ABL Agreement and additional borrowing capacity of $3.1 million. The maximum borrowing capacity under the Ares ABL Agreement was based on a formula of eligible accounts receivable and inventory. The Ares ABL Agreement also requires the Company to maintain certain minimum EBITDA levels. The Company repaid the $1.3 million outstanding balance of the Ares ABL when it matured on April 25, 2017.

  

 
8

 

  

Preferred Stock

 

As of March 31, 2017, the Company had issued 103,062 units of securities (“Series J Securities”), including 3,000 and 7,000 Series J Securities issued to Holdings III on January 27, 2017 and February 3, 2017, respectively. On April 24, 2017 and May 8, 2017, the Company issued an additional 4,400 and 10,600 Series J Securities, respectively, to Holdings III. In each case, the Series J Securities were issued at a purchase price of $1,000 per Series J Security. The Company received aggregate gross proceeds of approximately $10.0 million from the issuances of Series J Securities during the three months ended March 31, 2017 and an additional $15.0 million from the issuances of Series J Securities on April 24, 2017 and May 8, 2017. 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”).

 

Pursuant to the certificates of designation governing the Company’s 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”), Pegasus has the right to cause the Company to redeem such shares at any time on or after March 27, 2017 and, if Pegasus were to exercise such right and cause the Company to redeem its shares of Convertible Preferred Stock, all other holders of the applicable series would similarly have the right to request the redemption of their shares of Convertible Preferred Stock. Nonetheless, Pegasus has agreed that it will not exercise its optional redemption rights through November 14, 2019, The Company is also required to redeem the outstanding shares of 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 the Company 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, 2017, 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 $564.0 million. Prior to the redemption of any shares of Preferred Stock, however, the Company would be required to repay its outstanding obligation under the Medley Term Loan, which was $31.0 million as of March 31, 2017.

   

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, 2017, based solely on a review of the Company’s balance sheet, the Company did not have legally available funds under Delaware law to satisfy the redemption of all of its outstanding shares of Preferred Stock. 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.

 

 
9

 

 

Geveran Litigation

 

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 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 pursuant to the Subscription and Support Agreement, 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 (a “Series K Warrant”). 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 Order in favor of Geveran is 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.

 

Management’s Assessment Regarding the Company’s Ability to Continue as a Going Concern

  

In connection with the preparation of the financial statements for the three months ended March 31, 2017, the Company concluded that due to the Company’s historical cash flows and operating results, its existing and future obligations with respect to its outstanding indebtedness, the redemption rights of certain preferred stockholders and the Company’s obligations to make capital contributions to GVL (collectively, the “Liquidity Challenges”), substantial doubt exists regarding the Company’s ability to continue as a going concern. However, management believes that (i) certain events that have occurred since March 31, 2017, as discussed in further detail above and in Note 15, and (ii) certain actions expected to be implemented in 2017 will alleviate such substantial doubt. Specifically, management has concluded that it is probable that the following events will alleviate the substantial doubt raised by the Liquidity Challenges and, as a result, that the Company will be able to satisfy its estimated liquidity needs for 12 months from the issuance of the financial statements included in this report: (a) the issuance of an aggregate of 15,000 Series J Securities on April 24, 2017 and May 8, 2017 (the “Q2 Series J Issuances”), which provided $15.0 million in aggregate gross proceeds to the Company; (b) the payoff of the outstanding borrowings under the Ares ABL on April 25, 2017; (c) the expected cost savings resulting from headcount reductions in February 2017; (d) the Company’s expectations regarding the benefits of the Joint Venture that closed on May 8, 2017, including but not limited to anticipated improvements in gross margins and cash flows within the next 12 months; (e) Pegasus’s agreement that it will not exercise its optional redemption rights with respect to the Convertible Preferred Stock through November 14, 2019; and (f) Pegasus’s commitment to provide financial support to fund the Company’s operations and debt service requirements of up to $13.2 million for at least twelve months from April 12, 2017, all of which was funded in connection with the issuances of Series J Securities on April 24, 2017 and May 8, 2017, discussed in Note 15.

  

 
10

 

 

Nonetheless, the Company cannot predict, with certainty, the long-term impact of the actions that it has taken to date in order to generate liquidity, or the potential outcome of the actions that the Company intends to take in the near future, including whether such actions will generate the expected liquidity as currently planned. If the Company continues to experience operating losses and is not able to generate additional liquidity through the actions described above or through some combination of other actions, the Company will need to secure additional sources of funds, which may or may not be available on favorable terms, if at all.

 

Note 4. Detail of Certain Balance Sheet Accounts

 

Inventories

  

Inventories consisted of finished goods as of March 31, 2017 and December 31, 2016 and were stated net of inventory reserves of $4.9 million and $5.4 million, respectively. 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 life-cycle 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, 2017

   

December 31, 2016

 

Leasehold improvements

  $ 343,149     $ 343,150  

Office furniture and equipment

    284,986       284,986  

Computer hardware and software

    7,897,097       7,928,538  

Tooling, production and test equipment

    4,134,405       4,055,255  

Trailers

    45,996       45,996  

Construction-in-process

    31,312       33,787  

Total property and equipment

    12,736,945       12,691,712  

Accumulated depreciation

    (12,125,908 )     (12,055,474 )
                 

Total property and equipment, net

  $ 611,037     $ 636,238  

 

 

Depreciation related to property and equipment was $107,000 and $198,000 for the three months ended March 31, 2017 and 2016, 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, 2017 and December 31, 2016 are detailed below:

 

   

Cost, Less

Impairment

Charges

   

Accumulated

Amortization

   

Net Book

Value

 

Estimated

Remaining

Useful Life

(in years)

                               
                               

March 31, 2017:

                             

Technology and intellectual property

  $ 4,016,592     $ (445,054 )   $ 3,571,538   0.9 to

19.7

                               

December 31, 2016:

                             

Technology and intellectual property

  $ 3,908,796     $ (412,628 )   $ 3,496,169   0.9 to

19.7

 

 

Total intangible asset amortization expense was $32,000 and $23,000 for the three months ended March 31, 2017 and 2016, respectively.

 

 
11

 

 

Note 6. Debt Issuance Costs

 

The Company capitalizes its costs related to the issuance of long-term debt (including amendment fees) 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 unamortized debt issuance costs of $1.6 million and $2.1 million as of March 31, 2017 and December 31, 2016, respectively. The Company amortized $530,000 and $357,000 of debt issuance costs for the three months ended March 31, 2017 and 2016, respectively.

 

Note 7. Lines of Credit and Note Payable

 

Ares ABL

 

The Ares ABL provided the Company with a maximum borrowing capacity of $22.5 million, calculated based on a formula of eligible accounts receivable and inventory. As of March 31, 2017, the Company had additional borrowing capacity of $3.1 million.

 

At March 31, 2017 and December 31, 2016, borrowings outstanding under the Ares ABL were as follows:

 

   

March 31, 2017

   

December 31, 2016

 

Ares ABL, revolving line of credit

  $ 2,168,296     $ 6,080,911  

Less: Debt issuance costs

    -     $ (295,891 )

Line of credit, net of debt issuance costs

    2,168,296       5,785,020  

 

As of March 31, 2017, loan collateral value included $1.7 million of accounts receivable and $4.7 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, 2017, the interest rate on the Ares ABL was 6.29%.

  

The Company repaid the outstanding balance of the Ares ABL when it matured on April 25, 2017.

  

Medley Term Loan

 

The Medley Term Loan is a $30.5 million term loan facility that bears interest at a floating rate equal to three-month LIBOR plus 12% per annum, as follows: (i) up to 2% (at the Company’s election) of interest may be paid as “payment in kind” by adding such accrued interest to the unpaid principal balance of the Medley Term Loan and (ii) the remaining accrued interest amount is payable in cash monthly in arrears. As of March 31, 2017, the interest rate on the Medley Term Loan was 13.1%. 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. This $3.0 million is recorded as restricted cash in the accompanying condensed consolidated balance sheets. The outstanding principal balance and all accrued and unpaid interest on the Medley Term Loan are due and payable on February 19, 2019.

 

At March 31, 2017 and December 31, 2016, borrowings outstanding under the Medley Term Loan were as follows:

 

   

March 31, 2017

   

December 31, 2016

 

Medley Term Loan

  $ 31,016,864     $ 30,660,183  

Less: Debt issuance costs

  $ (1,629,059 )   $ (1,801,605 )

Note payable, net of debt issuance costs

    29,387,805       28,858,578  

 

 
12

 

 

For the three months ended March 31, 2017 and 2016, 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. In addition, the Company also recognized $162,000 and $155,000 of paid in kind interest accretion for the three months ended March 31, 2017 and 2016, respectively.

  

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, 2017, according to the valuation techniques the Company used to determine their fair values:

 

   

Fair Value Measurement as of March 31, 2017

 
   

Quoted Price in

Active Markets for

Identical Assets

   

Significant Other

Observable Inputs

   

Significant

Unobservable Inputs

 
   

Level 1

   

Level 2

   

Level 3

 

Liabilities (Recurring):

                       

Riverwood Warrants

  $ -     $ -     $ 1,067,458  

Pegasus Warrant

    -       -       590,000  

THD Warrant

    -       -       15,798  

Medley Warrants

    -       -       348,601  

Pegasus Guaranty Warrants

    -       -       396,301  
    $ -     $ -     $ 2,418,158  

 

 

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, 2017:

 

           

Realized and

unrealized gains

   

Purchases, sales,

   

Transfers in

         
   

Balance

   

 (losses) included

   

issuances and

   

or out of

   

Balance

 
   

December 31, 2016

   

in net loss

   

settlements

   

Level 3

   

March 31, 2017

 

Pegasus Commitment

  $ 40,000     $ (40,000 )   $ -     $ -     $ -  

Riverwood Warrants

    (345,568 )     (721,890 )     -       -       (1,067,458 )

September 2012 Warrants

    (40,000 )     40,000       -       -       -  

Pegasus Warrant

    (191,000 )     (399,000 )     -       -       (590,000 )

THD Warrant

    (2,782 )     (13,016 )     -       -       (15,798 )

Medley Warrants

    (218,262 )     (130,339 )     -       -       (348,601 )

Pegasus Guaranty Warrants

    (250,445 )     (145,856 )     -       -       (396,301 )
                                         

Total

  $ (1,008,057 )   $ (1,410,101 )   $ -     $ -     $ (2,418,158 )

 

 

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 for the three months ended March 31, 2016:  

 

           

Realized and

unrealized gains

   

Purchases, sales,

   

Transfers in

         
   

Balance

   

 (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 )

 

 
13

 

 

Note 9. Stockholders’ Equity

 

For the three months ended March 31, 2017 and 2016, the Company recorded expense of $2,000 and $12,000, respectively, related to stock compensation for awards to the Company’s directors. For the three months ended March 31, 2017, there were forfeitures of stock compensation awards for directors of $12,000.

 

Warrants for the Purchase of Common Stock

 

As of March 31, 2017, 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

    1,535,801     $2.06 to  $2.07  

March 3, 2022 through April 19, 2022

                         

The Home Depot

 

Purchasing agreement

    2,723,756       $0.79    

December 31, 2017

                         

Pegasus

 

Riverwood Warrants

    18,092,511    

 

Variable    

May 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

    273,114,300       $0.001    

January 3, 2019 through February 3, 2022

                         

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

                         
          341,074,807              

 

 

Note 10: Earnings (Loss) Per Share

 

The Company has two classes of Common Stock 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, 2017 and 2016, 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,

 
   

2017

   

2016

 
   

Controlling Stockholders

   

Noncontrolling Stockholders

   

Controlling Stockholders

   

Noncontrolling Stockholders

 

Basic and diluted net loss per share:

                               

Net loss attributable to common stock

  $ (6,089,764 )   $ (1,709,624 )   $ (3,632,930 )   $ (1,087,318 )

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

    (8,767,492 )     (2,461,363 )     (2,930,787 )     (877,170 )

Undistributed net loss

  $ (14,857,256 )   $ (4,170,987 )   $ (6,563,717 )   $ (1,964,488 )
                                 

Basic and diluted weighted average number of common shares outstanding

    375,961,974       105,546,568       327,637,170       98,060,244  
                                 

Basic and diluted net loss per common share

  $ (0.04 )   $ (0.04 )   $ (0.02 )   $ (0.02 )

 

 
14

 

 

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 283.8 million and 270.8 million common stock equivalents for the three months ended March 31, 2017 and 2016, 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.

 

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 92.5% of the Common Stock as of March 31, 2017.

 

On January 27, 2017 and February 3, 2017, the Company issued 3,000 and 7,000 Series J Securities, respectively, to Holdings III pursuant to the Series J Preferred Stock Subscription Agreement dated January 27, 2017, between the Company and Holdings III (as amended from time to time, the “2017 Subscription Agreement”) for aggregate gross proceeds of $10.0 million.

 

On February 3, 2017, Pegasus purchased all of the outstanding membership interests of RW LSG Holdings LLC and renamed the entity LSGC Holdings IIIa, LLC. Such entity owns 45,000 shares of Series H Preferred Stock and is one of the preferred stockholders entitled to the redemption rights described in Note 3 above. Pegasus also purchased an aggregate of 49,000 shares of Series H Preferred Stock from three other preferred stockholders who, acting together, could also trigger redemption rights with respect to the Convertible Preferred Stock. In addition, warrants held by these parties, representing the right to purchase an aggregate of 8,000,000 shares of Common Stock, were purchased by Pegasus and subsequently cancelled. As a result of the foregoing transactions, Pegasus is currently the only preferred stockholder possessing the right to require the Company to, at any time on or after March 27, 2017, redeem its shares of Convertible Preferred Stock and,consequently, trigger the rights of all other holders of the applicable series to request the redemption of their shares of Convertible Preferred Stock. Nonetheless, Pegasus agreed that it will not exercise such redemption rights through November 14, 2019. Finally, on February 3, 2017, Pegasus also purchased warrants to purchase an aggregate of 18,092,511 shares of Common Stock from affiliates of Riverwood LSG Management Holdings LLC.

 

Note 12. Restructuring Expense

 

 

In February 2017, the Company implemented restructuring plan to increase efficiencies across the organization and lower the overall cost structure. This restructuring plan included a reduction in full time headcount in the United States, which was substantially completed at March 31, 2017 and is expected to be finalized by May 31, 2017. For the three months ended March 31, 2017, the Company incurred $409,000 of costs as a result of severance and termination benefits.

 

As of March 31, 2017, 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, 2016

  $ 20,000     $ 241,493     $ 4,200     $ 265,693  

Charges

    409,199       -       -       409,199  

Payments

    (99,837 )     -       -       (99,837 )

Accrued liability as of March 31, 2017

  $ 329,362     $ 241,493     $ 4,200     $ 575,054  

 

 

The remaining accrual of $575,000 as of March 31, 2017 is expected to be paid during the years ending December 31, 2017 and 2018.

 

Note 13. Concentrations of Credit Risk

 

For the three months ended March 31, 2017 and 2016, revenue from sales to one customer represented 81% and 91% of the Company’s total revenue, respectively.

 

As of March 31, 2017 and December 31, 2016, the Company had one customer whose accounts receivable balance represented 69% and 58% of accounts receivable, net of allowances.

 

 
15

 

 

Note 14. Commitments and Contingencies  

 

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 probable 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, the Company’s 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.

 

The Summary Judgment Order was issued on August 28, 2014 and entered on November 30, 2015. Accordingly, on December 4, 2015, the Company, along with certain other related 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 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, that the Company 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. If the case is remanded to the trial court, the Company believe 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 the $40.2 million judgment, plus post judgment interest. Such an outcome would have a material adverse effect on its financial position.

 

The Company believes that, subject to the terms and conditions of the relevant policies (including retention and policy limits), directors’ and officers’ (“D&O”) insurance coverage will be available to cover a 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. On July 26, 2016, the Company, along with certain other related defendants, filed a lawsuit in Delaware state court against its D&O carriers, Liberty Insurance, Starr, and Continental Casualty, seeking a declaratory judgment and damages arising out of the defendant carriers’ breach of their coverage obligations under various applicable D&O policies.

 

Based upon the terms of an indemnification agreement, the Company has also paid, and may be required to pay 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 agreement 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.

 

 
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The Company was also a defendant in an 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 asserted 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 sought monetary damages and an injunction. On May 10, 2017, the Company and GE Lighting entered into a Settlement and Patent Cross-License Agreement that resolved the matter and released the underlying claims. Pursuant to the agreement, among other things, each of the parties agreed to grant the other party non-exclusive licenses for the patents underlying the claims, and the Company agreed to pay GE Lighting $600,000, which is payable in four installments commencing on June 1, 2017 and ending on December 3, 2018.

  

In April 2015, the Company filed a lawsuit against several former employees and a company they formed seeking damages and injunctive relief arising out of the defendants’ misappropriation of the Company’s 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.

 

Note 15. Subsequent Events  

On April 24, 2017 and May 8, 2017, the Company issued 4,400 and 10,600 Series J Securities, respectively, to Holdings III pursuant to the 2017 Subscription Agreement for aggregate gross proceeds of $15.0 million.The Company repaid the $1.3 million outstanding balance of the Ares ABL when it matured on April 25, 2017.

 

The Company made the $5.0 million prepayment to Medley under the Medley Term Loan on May 8, 2017.

 

In connection with the closing of the Joint Venture transaction on May 8, 2017, the Company (through LSG JV Holdings) made an initial capital contribution of $5.1 million in cash to GVL and owns 51% of the membership interests of GVL. MLS made an initial capital contribution of $2.0 million in cash to GVL and is required to contribute an additional $2.9 million by May 15, 2017. MLS owns 49% of the membership interests of GVL. Upon the determination of GVL’s board of managers, each of LSG JV Holdings and MLS will be required to make additional capital contributions of up to $7.65 million and $7.35 million in the aggregate, respectively, during the first 12 months following the closing date.

 

 
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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 and other sources of liquidity to meet our working capital and capital expenditure needs for 12 months from the date of issuance of our financial statements; our ability to realize the synergies and benefits that we expect the joint venture with MLS Co., Ltd. to provide; expectations regarding cost restructuring efforts; our ability to successfully identify new customers and business opportunities and retain or expand our relationship with current customers; our ability to manage our supply chain; uncertainty with respect to product demand, product costs and end of life-cycle planning; our ability to execute on our strategic plan; 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 profitability; and our expectations regarding 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, 2016 filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 14, 2017 (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

  

Unless expressly indicated or the context requires otherwise, the terms “Lighting Science Group,” “we,” “us,” “our” or the “Company” refer to Lighting Science Group Corporation and, where appropriate, its wholly owned subsidiaries.

 

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 use LEDs as their exclusive 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. We have also developed LED lighting technology that emits light at frequencies calibrated along the visible spectrum to achieve specific biological effects.

 

Our in-house design of power supplies, thermal management solutions and optical systems, along with our detailed specification of the packaged LEDs incorporated into our products, provides us with a unique ability to manage the interrelationships between components and subsystems. This system-based approach enables us to provide a broad range of solutions that deliver a high quality combination of lighting efficacy and reliability. In addition, we believe we can leverage our strong supply chain and sourcing capabilities to support an “all channels” go-to-market strategy and to deliver differentiated lighting solutions at competitive price points.

 

Our customers include retailers and original equipment manufacturers (“OEMs”) that sell our products on a co-branded or private label basis. Large retail, hospitality and other corporate customers also purchase products from us directly. In addition, our luminaires are utilized in large-scale infrastructure projects throughout the world.

 

We are seeking to lead the convergence of science and light to improve the environment as well as human health and well-being. Our lighting technology is designed to consume less electricity for each unit of light produced and we continue to improve our product packaging and lifespan to use fewer materials in the production and distribution of our lamps and luminaires.

 

 
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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.

 

 

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.

 

Recent Developments

Joint Venture Transaction. On March 20, 2017, we formed LSG MLS JV Holdings, Inc. (“LSG JV Holdings”) as a subsidiary and entered into an operating agreement (the “Operating Agreement”) with MLS Co., Ltd. (“MLS”) relating to the formation of Global Value Lighting, LLC (“GVL”). GVL was formed as a joint venture between us and MLS for the purpose of carrying out the manufacturing, marketing, sale and distribution of private label LED lighting products and services to retail and commercial customers in North America and South America. The joint venture is an integral part of our long-term strategy. We believe the joint venture will allow GVL to focus exclusively on the private label LED business, which to date has represented a significant portion of our revenues, while allowing us to focus on our technology business featuring product lines such as its proprietary HealthE™, VividGro®, and FreeLED™, which will be operated independently from GVL. In connection with the closing of the joint venture transaction on May 8, 2017, we (through LSG JV Holdings) made an initial capital contribution of $5.1 million in cash to GVL. MLS made an initial capital contribution of $2.0 million in cash to GVL and is required to contribute an additional $2.9 million to GVL by May 15, 2017. LSG JV Holdings owns 51% of the membership interests of GVL and MLS owns 49% of the membership interests of GVL. Upon the determination of GVL’s board of managers, LSG JV Holdings and MLS will be required to make additional capital contributions of up to $7.65 million and $7.35 million in the aggregate, respectively, during the first 12 months following the closing date.

 

Series J Issuances. On January 27, 2017, February 3, 2017, April 24, 2017 and May 8, 2017, we issued 3,000, 7,000, 4,400 and 10,600 units of our securities (“Series J Securities”), respectively, to LSGC Holdings III LLC (“Holdings III”), an affiliate of Pegasus Capital Advisors, L.P. (“Pegasus Capital”), for aggregate gross proceeds of $25.0 million, with each Series J Security consisting of (a) one share of our Series J Preferred Stock and (b) a warrant to purchase 2,650 shares of our common stock, par value $0.001 per share (the “Common Stock”) at an exercise price of $0.001 per share of Common Stock.

 

Credit Facilities. As of March 31, 2017, we had a three-year revolving credit facility from ACF Finco I LP (“Ares”) with $2.2 million in borrowings outstanding and additional borrowing capacity of $3.1 million (the “Ares ABL”), which was governed by the terms of the Loan and Security Agreement dated April 25, 2014, as amended from time to time. We repaid the $1.3 million outstanding balance of the Ares ABL when it matured on April 25, 2017.

  

 
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As a condition to consenting to the closing of the joint venture transaction, Medley Capital Corporation (“Medley”), the lender under our five-year term loan (as amended from time to time, the “Medley Term Loan”), required that we repay $5.0 million of the outstanding indebtedness under the Medley Term Loan on or before June 1, 2017. We made the mandatory prepayment on May 8, 2017.

 

Potential Transaction to Effect a Deregistration. On April 27, 2017, the board of directors (i) directed the Committee of Independent Directors (the “Independent Committee”) to evaluate the potential benefits and feasibility of a transaction to deregister our Common Stock, including a possible reverse stock split, and (ii) authorized the Independent Committee to, if necessary, engage an independent financial advisor to advise the Independent Committee with respect to any such transaction. 

 

Financial Results

 

The following table sets forth our revenue, cost of goods sold and gross profit for the three months ended March 31, 2017 and 2016:

 

   

Three Months Ended March 31,

 
   

2017

   

2016

 
                 

Revenue

  $ 9,337,305     $ 17,098,013  

Cost of goods sold

    7,355,672       13,619,103  
                 

Gross profit

  $ 1,981,633     $ 3,478,910  
                 

Gross profit percentage

    21.2 %     20.3 %

 

 

Our revenue is primarily derived from sales of our LED-based retrofit lamps and luminaires. Our revenue decreased by $7.8 million for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016. This decrease in revenue was due to an $8.0 million decrease in sales to our largest customer, The Home Depot, Inc. (“The Home Depot”), which was slightly offset by a $203,000 increase in sales to commercial customers. The Home Depot, performed a periodic product line review relating to its entire private label LED lighting product offering in 2015 and, as a result, 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 2016, which is the primary reason for the decline in sales to The Home Depot for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016.. Following the line review, we entered into a new supplier buying agreement with The Home Depot, which went into full effect in the second quarter of 2016.

  

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.   

 

For the three months ended March 31, 2017, our gross profit was 21.2% compared to 20.3% for the three months ended March 31, 2016.

 

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 generally accepted accounting principles in the United States of America. 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.   

 

 
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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, 2016 contains a discussion of these critical accounting policies. There have been no significant changes in our critical accounting policies since December 31, 2016. See also Note 2 to our unaudited condensed consolidated financial statements for the three months ended March 31, 2017 as set forth herein.

 

Results of Operations

 

Three Months Ended March 31, 2017 Compared to the Three Months Ended March 31, 2016

 

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

 

   

Three Months Ended March 31,

   

Variance

   

Percentage of Revenue

 
   

2017

   

2016

   

$

   

%

   

2017

   

2016

 
                                                 

Revenue

  $ 9,337,305     $ 17,098,013       (7,760,708 )     -45.4 %     100.0 %     100.0 %
                                                 

Cost of goods sold

    7,355,672       13,619,103       (6,263,431 )     -46.0 %     78.8 %     79.7 %
                                                 

Selling, distribution and administrative

    5,254,249       5,076,064       178,185       3.5 %     56.3 %     29.7 %
                                                 

Research and development

    730,334       1,080,999       (350,665 )     -32.4 %     7.8 %     6.3 %
                                                 

Restructuring expense

    409,199       -       409,199               4.4 %     0.0 %
                                                 

Depreciation and amortization

    139,397       221,073       (81,676 )     *       1.5 %     1.3 %
                                                 

Interest expense, including related party

    (1,844,026 )     (1,750,746 )     (93,280 )     *       -19.7 %     -10.2 %
                                                 

Increase in fair value of liabilities under derivative contracts

    (1,410,101 )     (78,734 )     (1,331,367 )     1691.0 %     -15.1 %     -0.5 %
                                                 

Other income, net

    6,692       11,018       (4,326     *       0.1 %     0.1 %
                                                 

Income tax expense

    407       2,560       (2,153 )     *       0.0 %     0.0 %
                                                 

Net loss

  $ (7,799,388 )   $ (4,720,248 )     (3,079,140 )     65.2 %     -83.5 %     -27.6 %

 

* Variance is not meaningful

 

 

Revenue

 

Revenue decreased $7.8 million, or 45.4%, to $9.3 million for the three months ended March 31, 2017 from $17.1 million for the three months ended March 31, 2016. The decrease in revenue was due to an $8.0 million decrease in sales to The Home Depot, which was slightly offset by a $203,000 increase in sales to commercial customers for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016.

  

Cost of Goods Sold

 

Cost of goods sold decreased $6.3 million, or 46.0%, to $7.4 million for the three months ended March 31, 2017 from $13.6 million for the three months ended March 31, 2016. The decrease in cost of goods sold was primarily due to the reduction in revenue for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016. Cost of goods sold as a percentage of revenue decreased slightly for the three months ended March 31, 2017 to 78.8% (or a gross profit percentage of 21.2%) as compared to 79.7% (or a gross profit percentage of 20.3%) for the three months ended March 31, 2016.

 

Selling, Distribution and Administrative

  

Selling, distribution and administrative expense increased $178,000, or 3.5%, to $5.3 million for the three months ended March 31, 2017 from $5.1 million for the three months ended March 31, 2016. The increase in selling, distribution and administrative expense was due to a $600,000 expense for settlement of a lawsuit and a $379,000 increase in professional services, partially offset by a $445,000 decrease in stock-based compensation expense (as a result of headcount reductions and the reversal of previously recognized stock compensation expense recorded for unvested stock options), and a $110,000 decrease in facilities expense (as a result of vacating our Melbourne, Florida office in May 2016).

  

Research and Development

 

Research and development expense decreased $351,000, or 32.4%, to $730,000 for the three months ended March 31, 2017 from $1.1 million for the three months ended March 31, 2016. The decrease in research and development expense was primarily a result of a $206,000 decrease in stock-based compensation expense (as a result of headcount reductions and the reversal of previously recognized stock compensation expense recorded for unvested stock options) and a $118,000 decrease in employee compensation expense (as a result of headcount reductions).

 

 
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Restructuring Expense

 

In February 2017, we implemented a restructuring plan to increase efficiencies across the organization and reduce our overall cost structure. During the three months ended March 31, 2017, we recorded restructuring expense of $409,000 as a result of reductions in full time headcount in the United States. We expect that implementation of this plan will be finished by May 31, 2017, though it was substantially complete as of March 31, 2017.

  

Increase in Fair Value of Liabilities under Derivative Contracts

 

The change in the fair value of liabilities under derivative contracts is driven by several factors, including the change in the fair market value of our Common Stock, issuances of our Series J Preferred Stock and changes in the expected volatility of our Common Stock. The increase in fair value of liabilities under derivative contracts for the three months ended March 31, 2017 was $1.4 million, compared to an increase of $78,000 for the three months ended March 31, 2016, representing an increase of $1.3 million. The change was due to the relative increase in the price of our Common Stock in the three months ended March 31, 2017 compared with the three months ended March 31, 2016.   

Liquidity and Capital Resources 

 

Overview

  

We have experienced significant historical net losses as well as negative cash flows from operations since our inception, resulting in an accumulated deficit of $855.4million and stockholders’ deficit of $588.1 million as of March 31, 2017. As of March 31, 2017, we had cash and cash equivalents of $1.8 million and an additional $3.0 million in restricted cash subject to a cash collateral dominion agreement pursuant to the terms of our Medley Term Loan. Our cash expenditures primarily relate to procurement of inventory and payment of salaries, employee 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, Pegasus Capital and its affiliates (collectively, “Pegasus”). Pegasus is our controlling stockholder and has led a majority of our capital raises.

 

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.

 

Our cash flows were adversely affected by the loss of certain business from our largest customer, The Home Depot, following a 2015 product line review. Although we were selected to supply certain new products to The Home Depot under the new supplier buying agreement with The Home Depot that went into full effect in the second quarter of 2016, such new business only partially offset the negative effects of the lost business. 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 under the new supplier agreement.

 

As a result of our historical losses, we believe we will likely need to raise additional capital to fund our operations. Sources of additional capital may not be available in an amount or on terms that are acceptable to us, if at all. Our capital structure includes four outstanding series of preferred stock: Series H Convertible Preferred Stock (“Series H Preferred Stock”); Series I Convertible Preferred Stock (“Series I Preferred Stock”); Series J Preferred Stock (collectively with the Series H Preferred Stock and the Series I Preferred Stock, the “Convertible Preferred Stock”); and Series K Preferred Stock (collectively with the Convertible Preferred Stock, the “Preferred Stock”). The complexity of our capital structure as well as our obligations to the holders of the outstanding shares of 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.

 

Pegasus committed to provide financial support to fund our operations and debt service requirements of up to $13.2 million for at least 12 months from April 12, 2017, all of which was funded in connection with the issuances of Series J Securities on April 24, 2017 and May 8, 2017.

 

Joint venture

 

As discussed above under “Recent Developments,” on March 20, 2017, we and our newly formed subsidiary, LSG JV Holdings, entered into the Operating Agreement with MLS. In connection with the closing of the joint venture transaction on May 8, 2017, we (through LSG JV Holdings) made an initial capital contribution of $5.1 million in cash to GVL. MLS made an initial capital contribution of $2.0 million in cash to GVL and is required to contribute an additional $2.9 million to GVL by May 15, 2017. LSG JV Holdings owns 51% of the membership interests of GVL and MLS owns 49% of the membership interests of GVL. Upon the determination of GVL’s board of managers, LSG JV Holdings and MLS will be required to make additional capital contributions of up to $7.65 million and $7.35 million in the aggregate, respectively, during the first 12 months following the closing date.

 

 
22

 

 

Debt Financing

 

The Medley Term Loan is subject to the terms of the Term Loan Agreement dated February 19, 2014 (as amended from time to time 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. As discussed above, as a condition to Medley consenting to the closing of the joint venture transaction, Medley required that we repay $5.0 million of the outstanding indebtedness under the Medley Term Loan on or before June 1, 2017. We made the mandatory prepayment on May 8, 2017.

 

As of March 31, 2017, we had $2.2 million in borrowings outstanding under the Ares ABL and additional borrowing capacity of $3.1 million. The maximum borrowing capacity under the Ares ABL was based on a formula of eligible accounts receivable and inventory. The Ares ABL Agreement also required us to maintain certain minimum EBITDA levels. We repaid the outstanding balance of the Ares ABL when it matured on April 25, 2017.

 

Equity financing and related matters

 

As of March 31, 2017, we had issued 103,062 Series J Securities, including 3,000 and 7,000 Series J Securities issued to Holdings III on January 27, 2017 and February 3, 2017, respectively. On April 24, 2017 and May 8, 2017, we issued an additional 4,400 and 10,600 Series J Securities, respectively, to Holdings III.

 

Pursuant to the certificates of designation governing the Series H Preferred Stock and Series I Preferred Stock, Pegasus has the right to cause us to redeem its shares of Series H Preferred Stock and Series I Preferred Stock at any time on or after March 27, 2017 and, if Pegasus were to exercise such right and cause us to redeem its shares of Convertible Preferred Stock, all other holders of the applicable series would similarly have the right to request the redemption of their shares of Convertible Preferred Stock. Nonetheless, Pegasus has agreed that it will not exercise its optional rights through November 14, 2019. We are also required to redeem the outstanding shares of 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 us to redeem such shares upon the 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. 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, 2017, in the event we were required to redeem all of our outstanding shares of Preferred Stock, our maximum payment obligation would have been $564.0 million. Prior to the redemption of any shares of Preferred Stock, however, we would be required to repay the outstanding balance under the Medley Term Loan, which was $31.0 million as of March 31, 2017.

 

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 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, 2017, based solely on a review of our balance sheet, we did not have legally available funds under Delaware law to satisfy the redemption of all of our outstanding shares of Preferred Stock. 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.

 

Geveran Litigation

 

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, posted the Appeal Bond to obtain an automatic stay of enforcement as we appeal the Summary Judgment Order. 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 $25.0 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 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 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.

 

 
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Cash Flows

 

The following table summarizes our cash flow activities for the three months ended March 31, 2017 and 2016:

 

   

Three Months Ended March 31,

 

Cash flow activities:

 

2017

   

2016

 

Net cash used in operating activities

  $ (5,829,006 )   $ (6,265,868 )

Net cash used in investing activities

    (189,568 )     (154,441 )

Net cash provided by financing activities

    5,842,400       7,651,031  

 

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 was $5.8 million and $6.3 million for the three months ended March 31, 2017 and 2016, respectively. The largest driver behind the net cash used in operating activities for the three months ended March 31, 2017 and 2016 was our net loss, which was $7.8 million and $4.8 million, respectively.

 

Net cash used in operating activities for the three months ended March 31, 2017 included certain non-cash reconciliation items that increased cash, consisting primarily of a $1.4 million increase in the fair value of warrants, $887,000 in amortization of debt issuance costs, accretion and interest accrual on the Ares ABL and the Medley Term Loan, $139,000 in depreciation and amortization and a $138,000 inventory write-down. These non-cash charges were offset slightly by a $105,000 net credit related to stock-based compensation, which resulted from employees departing during the three months ended March 31, 2017 and the reversal of expense associated with their unvested stock options. 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.

 

For the three months ended March 31, 2017, changes in operating working capital (current assets and current liabilities, excluding our line of credit) used $1.1 million in cash. This use of cash resulted from a decrease in accounts payable of $3.9 million (due to a lower level of sales and the impact on inventory purchases) and an increase in prepaid expenses of $276,000 (due to increases in prepayments for inventory). That decrease was offset by a reduction in inventory of $5.0 million (resulting from lower levels of purchases due to lower levels of expected sales in the immediate future) and an increase in accrued expenses and other liabilities of 357,000 (primarily due settlement of a lawsuit). 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.

  

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 $190,000 and $154,000 for the three months ended March 31, 2017 and 2016, respectively. The cash used in investing activities for the three months ended March 31, 2017 was due to investments in capitalized patents of $108,000 and purchases of property and equipment of $82,000 (primarily tooling equipment). Cash used in investing activities for the three months ended March 31, 2016 was primarily due to investments in capitalized patents of $145,000.

 

Financing Activities

 

Cash provided by financing activities has historically been composed of net proceeds from various debt facilities and the issuance of common and preferred stock. Net cash provided by financing activities was $5.8 million and $7.7 million for the three months ended March 31, 2017 and 2016, respectively.

  

Cash provided by financing activities for the three months ended March 31, 2017 included $10.0 million of proceeds received from the issuance of Series J Securities. This increase was partially offset by payments of borrowings outstanding under our line of credit of $3.9 million (using proceeds from the issuance of Series J Securities) and of $245,000 in fees paid in connection with the issuance of Series J Securities as well as debt issuance and loan amendment costs.

  

 
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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 $3.0 million of proceeds from the issuance of Series J Securities.

  

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 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, 2017, our disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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, 2017, which discussion is incorporated by reference herein.

 

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

 

       

Total Number of Shares Purchased

   

Average Price Paid per Share

   

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

   

Maximum Number ( or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs

 

January 1, 2017

January 31, 2017     --       --       --       --  

February 1, 2017

February 28, 2017     554,221 (1)     $ 0.16       --       --  

March 1, 2017

March 31, 2017     --       --       --       --  

 

 

(1)

Represents shares of Common Stock purchased by an “affiliated purchaser” in a privately negotiated transaction.

 

Item 6. Exhibits

 

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

 

 
25

 

 

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 15, 2017

 

By

/s/ Edward D. Bednarcik

 

 

 

 

 

 

 

Edward D. Bednarcik

 

 

Chief Executive Officer

   

(Principal Executive Officer)

         

Date: May 15, 2017

 

By

/s/ Denis M. Murphy

 

 

 

 

 

   

Denis M. Murphy

 

 

Executive Vice President and Chief Financial Officer

   

(Principal Financial and Accounting Officer)

         

 

 
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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).

 

 

 
27 

 

 

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).

 

4.4.2

 

Certificate of Increase of Series J Convertible Preferred Stock filed with the Secretary of State of Delaware on July 19, 2016 (previously filed as Exhibit 4.1 to the Current Report on Form 8-K filed on July 25, 2016, File No. 0-20354, and incorporated herein by reference).

 

4.4.3

 

Certificate of Increase of Series J Convertible Preferred Stock filed with the Secretary of State of Delaware on January 27, 2017 (previously filed as Exhibit 4.1 to the Current Report on Form 8-K filed on February 2, 2017, 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).

 

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 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).

 

4.10

 

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).

 

4.11

 

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).

 

4.12

 

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).

 

4.13

 

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).

 

  

 
28 

 

 

4.14

 

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).

 

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 4.9 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 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).

 

4.17

 

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).

 

4.18

 

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).

 

4.19

 

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).

 

4.20

 

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).

 

4.21

 

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).

 

4.21.1

 

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).

 

4.22

 

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).

 

4.23

 

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).

 

4.24

 

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).

 

  

 
29 

 

 

4.25

 

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

 

Series J Preferred Stock Subscription Agreement, dated January 27, 2017, by and between Lighting Science Group Corporation and LSGC Holdings III LLC (previously filed as Exhibit 10.1 to the Current Report on Form 8-K filed on February 2, 2017, File No. 0-20354, and incorporated herein by reference).

 

10.2

 

Sixth Amendment and Limited Consent to Term Loan Agreement, dated January 27, 2017, by and among Lighting Science Group Corporation, Medley Capital Corporation and the lenders from time to time party thereto (previously filed as Exhibit 10.2 to the Current Report on Form 8-K filed on February 2, 2017, File No. 0-20354, and incorporated herein by reference).

 

10.3

 

Seventh Amendment and Limited Consent to Term Loan Agreement, dated February 3, 2017, by and among Lighting Science Group Corporation, Medley Capital Corporation and the lenders from time to time party thereto (previously filed as Exhibit 10.1 to the Current Report on Form 8-K filed on February 9, 2017, File No. 0-20354, and incorporated herein by reference).

 

10.4

 

Letter Agreement, dated February 3, 2017, by and among Lighting Science Group Corporation, Cleantech Europe II (A), L.P. and Cleantech Europe II (B), L.P. (previously filed as Exhibit 10.2 to the Current Report on Form 8-K filed on February 9, 2017, File No. 0-20354, and incorporated herein by reference).

 

10.5*

 

Operating Agreement of Global Value Lighting, LLC, dated March 20, 2017, by and among LSG MLS JV Holdings, Inc., MLS Co. Ltd. and, solely with respect to certain sections, Lighting Science Group Corporation.

 

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 Quarterly Report on Form 10-Q, regardless of any general incorporation language in such filing.

 

30