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| LSCG.OB > SEC Filings for LSCG.OB > Form 10-Q on 19-Nov-2008 | All Recent SEC Filings |
19-Nov-2008
Quarterly Report
in the second quarter of 2010. In connection with the acquisition of the net
assets of Lamina, we also entered into a Loan Authorization Agreement with Bank
of Montreal ("BMO") whereby BMO agreed to provide us with a $20 million demand
line of credit. The line of credit is guaranteed by Pegasus Partners IV, LP
("Pegasus IV").
In the event that the line of credit is called by BMO prior to the end of the
maximum one-year term and we have not obtained alternative financing, Pegasus IV
has agreed, pursuant to a certain letter agreement dated as of July 25, 2008, to
extend a bridge loan to us for up to six months for the amount of the then
outstanding aggregate principal amount of the line of credit plus an additional
$2 million (up to an aggregate of $20 million).
Target Markets
We are targeting what we believe will be high growth market segments that have
become economically viable from a price/performance ratio but remain in the
infancy stage of the technology adoption curve. For example, in the general
illumination category, we believe we are a leading global provider of
intelligent, environmentally responsible LED lighting solutions focused on
replacing less energy efficient technologies.
Our primary target markets and their respective supporting products are as
follows:
Gaming - Comprised of casino gaming machine manufacturers. We provide
engineering support and contract production services for dynamic color LED
displays in gaming devices, toppers and signage.
Architainment - Comprised of building exterior and interior spaces that are
characterized by unique architectural elements to create ambience and a
welcoming atmosphere. We offer an extensive product portfolio to illuminate and
enhance the architecture for exterior and interior applications. These solutions
are available in three shades of white and red, green and blue for various
applications, such as wall washing, cove lighting, flood lighting, integrated
lighting and display lighting.
Commercial & Industrial - Comprised of commercial & industrial workspaces
such as offices, warehouses, manufacturing plants, healthcare and education
locations. These settings require high performance white light solutions, which
can be delivered via our new range of LED lamps designed to replace or
seamlessly integrate into existing lighting systems. These retrofit lamps fit
into existing sockets and reduce energy consumption by as much as 80% while
providing equal lighting performance to traditional incandescent technology.
Retail - Comprised of hospitality (hotels, lounges, resorts and other
locations for entertainment) and store retailers (specialty stores, department
stores, supermarkets, convenience stores, Do It Yourself ("DIY") stores). We
provide economically viable LED solutions with OEMs and national accounts. The
primary product lines sold in these retail industries are display lighting
systems for retail applications and replacement lamp solutions for general
illumination.
Public Infrastructure - Comprised of government entities that manage streets
and highways, airports, ports, bridges, tunnels and other public spaces. In
collaboration with leading OEMs, we are developing a broad range of solutions
that will be sold through national OEM distribution networks. Primary products
in this channel are targeted for street lighting applications.
Results of Operations
Revenues
For the three-and nine month periods ended September 30, 2008, consolidated
revenues totaled $5,646,000 and $13,075,000, respectively, representing
increases of $5,194,000 and $12,230,000 compared to consolidated revenue levels
for the comparative periods in 2007. For the three-month period ended
September 30, 2008, our consolidated revenues increased from the comparative
period in 2007 due mainly to (i) the inclusion of the revenues for the LED
Holdings business, which was acquired in October 2007 and (ii) the inclusion of
the revenues of LPBV, which was acquired in April 2008. For the nine-month
period ended September 30, 2008, the increase from the comparative period in
2007 is mainly due to (i) the inclusion of revenues for the LED Holdings
business for the full nine-month period and (ii) the inclusion of the revenues
of LPBV for five months. The increases in revenue in the three- and nine-month
periods ended September 30, 2008 were also due in part to our introduction of
new products, including linear lighting products.
Cost of Goods Sold
For the three- and nine-month periods ended September 30, 2008, consolidated
cost of goods sold was $3,919,000 and $9,867,000, respectively, as compared to
$324,000 and $651,000, respectively, for the comparable period in 2007. The
increase in consolidated cost of goods sold during this period was primarily due
to our increased sales volume resulting from the acquisition of the operating
business of LED Holdings in October 2007 and the acquisition of LPBV in
April 2008.
Sales and Marketing Expenses
Summarized in the table below are our consolidated sales and marketing expenses
comparing the three- and nine-month periods ended September 30, 2008, with the
three- and nine-month periods ended September 30, 2007:
For the Three-Month For the Nine-Month
Periods Ended Periods Ended
September September September September
30, 2008 30, 2007 30, 2008 30, 2007
Sales and marketing expense $ 1,801,000 $ 747,000 $ 4,360,000 $ 1,207,000
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Consolidated sales and marketing expenses for the three- and nine-month periods
ended September 30, 2008, increased by $1,054,000 and $3,153,000, respectively,
from the comparable periods in 2007. The increase in consolidated sales and
marketing expenses for the three- and nine-month periods ended September 30,
2008, was primarily due to (i) the increase in sales and marketing staff, (ii)
marketing and promotional expenses related to new product lines introduced or
expected to be introduced in 2008 and (iii) increased travel, trade show and
website development and management costs related to the implementation of our
strategic marketing plan, which was developed subsequent to the acquisition of
the operating business of LED Holdings. The increases in the three- and
nine-month periods were also due to the inclusion of the sales and marketing
expenses of LPBV, which was acquired in April 2008.
Operations Expense
Summarized in the table below are operations and related expenses comparing the
three-and nine-month periods ended September 30, 2008, with the three-and
nine-month periods ended September 30, 2007:
For the Three-Month For the Nine-Month
Periods Ended Periods Ended
September September September September
30, 2008 30, 2007 30, 2008 30, 2007
Operations expenses $ 5,110,000 $ 563,000 $ 8,318,000 $ 1,156,000
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Consolidated operations and related expenses include supply chain management,
management of third-party contract manufacturers, procurement and research and
development. Consolidated operations and related expenses increased by
approximately $4,547,000 and $7,162,000 for the three- and nine-month periods
ended September 30, 2008, compared to the comparable periods in 2007. The
principal reasons for the increase in the three- and nine-month periods ended
September 30, 2008 were (i) the increase in operations staff resulting from our
acquisition of the operating business of LED Holdings in October 2007, (ii) the
increase in operations staff resulting from our acquisition of LPBV in
April 2008 and (iii) an increase in our new product development activities.
General and Administrative Expenses
Summarized in the table below are consolidated general and administrative
expenses comparing the three- and nine-month periods ended September 30, 2008,
with the three- and nine-month periods ended September 30, 2007:
For the Three-Month For the Nine-Month
Periods Ended Periods Ended
September September September September
30, 2008 30, 2007 30, 2008 30, 2007
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Consolidated general and administrative expenses increased by approximately $2,994,000 and $10,468,000 in the three- and nine-month periods ended September 30, 2008, compared to the three- and nine month periods ended September 30, 2007. The principal reasons for this increase were (i) the increase in management and administrative staff resulting from our acquisition of the operating business of LED Holdings in October 2007 and our acquisition of
LPBV in April 2008; (ii) a substantial increase in legal expenses in connection
with our pending litigation with Philips, securities filings in connection with
our acquisition of the operating business of LED Holdings, LPBV and the net
assets of Lamina, effecting a reverse stock split in January 2008 and the
acceleration of the filing and maintenance of our patent portfolio; (iii) the
incurrence of approximately $500,000 in costs related to the elimination of
certain staff and employee roles identified for restructuring during the
integration period subsequent to the acquisition of the operating business of
LED Holdings; (iv) the increase in third party service costs, including costs
related to network and applications integration and developing an integrated
marketing strategy, which were incurred to facilitate our integration of the
operating business of LED Holdings; and (v) the increase in stock compensation
costs related to our issuance of options to purchase 729,000 shares of common
stock to our employees and entering into related agreements with certain
officers and employees for the issuance of 841,250 shares of restricted stock in
April and May 2008. The total compensation expense related to stock options and
restricted stock in the three- and nine-month periods ended September 30, 2008,
was $871,000 and $1,864,000, respectively, compared to $944,000 and $1,097,000
in the comparative periods in 2007.
Depreciation and Amortization Expenses
Summarized in the table below are depreciation and amortization expenses
comparing the three- and nine-month periods ended September 30, 2008, with the
three- and nine-month periods ended September 30, 2007:
For the Three-Month For the Nine-Month
Periods Ended Periods Ended
September September September September
30, 2008 30, 2007 30, 2008 30, 2007
Depreciation and amortization $ 1,234,000 $ 54,000 $ 2,560,000 $ 280,000
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Consolidated depreciation and amortization expense increased in the three- and
nine-month periods ended September 30, 2008, as compared to the similar periods
in 2007 due mainly to increased amortization of (i) the intangible assets
purchased from LED Holdings, (ii) the intangible assets purchased from LED
Holdings and resulting from our election to use push-down accounting for certain
assets and (iii) the intangible assets acquired pursuant to our acquisition of
LPBV.
Interest Income (Expense) (Net)
Summarized in the table below is consolidated interest income, net of interest
expense, comparing the three- and nine-month periods ended September 30, 2008,
with the three- and nine-month periods ended September 30, 2007:
For the Three-Month For the Nine-Month
Periods Ended Periods Ended
September September September September
30, 2008 30, 2007 30, 2008 30, 2007
Interest income (expense)(net) $ (344,000 ) $ (101,000 ) $ (296,000 ) $ (925,000 )
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Consolidated interest expense, net of interest income, increased by approximately $243,000 in the three-month period ended September 30, 2008, compared the three-month period ended September 30, 2007, as the consolidated net interest expense in 2008 mainly related to interest expense on debt facilities held by LPBV and the interest on the BMO demand line of credit obtained in July 2008, partially offset by our interest income, was significantly higher than the interest expense recognized in 2007. In 2007, we were amortizing the guarantee fees that had been paid to the guarantors of our prior line of credit with Bank of Texas. For the nine-month period ended September 30, 2008, the consolidated net interest expense was approximately $629,000 lower than in the comparable period in 2007 due to the interest expense incurred by LPBV for the five months for which its results were included in our consolidated financial statements, plus the interest on the BMO demand line of credit for the two months it was outstanding in 2008, net of our interest income, was significantly less than in 2007, when we had lower average net cash balances in the period and we amortized a substantial portion of the guarantee fees related to our prior line of credit with Bank of Texas.
Other Income (Net)
Summarized in the table below are consolidated other income, net of other
expenses, comparing the three- and nine-month periods ended September 30, 2008,
with the three- and nine-month periods ended September 30, 2007:
For the Three-Month For the Nine-Month
Periods Ended Periods Ended
September September September September
30, 2008 30, 2007 30, 2008 30, 2007
Other income (expense) (net) $ 84,000 $ (1,282,000 ) $ 232,000 $ (820,000 )
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Consolidated other income (expense), increased by approximately $1,366,000 and $1,052,000 in the three- and nine-month periods ended September 30, 2008, compared with the consolidated amounts in the comparable periods in 2007. The majority of this increase in the three-and nine-month periods ended September 30, 2008, from the comparable periods in 2007 is related to a decrease in the number and value of the derivative instruments (preferred stock conversion rights and common stock purchase warrants) related to the 6% Convertible Preferred Stock and warrants issued pursuant to bridge loans provided to us by certain of our current and former directors. At September 30, 2007, there were 515,653 shares of 6% Convertible Preferred Stock outstanding compared to 196,902 shares outstanding at September 30, 2008. In accordance with generally accepted accounting principles, these derivatives are valued on a quarterly basis taking into account a number of variables including current market price for our common stock and current interest rates. Dividends and Accretion of Preferred Stock Redemption Value Summarized in the table below are dividends on 6% Convertible Preferred Stock and accretion of preferred stock redemption value comparing the three- and nine-month periods ended September 30, 2008, with the three- and nine-month periods ended September 30, 2007:
For the Three-Month For the Nine-Month Periods
Periods Ended Ended
September September September September
30, 2008 30, 2007 30, 2008 30, 2007
Dividends on 6% Convertible Preferred
Stock and accretion of preferred stock
redemption value $ 41,000 $ (873,000 ) $ 96,000 $ (1,147,000 )
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The total dividends on the 6% Convertible Preferred Stock and the accretion of
the redemption value of the 6% Convertible Preferred Stock increased
significantly in the three- and nine-month periods ended September 30, 2008,
compared to the same period in 2007. This increase primarily resulted from the
737,900 and 1,550,400 shares of the 6% Convertible Preferred Stock that were
converted in the three- and nine-month periods ended September 30, 2007,
respectively. With the conversion of the 6% Convertible Preferred Stock, we
reversed the accretion that had been recorded in the prior two years for the
converted stock. This resulted in a significant reversal (income) related to the
shares converted. Only 10,000 shares of 6% Convertible Preferred Stock were
converted during the nine-month period ended September 30, 2008.
Income Tax Benefit
Summarized below in the table below is the consolidated income tax benefit
comparing the three- and nine-month periods ended September 30, 2008, with the
three- and nine-month periods ended September 30, 2007:
For the Three-Month For the Nine-Month
Periods Ended Periods Ended
September September September September
30, 2008 30, 2007 30, 2008 30, 2007
Income tax benefit $ 124,000 - $ 206,000 -
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Certain of the intangible assets acquired pursuant to our acquisition of LPBV have a value for accounting purposes that is significantly more than the value for income tax purposes. As a result, we recorded a deferred tax liability on the acquisition of the intangible assets. This temporary difference is being recognized in income based on the amortization of the underlying intangible assets. The income tax benefit recorded in the three- and nine-month periods ended September 30, 2008, reflects two and five months, respectively, of amortization of this deferred tax liability'
Liquidity and Capital Resources
Our primary sources of liquidity are our draws from the BMO demand line of
credit, cash reserves and cash flows from operating activities. Cash outflows
are primarily tied to procurement of inventories and payment of salaries,
benefits and other operating costs. During the three and nine month periods
ended September 30, 2008, liquidity was adversely affected as a result of design
flaws discovered in our replacement lamps and EYELEDS products, which resulted
in our inability to consummate a significant amount of sales. We believe we have
resolved these design flaws and will attempt to replace any defective bulbs and
increase shipments of products during the fourth quarter of 2008.
We currently have open orders booked of approximately $7.6 million, an increase
of approximately 40% over the amount of orders that were booked at the time we
filed our Form 10-Q for the second quarter of 2008. This increase is primarily
related to new products that were released during the third quarter of 2008 as
well as new custom projects. These orders are expected to ship throughout the
period through the end of the third quarter of 2009. We also recorded unearned
revenue of approximately $658,000 as of September 30, 2008, which mainly
represents deposits received for the completion of milestones on custom
projects. This represents an increase of approximately 65% over the amount
recorded as unearned revenue as of June 30, 2008. The increase is mainly due to
milestone payments related to the City of Dreams project in Macau.
In connection with our acquisition of the net assets of Lamina, we obtained a
$20 million demand line of credit from BMO. We borrowed approximately
$4.5 million in conjunction with our acquisition of the net assets of Lamina and
subsequently borrowed approximately $11.5 million for working capital and other
corporate purposes. As a result, approximately $4 million remains available to
us under the BMO demand line of credit.
In March 2007, we issued warrants for the purchase of our common stock to a
group of accredited investors. As of September 30, 2008, we have received gross
proceeds of $5,829,000 from the exercise of such warrants, and an additional
$505,700 may be recognized if all remaining warrants were exercised through the
payment of the cash exercise price by the holders prior to expiration.
We pay dividends on our 6% Convertible Preferred Stock four times annually:
February 10, May 10, August 10 and November 10. Based on the 6% Convertible
Preferred Stock currently outstanding, we expect to pay up to $40,000 annually
to satisfy the dividend obligation.
Philips Solid State Lighting Solutions, Inc. filed a civil lawsuit against us on
February 19, 2008. The lawsuit seeks injunctive relief and unspecified
compensatory and treble damages and attorneys' fees for alleged infringement of
five (5) related patents. We believe that this lawsuit is without merit and
intend to dispute the claim. We cannot, however, determine with certainty the
outcome or resolution of this lawsuit or the timing for its resolution. We may
incur expenses in defending this litigation and damages if we are found liable.
If the final resolution of this litigation is unfavorable to us, our
consolidated financial condition, consolidated results of operations and
consolidated cash flows might be adversely affected.
Currently, our strategy includes the outsourcing of certain manufacturing
operations. Accordingly, except for any expenditures required to produce
production tooling and molds for use by our contract manufacturers, we have made
. . .
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