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RVLT > SEC Filings for RVLT > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for NEXXUS LIGHTING, INC.

Form 10-Q for NEXXUS LIGHTING, INC.


14-Nov-2012

Quarterly Report


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

Special Note Regarding Forward-Looking Statements

The following discussion and analysis provides information that management believes is useful in understanding our operating results, cash flows and financial condition. The discussion should be read in conjunction with, and is qualified in its entirety by reference to, the unaudited Consolidated Financial Statements and Notes thereto appearing elsewhere in this report and the audited Financial Statements and related Notes to Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2011. All references in this report on Form 10-Q to "Nexxus," "Nexxus Lighting," "the Company," "we," "us," "our company," or "our" refer to Nexxus Lighting, Inc. and its consolidated subsidiary, except where it is clear that such terms mean only Nexxus Lighting, Inc. or our subsidiary Lumificient Corporation ("Lumificient").

Except for the historical information contained herein, the discussions in this report contain certain forward-looking statements within the meaning of the "safe-harbor" provisions of the Private Securities Litigation Reform Act of 1995, as amended, the attainment of which involve various risks and uncertainties. Forward-looking statements may be identified by the use of forward-looking terminology such as "may", "should", "expect", "plan", "believe", "estimate", "anticipate", "continue", "predict", "forecast", "intend", "potential", or similar terms, variations of those terms or the negative of those terms. Our actual results may differ materially from those described in these forward-looking statements. The forward-looking statements are subject to risks, uncertainties and assumptions, including, among other factors:

• our history of losses and anticipated future losses;

• the risk that any reorganization of our company, operations and/or product offerings, may cause us to incur greater losses and create disruptions in our business;

• the risk that we may be unable to obtain sufficient capital to continue operations;

• the risk that we may not be able to maintain adequate liquidity or remain viable if we are unable to successfully manage our costs and expenses, increase revenue, or raise capital, as needed;

• the risk that demand for our Arrayฎ brand of LED light bulbs fails to emerge as anticipated and the potential failure to make adjustments to our operating plan necessary as a result of any failure to forecast accurately;

• the risk that any investments in new business strategies or acquisitions may distract management from current operations and result in greater than expected liabilities and expenses, inadequate return of capital, additional indebtedness and/or dilution to our stockholders;

• competition in each of our product areas, including price competition;

• dependence on suppliers and third-party manufacturers;

• the success of our sales, marketing and product development efforts;

• the condition of the international marketplace;

• general economic and business conditions;

• the evolving nature of our LED lighting technology;

• our ability to adequately protect our intellectual property rights;

• the risk that infringement claims by others may subject us to significant costs even if the claims are invalid and that an adverse outcome in litigation could subject us to significant liabilities, require us to license disputed rights from others or require us to cease marketing or using certain products or technologies; and

• our majority stockholder controls the outcome of all matters submitted for stockholder action, including the composition of our Board of Directors and the approval of significant corporate transactions and we have elected to be governed as a "controlled company" pursuant to the rules of The Nasdaq Capital Market.

Additional information concerning these or other factors which could cause actual results to differ materially from those contained or projected in, or even implied by, such forward-looking statements is contained in this report and also from time to time in our other Securities and Exchange Commission filings. Readers should carefully review the risk factors described in other documents we file from time to time with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2011. Although we believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking information will prove to be accurate. Neither our company nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. We are under no duty to update any of the forward-looking statements after the date of this report on Form 10-Q to conform our prior statements to actual results.

Recent Events

On September 12, 2012, we entered into an Investment Agreement (the "Investment Agreement") with RVL 1 LLC (the "Investor"), an affiliate of Aston Capital, LLC. The closing of the Investment occurred on September 25, 2012. In consideration of a cash payment of $6 million (the "Investment"), we issued to the Investor 600,000 shares of newly-created Series B Convertible Preferred Stock, $.001 par value per share (the "Preferred Stock"). The Preferred Stock is convertible into shares of our common stock, $.001 par value per share (the "Common Stock") at a conversion price per share equal to $0.13, subject to certain anti-dilution adjustments. The conversion price was the closing price of the Company's Common Stock on August 2, 2012, the date the Company entered into the letter of intent with respect to the Investment. The proceeds from the Investment were used to extinguish approximately $2.5 million of existing short term debt, to fund a settlement payment in connection with the settlement of the Philips lawsuit described below, to pay the fees and expenses in connection with the Investment and for working capital purposes.


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After giving effect to the conversion of the Preferred Stock and the other transactions contemplated by the Investment Agreement, the Investor owns 46,153,846 shares, or approximately 73% of the Company's outstanding Common Stock. The Preferred Stock represents approximately 73% of the outstanding voting stock of the Company on an as-converted basis and resulted in a change in control of the Company. The Investor is entitled to vote the Preferred Stock on an as-converted basis with the Company's Common Stock.

The Preferred Stock has a liquidation preference of $10 per share. The Preferred Stock also will share ratably on an as-converted basis with the Company's Common Stock in the payment of dividends and distributions. In addition, the Company is prohibited from taking certain actions specified in the Certificate of Designations with respect to the Preferred Stock without the consent of the holders of at least a majority of the then outstanding shares of Preferred Stock.

A portion of the proceeds from the Investment were used in connection with the settlement of a lawsuit brought against the Company by Koninklijke Philips Electronics N.V. and Philips Solid-State Lighting Solutions, Inc. (collectively, "Philips") on March 26, 2012, alleging that the Company's Array and certain other products infringe certain of Philips' patents for LED lighting. In September 2012, the Company entered into a settlement agreement ending the patent litigation brought by Philips. In connection with the settlement and patent license agreement, Philips granted the Company an ongoing, royalty-bearing license to the comprehensive portfolio of patented LED technologies and solutions offered under Philips' LED luminaire and retrofit bulb licensing program. The license allows Nexxus to continue the manufacture and sale of LED-based lighting products, including the Arrayฎ brand of LED replacement light bulbs. In September 2012, Nexxus paid Philips a one-time, lump-sum royalty fee to address past sales. In conjunction with the settlement and patent license agreement, on October 3, 2012, the parties filed a joint stipulation requesting dismissal of the lawsuit and on October 4, 2012 the action was dismissed without prejudice.

In addition, concurrent with closing the Investment by RVL 1 LLC, on September 25, 2012, the holders of $2.4 million in aggregate principal amount of convertible promissory notes of the Company (the "Exchange Notes") exchanged the Exchange Notes (including $140,667 of accrued interest) for a total of $880,000 in cash (which payment was funded at closing from the proceeds of the Investment) and 1,000,000 newly-issued shares of the Company's Common Stock (the "Note Exchange"). The Note Exchange was consummated pursuant to the terms of a termination and exchange agreement (the "Termination and Exchange Agreement") entered into by the Company and the holders of the Exchange Notes on September 12, 2012, providing for the extinguishment of the approximately $2.5 million of indebtedness associated with the Exchange Notes concurrent with and subject to the Investment.

Overview

We design, manufacture, market and sell high performance, commercial grade, LED replacement light bulbs and LED-based signage, channel letter and contour lighting products. We sell these products under the Array Lighting and Lumificient brand names. With 46 issued patents and 28 combined U.S. and foreign patent applications pending related to our Array Lighting and Lumificient product offerings, our products incorporate many proprietary and innovative features. Our patented Selective Heat Sink (SHS) technology and patented designs provide opportunities for significant savings in energy and maintenance costs without compromising the environment. We generate revenue by selling products for use in the commercial, hospitality, institutional, retail and sign markets. We market and distribute products globally through multiple networks of independent sales representatives and distributors as well as through energy savings companies and national accounts. We began shipping our line of Array LED replacement lamps in December 2008 and continued the launch in 2009. In 2011, we expanded our sales of Array replacement lamps to the consumer market channel through a large home improvement retailer. In March 2011, the retailer began offering our Array lamps through its website. Beginning in June 2011, our Array lamps became available in approximately 1,100 of the retailer's stores. We expect that sales to this customer will not be significant in 2012 due to low consumer acceptance of our Array products at their current price points.

The initial Array product line included five lamp sizes or types with several options for color temperatures and light beams. Since its introduction we have continued to broaden the product line by adding additional lamp sizes and options, as well as upgrades to the original products. We have successfully certified a number of our Array lamps under the Energy Star program and expect to continue seeking certification of our Array lamps under the Energy Star program as new products are introduced. Four of our Array lamps were among the first lamps to be certified under the Energy Star program which began accepting applications for lamps in September 2010. In February 2012, our


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Array R30 lamps were the first LED reflector lamp replacements to earn the full 50,000 hour certification by Energy Star. This 50,000 hour life is equivalent to more than 10 years when the lamp is on for twelve hours per day. We intend to continue making investments to expand the Array product offering and grow our market share.

The Company's operations are principally managed on a product basis and are comprised of two reportable segments for financial purposes: LED replacement lamps and LED signage and lighting strips. The Array product line consists of white light LED replacement lamps. The Lumificient product line consists of LED signage and lighting strips. Throughout this report, we sometimes use "Array" to refer to our LED replacement lamps segment and "Lumificient" to refer to our LED signage and lighting strips segment.

On October 28, 2010, we sold substantially all of the assets of our legacy commercial/architectural lighting and pool and spa lighting businesses (the "Legacy Commercial and Pool Lighting Businesses"). Our Legacy Commercial and Pool Lighting Businesses consisted of the manufacture, marketing and sale of LED and fiber optic lighting products used for applications in commercial, architectural and pool and spa markets, excluding our Array business and the business of Lumificient. The divestiture of these businesses fits with our strategic plans to focus our resources on businesses where we see more significant long term growth potential. The results of operations of the Legacy Commercial and Pool Lighting Businesses have been reflected as discontinued operations for all periods presented.

Results of Operations

Revenue: Revenue is derived from sales of our advanced lighting products. These products consist of solid-state LED replacement lamps, lighting systems and controls. Revenue is subject to both quarterly and annual fluctuations as a result of product mix considerations.

We sell our products pursuant to purchase orders and do not have any long-term contracts with our customers. We recognize revenue upon shipment to our customers. Delays in product orders or changes to the timing of shipments could cause our quarterly revenue to vary significantly. The majority of our sales are to the North American market (which includes Canada, but excludes Mexico for our purposes), and we expect that region to continue to be a major source of revenue for us. However, we also derive a portion of our revenue from customers outside of the North American market. All of our revenue is denominated in U.S. dollars.

Cost of Goods Sold: Our cost of goods sold consists primarily of raw materials, production costs from our contract manufacturers and manufacturing-related overhead such as depreciation, rent and utilities. In addition, our cost of goods sold includes provisions for excess and obsolete inventory reserves, freight and warranties. We manufacture our products based on sales projections and customer orders. We purchase materials and supplies to support such demand.

Gross Profit: Our gross profit has been and will continue to be affected by a variety of factors, including average sales prices of our products, product mix, our ability to reduce manufacturing costs and fluctuations in the cost of our purchased components. We define direct gross margin as revenue less direct material costs.

Operating Expenses: Operating expenses consist primarily of salaries and associated costs for employees in sales, engineering, finance, and administrative activities. In addition, operating expenses include charges relating to accounting, legal, insurance and stock-based compensation under the Financial Accounting Standards Board Accounting Standards Codification 718, "Compensation - Stock Compensation".


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Three months ended September 30, 2012 vs. 2011

Revenue

                                                  (Unaudited)
                                          Quarter Ended September 30,
                               2012            2011            Change           %
          Array LED lamps   $   117,519     $ 1,155,697     $ (1,038,178 )      -90 %
          Lumificient         1,132,996         957,306          175,690         18 %

          Total revenue     $ 1,250,515     $ 2,113,003     $   (862,488 )      -41 %

Our operations faced significant challenges during the quarter. Our cash levels approached illiquidity and our business prospects were uncertain, particularly for the Array business. We implemented a number of measures to preserve cash, including the termination of all Array sales and marketing personnel. Prices for Array product were sharply reduced in an attempt to convert inventory to cash. During this same period, we operated our Lumificient business largely under normal conditions. On September 25, 2012, we closed the Investment from RVL 1 LLC, an affiliate of Aston Capital, LLC. As a result, we believe that our Company is poised to resume its sales growth and penetration into the LED lighting market.

Total revenue for the three months ended September 30, 2012 decreased 41%, or approximately $862,000, to approximately $1,251,000 as compared to approximately $2,113,000 for the three months ended September 30, 2011. Sales of Lumificient products increased 18% from approximately $957,000 in the third quarter of 2011 to approximately $1,133,000 in the third quarter of 2012. This increase represents growth in Lumificient's national sign lighting business.

Sales of Array products decreased 90% from approximately $1,156,000 in the third quarter of 2011 to approximately $118,000 in the third quarter of 2012. Sales in the third quarter of 2011 primarily represented the initial shipments of our Array products to Lowe's distribution centers across the United States. These shipments were intended to meet the anticipated replenishment demand from the approximately 1,100 Lowe's stores that our company supplied in the second quarter of 2011. We expect that sales to this customer will not be significant in 2012 due to low consumer acceptance of our Array products at their current price points. In addition, as noted above, sales of our Array products in particular had been adversely affected by our deteriorating financial condition and business prospects.

Gross Profit



                                                 (Unaudited)
                                         Quarter Ended September 30,
                              2012             2011            Change          %
          Revenue          $ 1,250,515      $ 2,113,003      $ (862,488 )      -41 %
          Cost of sales        935,379        1,456,946        (521,567 )      -36 %

          Gross profit     $   315,136      $   656,057      $ (340,921 )      -52 %

          Gross margin %            25 %             31 %

Gross profit for the three months ended September 30, 2012 was approximately $315,000, or 25% of revenue, as compared to gross profit of approximately $656,000, or 31% of revenue for the comparable period of 2011. Direct gross margin, which is revenue less material cost, decreased from 43% in the third quarter of 2011 to 38% in the third quarter of 2012. Our sales of Array products generated negative direct gross margins as we began liquidating surplus and discontinued inventory. In addition Lumificient's sales shifted toward a higher concentration of sales for national sign lighting programs where margins are more constricted.

In the third quarter of 2012, distribution costs, which include some light assembly costs, decreased to approximately $155,000 from approximately $257,000 in the third quarter of 2011. Distribution costs equated to 12% of sales for each of these periods. Lumificient's distribution costs increased slightly in the third quarter of 2012 compared to the same period in the prior year, while the distribution costs associated with Array declined for the same period.


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Operating Loss and Expenses



                                                                    (Unaudited)
                                                            Quarter Ended September 30,
                                                2012              2011             Change           %
Gross profit                                 $   315,136       $   656,057       $ (340,921 )       -52 %
Less operating expenses:
Selling, general and administrative              899,116         1,432,920         (533,804 )       -37 %
Research and development                         125,924           214,116          (88,192 )       -41 %

Total operating expenses                       1,025,040         1,647,036         (621,996 )       -38 %

Operating loss                               $  (709,904 )     $  (990,979 )     $  281,075         -28 %

Selling, general and administrative (SG&A) expenses were approximately $899,000 for the quarter ended September 30, 2012 as compared to approximately $1,433,000 for the same period in 2011, a decrease of approximately $534,000, or 37%. Lumificient's SG&A expenses decreased by approximately $14,000 in the third quarter of 2012 compared to the same period in 2011. In an effort to improve liquidity, we cut costs sharply in our corporate and Array businesses across almost all categories. In addition, we were able to negotiate lower payments on previous expenses with many of our vendors.

Research and development costs were approximately $126,000 during the three months ended September 30, 2012, a decrease of approximately $88,000, or 41%, compared to the same period in 2011. This decrease primarily reflects a decrease in compensation costs of approximately $52,000.

Non-operating Expense

In the third quarter of 2012, we recorded a gain on debt restructuring of approximately $1,048,000 related to the extinguishment of debt in the Note Exchange concurrent with the Investment. The Exchange Notes had a principal value of $2.4 million, plus accrued interest. The Exchange Notes were exchanged for a total of $880,000 in cash and 1,000,000 million shares of our Common Stock.

Income Taxes

We have provided a full valuation allowance against income tax benefits resulting from losses incurred and accumulated on operations. As a result, there was no provision for income tax recorded during the three months ended September 30, 2012 and 2011, respectively.

Net Loss

Net income for the three months ended September 30, 2012 was approximately $259,000. Net loss for the three months ended September 30, 2011 was approximately $1,029,000, including income from discontinued operations related to our Legacy Commercial and Pool Lighting Businesses of approximately $3,000. After including the effect of the accretion of the beneficial conversion feature for the Series B convertible preferred stock we issued to the Investor on September 25, 2012, net loss attributable to common stockholders was approximately $4,936,000 and $1,029,000 for the three months ended September 30, 2012 and 2011, respectively. Basic and diluted loss per common share attributable to common stockholders was $0.30 and $0.06 for the three months ended September 30, 2012 and 2011, respectively. Basic and diluted loss per common share from continuing operations attributable to common stockholders was $0.30 and $0.06 for the three months ended September 30, 2012 and 2011, respectively.

Nine months ended September 30, 2012 vs. 2011

Revenue

                                                  (Unaudited)
                                        Nine Months Ended September 30,
                               2012            2011            Change           %
          Array LED lamps   $   577,389     $ 4,750,958     $ (4,173,569 )      -88 %
          Lumificient         2,874,678       2,981,355         (106,677 )       -4 %

          Total revenue     $ 3,452,067     $ 7,732,313     $ (4,280,246 )      -55 %

Total revenue for the nine months ended September 30, 2012 declined 55% to approximately $3,452,000 as compared to the nine months ended September 30, 2011. Sales of Lumificient products decreased approximately $107,000, or 4%, to approximately $2,875,000 for the first nine months of 2012 compared to approximately


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$2,981,000 for the same period of 2011. Lumificient grew its sales to several large national sign customers during the second and third quarters of 2012. This growth served to partially offset a drop in sales for non-sign lighting applications which the business gained in the first quarter of 2011 and did not replicate in 2012.

Sales of our Array LED lamps declined 88% to approximately $577,000 for the first nine months of 2012 compared to approximately $4,751,000 for the same period of 2011. The sales decrease of approximately $4,174,000 reflects the growth in sales of Array products associated with the 2011 launch of Array products for sale through the consumer market channel. In the second quarter of 2011, we completed our initial shipments of Array products to approximately 1,100 Lowe's stores across the United States. In the third quarter of 2011, we initiated shipments to Lowe's distribution centers to meet anticipated replenishment demand from the Lowe's stores. We expect that sales to this customer will not be significant in 2012 due to low consumer acceptance of our Array products at their current price points. In addition, sales of our Array products in particular have been adversely affected by our deteriorating financial condition, business prospects and the associated actions taken by our Company.

Gross Profit



                                                   (Unaudited)
                                         Nine Months Ended September 30,
                               2012             2011             Change           %
      Revenue               $ 3,452,067      $ 7,732,313      $ (4,280,246 )       -55 %
      Cost of sales           3,830,215        5,582,692        (1,752,477 )       -31 %

      Gross (loss) profit   $  (378,148 )    $ 2,149,621      $ (2,527,769 )      -118 %

      Gross margin %                -11 %             28 %

Negative gross profit for the nine months ended September 30, 2012 was approximately $378,000, or -11% of revenue, as compared to gross profit of approximately $2,150,000, or 28% of revenue for the comparable period of 2011. Direct gross margin, which is revenue less material cost, remained flat at 40% for both periods. Array direct gross margins declined due to market price pressures and our inventory liquidation efforts. Lumificient experienced a decline in direct gross margins due to the growth in national sign lighting programs where pricing is more competitive. These declines however were offset by the shift in sales mix from Array products to Lumificient's products, resulting in our direct gross margin remaining flat.

Distribution costs, which include some light assembly costs, for the first nine months of 2012 increased approximately $830,000 to approximately $1,769,000 as compared to approximately $939,000 for the same period of 2011. The increase in distribution costs includes approximately $1,184,000 more expense for inventory adjustments recorded through September 30, 2012 compared to the same period in 2011. As a result of deteriorating market conditions, aggressive pricing by our competitors and our inventory liquidation efforts, we recorded a write down of Array inventory to allow us to price our Array products accordingly. We are reviewing our sourcing strategy and may decide to discontinue certain products. Offsetting these higher inventory adjustments for the first nine months of 2012, . . .

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