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RVLT > SEC Filings for RVLT > Form 10-K on 16-Apr-2013All Recent SEC Filings

Show all filings for REVOLUTION LIGHTING TECHNOLOGIES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for REVOLUTION LIGHTING TECHNOLOGIES, INC.


16-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of our results of operations and financial condition is based upon, and should be read in conjunction with, our consolidated financial statements and accompanying notes thereto included elsewhere in this report. This discussion contains forward-looking statements. Actual results could differ materially from the results discussed in the forward-looking statements. Please see "Risk Factors" and "Cautionary Note Regarding Forward-Looking Statements" for a discussion of some of the uncertainties, risks and assumptions associated with these statements.


Overview

We design, manufacture, market and sell high-performance, commercial grade, LED replacement lamps, LED fixtures and LED-based signage, channel-letter and contour lighting products. We sell these products under the Seesmart, Array Lighting and Lumificient brand names. Our products incorporate many proprietary and innovative features. Our product offering and patented designs provide opportunities for significant savings in energy and maintenance costs without compromising the environment. We generate revenue by selling LED lighting products for use in the commercial market segment, which include vertical markets such as industrial and commercial facilities, hospitality, institutional, educational, healthcare and signage markets. We market and distribute our products globally, primarily through our network of distributors and independent sales representatives.

On December 20, 2012, we acquired Seesmart Technologies, Inc., headquartered in Simi Valley, California. Seesmart is a LED solutions provider with a broad range of solutions serving the commercial lighting market. We believe that Seesmart's strong management combined with its exclusive network of experienced lighting distributors and sales representatives provides us with a customer and solution-focused advantage. Seesmart has a growing group of 56 exclusive distributors in the United States and 300 sales representatives promoting Seesmart products, along with more distributors in selected international locations. In addition, it has established centers of excellence in key U.S. locations, which are used to provide distributor training and to demonstrate and develop state-of-the-art lighting solutions in realistic product environments. We believe that Seesmart has extensive end-to-end product line for both indoor (interior) and outdoor (exterior) applications that is highly complementary to our existing Array product line. With the recent acquisition of Seesmart by Revolution, the Array and Lumificient brands are now being merged into Seesmart's product categories and offered through Seesmart's sales channels.

The Company's operations are principally managed on a product basis and are comprised of two reportable segments for financial reporting purposes: LED replacement lamps and fixtures and LED signage and lighting strips. The LED replacement lamps and fixtures segment include the Seesmart business and the Array business, which has been integrated with the Seemart business. The LED signage and lighting strips segment is comprised of the Lumificient business. Throughout this report, we sometimes use "Seesmart" to refer to our LED replacement lamps and fixtures segment and "Lumificient" to refer to our LED signage and lighting strips segment.

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 or delivery to our customers in accordance with the respective contractual arrangements. Delays in product orders or changes to the timing of shipments or deliveries 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 purchased components and products 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, freight and warranties. We source our manufactured 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".

Results of Operations

Revenue



                                           Year Ended December 31,
                              2012            2011            Change           %
           LED lamps       $   792,068     $ 4,938,762     $ (4,146,694 )      -84 %
           Lumificient       3,689,287       4,049,086         (359,799 )       -9 %

           Total revenue   $ 4,481,355     $ 8,987,848     $ (4,506,493 )      -50 %

Total revenue for the year ended December 31, 2012 decreased 50% to approximately $4,481,000 as compared to the year ended December 31, 2011. Sales of our LED lamps decreased approximately $4,147,000 or 84% to approximately $792,000 for the year ended December 31, 2012 compared to approximately $4,939,000 for the year ended December 31, 2011. This sales decrease reflects the launch of Array products for sale through a large home improvement retailer in 2011 which did not repeat in 2012. Sales of Lumificient products decreased approximately 9% from approximately $4,049,000 for the year ended December 31, 2011 to approximately $3,689,000 for the year ended December 31, 2012 as a result of lower than expected demand in the fourth quarter of 2012. Our Seesmart subsidiary, which was acquired on December 20, 2012 did not have a material impact on revenue.

Gross Profit and Cost of Goods Sold



                                           Year Ended December 31,
                             2012             2011             Change           %
         Revenue          $ 4,481,355      $ 8,987,848      $ (4,506,493 )       -50 %
         Cost of sales      4,705,173        7,075,063        (2,369,890 )       -33 %

         Gross profit     $  (223,818 )    $ 1,912,785      $ (2,136,603 )      -112 %

         Gross margin %            -5 %             21 %

Gross profit for the year ended December 31, 2012 was approximately a negative $224,000 compared to gross profit of approximately $1,913,000 for the year ended December 31, 2011. Gross margins decreased from approximately 21% of sales in 2011 to approximately negative 5% of sales in 2012. Our Seesmart subsidiary, which was acquired on December 20, 2012 did not have a material impact on gross profit. Direct gross margin, which is revenue less material cost, decreased from 41% for the year ended December 31, 2011 to 40% for the same period of 2012.

Distribution costs, which include some light assembly costs, increased to approximately $2,001,000, or 45% of revenue for the year ended December 31, 2012, as compared to approximately $1,774,000, or 20% of revenue, for the year ended December 31, 2011. The increase of approximately $227,000 in distribution costs for the year ended December 31, 2012, as compared to the year ended December 31, 2011, reflects an approximate $676,000 increase in our inventory provisions primarily for excess Array product. Offsetting this increase, we incurred $237,000 lower freight costs and $147,000 lower depreciation expense in 2012 compared to 2011.

Operating Loss and Expenses



                                                           Year Ended December 31,
                                            2012               2011              Change            %
Operating expenses:
Selling, general and administrative     $  5,240,884       $  5,981,212       $   (740,328 )       -12 %
Research and development                     554,745            833,876           (279,131 )       -33 %
Impairment expense                         3,397,212            407,369          2,989,843         734 %

Total operating expenses                   9,192,841          7,222,457          1,970,384          27 %

Operating loss                          $ (9,416,659 )     $ (5,309,672 )     $ (4,106,987 )        77 %


Operating Expenses

Selling, general and administrative ("SG&A") expenses were approximately $5,241,000 for the year ended December 31, 2012 as compared to approximately $5,981,000 for the same period in 2011, a decrease of approximately $740,000, or 12%. Our Seesmart subsidiary, which was acquired on December 20, 2012, did not have a material impact on SG&A. The decrease in SG&A primarily reflects a reduction of approximately $659,000 in salaries, contract sales personnel and other payroll-related costs for the year ended December 31, 2012 as compared to the same period in 2011. In addition, stock compensation expense decreased by approximately $256,000 in 2012 compared to 2011.

Research and development costs were approximately $555,000 for the year ended December 31, 2012 as compared to approximately $834,000 for the year ended December 31, 2011. This decrease of approximately $279,000 was primarily due to lower corporate payroll expenses of approximately $208,000 and lower project-related costs of approximately $67,000 in 2012 as compared to 2011.

For the year ended December 31, 2012, we recorded an impairment charge for our Array division of approximately $3,378,000 and an impairment charge for our corporate trademarks of approximately $19,000. These charges include approximately $1,989,000 for goodwill impairment, approximately $1,015,000 for impairment of other intangible assets and approximately $393,000 for impairment of property and equipment. For the year ended December 31, 2011 we recorded a goodwill impairment charge of approximately $407,000 as a result of lowering the projected revenue growth and cash flows for Lumificient compared to previous projections.

Interest

For the years ended December 31, 2012 and 2011, the company recorded interest expense of approximately $210,000 and $127,000, respectively, primarily related to borrowing costs under approximately $2,400,000 of indebtedness incurred in December 2009. This debt was extinguished in 2012.

Other Income and Debt Extinguishment Costs

We recognized a gain on debt extinguishment of approximately $1,048,000 in the third quarter of 2012 relating to the redemption at a discount of promissory notes issued in December 2009.

Income Tax

We have provided a full valuation allowance against the net income tax benefits resulting from losses incurred and accumulated on operations. As a result, there was no provision or benefit for income tax recorded during 2012 and 2011.

Net Loss

Net loss for the years ended December 31, 2012 and 2011 was approximately $8,577,000 and $5,469,000, respectively. Net loss includes income from discontinued operations related to the Legacy Commercial and Pool Lighting Businesses of approximately $1,000 in 2012 compared to a loss from discontinued operations of $44,000 in 2011. Net loss attributable to common stockholders was approximately $13,803,000 and includes the effects of the accretion of the beneficial conversion feature and dividends related to the preferred stock issued in 2012. Basic and diluted loss per common share was $0.63 and $0.33 for the years ended December 31, 2012 and 2011, respectively.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2012, we had negative working capital of approximately $3,106,000, including cash and cash equivalents of approximately $4,434,000, a decrease of approximately $8,432,000 compared to working capital of approximately $5,326,000, including cash and cash equivalents of approximately $3,015,000, at December 31, 2011. The decrease in working capital primarily represents net liabilities assumed by the Company in connection with, and the unpaid purchase price obligations related to, the acquisition of Seesmart, offset partially by capital raised through the issuance of equity securities to RVL during 2012.


Net cash used in operations increased approximately $1,760,000 to approximately $5,129,000 for the year ended December 31, 2012, compared to approximately $3,369,000 in 2011. The increase in net cash used in operating activities over the comparable period of 2011 is due to an increase of approximately $1,674,000 in net loss adjusted for non-cash items for the year ended December 31, 2012, as compared to the same period in 2011. In addition, cash used for accounts payable, accrued liabilities and related party payable increased by approximately $1,165,000 for the year ended December 31, 2012 as compared to the same period in 2011. The increase in net cash used in operating activities over the comparable period in 2011 was partially offset by an increase in cash provided by inventories of approximately $1,233,000.

Net cash used in investing activities for the year ended December 31, 2012 was approximately $7,686,000 as compared to net cash provided by investing activities of approximately $755,000 in the comparable period of 2011. This increase in cash used in investing activities of approximately $8,441,000 is primarily the result of our 2012 acquisition of Seesmart.

Net cash provided by financing activities for the year ended December 31, 2012 was approximately $14,235,000 as compared to net cash provided in financing activities of approximately $320,000 for the comparable period of 2011. This increase in cash provided by financing activities of approximately $13,915,000 as compared to 2012 is mostly attributable to $5,195,000 from our issuance of Series B convertible preferred stock and $9,936,000 from our issuance of Series C convertible preferred stock. We used approximately $880,000 of the Series B preferred stock proceeds to restructure and extinguish the principal outstanding on the promissory notes we issued in December 2009.

At December 31, 2012, we had cash on hand of approximately $4,434,000. In the last two fiscal years we have had negative cash flow from operations of approximately $5,129,000 and $3,369,000. During 2012, we issued convertible preferred stock to RVL for net cash proceeds aggregating approximately $15,132,000 which was used to fund the cash portion of the purchase price of Seesmart, to repay pre-existing debt and other liabilities and for working capital. In addition, subsequent to December 31, 2012, we issued convertible preferred stock to RVL for cash of $5 million and common stock to unaffiliated investors for an additional $5 million in cash. In 2013, we are required to settle the assumed convertible obligations of Seesmart of approximately $3,422,000, disburse approximately $2,441,000 of the remaining cash consideration for the acquisition of Seesmart and fund our operations and working capital. While we expect to generate negative cash flow from operations in 2013 as we integrate Seesmart, invest in the growth of the Company and implement our growth strategy, we believe we have adequate resources to meet our cash requirements in the near future.

We face significant challenges in order to achieve profitability and there can be no assurance that we will achieve or sustain positive cash flows from operations or profitability. Our ability to meet our obligations in the ordinary course of business is dependent upon our ability to establish profitable operations or raise additional capital through public or private debt or equity financing, or other sources of financing to fund operations. There can be no assurance such financing will be available on terms acceptable to us, if at all, or that any financing transaction will not be dilutive to our current stockholders.

In addition, to accelerate the growth of our operations in response to new market opportunities or to acquire other technologies or businesses, we may need to raise additional capital. Additional capital may come from several sources, including the incurrence of indebtedness or the issuance of additional common stock, preferred stock, debt (whether convertible or not) or other securities. Increased indebtedness could negatively affect our liquidity and operating flexibility. The issuance of any additional securities could, among other things, result in substantial dilution of the percentage ownership of our stockholders at the time of issuance, result in substantial dilution of our earnings per share, and adversely affect the prevailing market price for our common stock. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If additional funds become necessary and are not available on terms favorable to us, or at all, we may be unable to expand our business or pursue an acquisition and our business, results of operations and financial condition may be materially adversely affected.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We use certain accounting policies and procedures to manage changes that occur in our business environment that may affect accounting estimates made in preparation of our financial statements. These estimates relate primarily to our allowance for doubtful accounts receivable, reserve for product returns, provision for inventories, warranties and product liability, revenue recognition, stock-based compensation, goodwill, intangible assets, income taxes and purchase price allocation.


Accounts Receivable and Bad Debts - Our strategy for managing doubtful accounts includes centralized credit policies and collection procedures for all customer accounts. We use a credit risk rating system in order to measure the quality of individual credit transactions. We strive to identify potential problem receivables early, take appropriate collection actions, and maintain adequate reserve levels. As revenue is recorded, we accrue an estimated amount for product returns as a reduction of revenue. Our estimate for product returns is based on our historical return experience and our expectation of future returns. We believe that our allowance for doubtful accounts and reserve for product returns were adequate at December 31, 2012 and 2011.

Inventory Provisions - Our strategy for providing for inventory obsolescence includes the evaluation of existing inventory usage and realizable value. Typically, no provision is recorded for inventory items that are currently used and expected to be sold within one year of purchase. We believe that our provision for inventory obsolescence is adequate at December 31, 2012 and 2011.

Warranties and product liability - Our products typically carry a warranty that ranges from one to seven years and includes replacement of defective parts. A warranty reserve is recorded for estimated costs associated with potential warranty expenses on previous sales. The estimate is based on historical experience. If future experience proves to be different from historical experience, we may need to increase or decrease the reserve.

Revenue recognition - Generally, we recognize revenue for our products upon shipment or delivery to customers in accordance with the respective contractual arrangements, provided no significant obligations remain and collection is probable. For sales that include customer acceptance terms, revenue is recorded after customer acceptance. It is our policy that all sales are final. Requests for returns are reviewed on a case by case basis. As revenue is recorded, we accrue an estimated amount for product returns as a reduction of revenue. As our products were new in the consumer market channel in 2011, we increased our reserve estimate for 2011 related to product returns for this channel. The level of returns may fluctuate from our estimate. We offer early payment discounts to select customers. Revenue is recorded net of the amount of the early payment discounts that we estimate will be claimed by customers.

Revenues from merchandise shipped to a logistics supplier for Seesmart, who has the contractual right to return merchandise in inventory, are recognized when the merchandise is delivered by the logistics supplier to the end user. Payments received from the logistics supplier prior to recognizing the related revenue are recorded as customer deposits.

Pursuant to agreements with distributors, which provide the distributors with the rights to purchase and resell inventory, we receive up front licensing fees for ongoing support obligations during the term of the agreement. Such fees are amortized by us over the term of the contracts which range from three to ten years. Unamortized licensing fees are included in deferred revenue in the accompanying consolidated balance sheets.

Stock-based Compensation - We account for stock-based compensation under the provisions of FASB ASC 718 "Compensation-Stock Compensation". Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the requisite service period, which is typically the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating volatility and expected lives. In addition, judgment is also required in estimating the amount of share-based awards that are expected to be forfeited. If actual results differ significantly from our estimates, our results of operations could be materially impacted.

Goodwill and Intangible Assets - We record goodwill as the excess of purchase price over the fair value of the identifiable net assets acquired. FASB ASC 350 "Intangibles - Goodwill and Other" ("ASC 350"), prescribes a two-step process for annual impairment testing of goodwill. The first step tests for impairment, while the second step, if necessary, measures the impairment. Step one compares the fair value of our reporting units to their carrying amount. If the fair value of the reporting unit is greater than its carrying amount, there is no impairment. If the reporting unit's carrying amount exceeds its fair value, then the second step must be completed to measure the amount of impairment, if any. Step two calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit as calculated in step one. In this step, the fair value of the reporting unit is allocated to all of the reporting unit's assets and liabilities in a hypothetical purchase price allocation as if the reporting unit had been acquired on that date. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss will be recognized in an amount equal to the excess. Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including revenue growth rates, strategic plans, future market conditions, cash flows and discount rates, among others. There can be no assurance that our estimates and assumptions made for purposes of the goodwill impairment testing will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenue or margin growth rates are not achieved or changes in strategy or market conditions occur, we may be required to record goodwill impairment charges in future periods.

Income Taxes - We have recorded net deferred tax assets of approximately $16,187,000 at December 31, 2012, including the tax benefits of net operating loss carryfowards aggregating approximately $18,151,000, with a full valuation allowance. Management evaluated the adequacy of the valuation allowance in light of the results for the year and on the cumulative results of operations. The evaluation included recording a full valuation allowance for net deferred tax assets. Management evaluates the adequacy of the valuation allowance annually and, if its assessment of whether it is more likely than not that the related tax benefits will be realized changes, the valuation allowance will be increased or reduced with a corresponding benefit or charge included in income. At December 31, 2012, we have U.S. Federal net operating carryforwards of approximately $48,751,000, which may be used to reduce future taxable income.

Utilization of net operating loss carryforwards is dependent on generating future taxable income of the appropriate type and in the appropriate jurisdiction. In addition, as a result of transactions consummated during 2012, including the issuance of common and preferred stock by the Company and the acquisition of Seesmart, substantially all of our net operating loss carryforwards are subject to limitations imposed by Section 382 of the Internal Revenue Code. The determination of such limitations is complex and requires a significant amount of analysis and review of past transactions, including those transactions involving acquired companies and their predecessors. We have not fully analyzed the limitations and their impact on the recorded gross deferred tax assets, but we expect that the limitations may prevent us from utilizing a significant portion of the net operating losses prior to their expiration. We expect to undertake reviews of the limitations in the near future and we will make appropriate adjustments to our deferred tax assets. However, as we have recognized a full valuation allowance related to our net deferred tax assets, any adjustment to the deferred tax assets related to the net operating loss carryforwards would be offset by a corresponding adjustment to the valuation allowance.

Uncertain tax positions are recognized if we determine that it is more likely than not that a tax position will be sustained based on the technical merits of the position, on the presumption that the position will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.

Purchase Price Allocation - Valuations of acquired businesses require us to make significant estimates, which are derived from information obtained from the management of the acquired businesses, our business plans for the acquired businesses or intellectual property and other sources. Critical assumptions and estimates used in the initial valuation of goodwill and other intangible assets include, but are not limited to:

Assessments of appropriate valuation methodologies in the circumstances;

Future expected cash flows from product sales, customer contracts and acquired developed technologies, patents and other intellectual property;

. . .

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