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ILED > SEC Filings for ILED > Form 10-Q on 15-May-2013All Recent SEC Filings

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Form 10-Q for EVOLUCIA INC.


15-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following information should be read in conjunction with the consolidated financial statements and the notes thereto contained elsewhere in this report. Statements made in this Item 2, "Management's Discussion and Analysis or Plan of Operation," and elsewhere in this 10-Q that do not consist of historical facts, are "forward-looking statements." Statements accompanied or qualified by, or containing words such as "may," "will," "should," "believes," "expects," "intends," "plans," "projects," "estimates," "predicts," "potential," "outlook," "forecast," "anticipates," "presume," and "assume" constitute forward-looking statements, and as such, are not a guarantee of future performance. The statements involve factors, risks and uncertainties, the impact or occurrence of which can cause actual results to differ materially from the expected results described in such statements. Risks and uncertainties can include, among others, fluctuations in general business cycles and changing economic conditions; changing product demand and industry capacity; increased competition and pricing pressures; advances in technology that can reduce the demand for the Company's products, as well as other factors, many or all of which may be beyond the Company's control. Consequently, investors should not place undue reliance upon forward-looking statements as predictive of future results. The Company disclaims any obligation to update the forward-looking statements in this report.

You should read the following information in conjunction with our financial statements and related notes contained elsewhere in this report. You should consider the risks and difficulties frequently encountered by early-stage companies, particularly those engaged in new and rapidly evolving markets and technologies. Our limited operating history provides only a limited historical basis to assess the impact that critical accounting policies may have on our business and our financial performance.

We encourage you to review our periodic reports filed with the SEC and included in the SEC's Edgar database, including the annual report on Form 10-K filed for the year ended December 31, 2012. The Company is focusing solely on building its LED lighting business at this time, while attempting to preserve the value of both its patented solar substrate technology and its shared solar technology for possible commercialization in the future.

Evolucia Inc. ("Evolucia", the "Company", "we", "our", "us") is an LED lighting company that markets LED lighting products. The Company's sole focus is on the design, engineering, development, patent protection, manufacturing, marketing, sales and support of LED (light emitting diode) lighting fixtures, controls and components. LEDs are semiconductor devices that emit light when electric currents are passed through them. LED's have many advantages over traditional light sources including longer lifetime, lower energy consumption, smaller size and greater design flexibility. The Company's LED light sources are designed to enhance lighting performance, reduce energy consumption, eliminate the use of hazardous materials and lower maintenance costs.

LED Lighting

LED lights are the most energy-efficient lighting source on the market today. Through our patented Aimed LED Lighting™ technology, we have demonstrated that less overall light is needed if the light is correctly focused on the target area. Our LED lighting product's are currently focused on (i) the roadway / walkway lighting market ("cobra head," "shoebox", "post-top" and "bell-top" products) (ii) the area lighting market (utility lights, wall packs, canopy lights and parking garage lights) and (iii), commercial indoor market ("high-bay", "troffer", and "flat panel" products). A report issued in January 2011 by Navigant Consulting, Inc. prepared for the Building Technologies Program of the Office of Energy Efficiency and Renewable Energy (EERE) of the Department of Energy estimates that there are 56.2 million roadway lights in the United States, including 26.5 million street lights and 26.1 million highway lights. The same report estimates approximately36.4 million parking garage lights and 15.8 million parking lot light fixtures installed in the United States. It is estimated that fewer than 5% of the parking light totals and fewer than 1% of the roadway and highway lights utilized LED technology. We believe these markets, which are primary markets for the Company's products, have the potential for significant growth in LED replacements of existing technologies in the years ahead. We believe traditional lighting companies have been somewhat slow to develop LED technologies; however, the large lighting companies have acquired the technology either through acquisition or OEM and licensing arrangements with smaller LED lighting companies. There are currently over 200 competitors in the outdoor LED lighting market. Our Aimed Optics™ technology potentially provides a competitive advantage in this market, as it uses less energy to put more light on the ground, although high product costs have hampered sales of the cobrahead and shoebox products in certain markets.

We believe we have proven that our proprietary Evolucia Aimed Optics™ LED lighting system is the most efficient method to deliver light to a target area. By mounting LEDs at numerous complementary angles within a single LED fixture, we believe we have achieved performance metrics that are superior to competing products in crucial aspects of LED lighting: energy conservation and photometry (light delivered to a target area). Our proprietary lighting system has received an award for the Best Outdoor Street Light, in its class, from the United States Department of Energy (DOE), one of the most highly regarded recognitions within the lighting industry.

In addition to superior efficiency, we believe our products are beating the competition in the performance metric of Fitted Target Efficacy (FTE) which is a standard the U.S. Department of Energy (DOE) has proposed for ENERGY STAR™ to evaluate how effectively a luminaire delivers light to the target area that it was designed to illuminate. We believe our patent pending Evolucia Aimed Optics™ technology consistently outperforms our competitors, which is supported by our receipt of the 2010 Next Generation Luminaries™ Solid State Lighting Design Award for our outdoor street and area cobra-head product, selected by judging representatives from the lighting industry, International Association of Lighting Designers, the Illuminating Engineering Society and the Department of Energy from more than 350 applicants. This award serves as a recommendation to the lighting specifier community. In addition, our cobra head and shoebox fixtures have been certified by the Design Lights Consortium (DLC). We expect that the certification from the DLC will open up additional opportunities for us, as customers and suppliers receive incentives from state and utility energy programs for purchasing products that are certified by the DLC.


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Evolucia's Aimed Optics™ LED technology consistently outperforms LED "light bar" technology on FTE tests, as shown in the chart below:

Company Roadway Type FTE Required* Actual FTE AEL Type II 37 29 Beta LED Type II 37 40 General Electric Type II 37 42 Evolucia Type II 37 56

*DOE evaluated hundreds of High Intensity Discharge (HID) fixtures to establish ENERGY STAR™ minimum FTE requirements. Minimum FTEs for LED luminaries were established to achieve at least 20% energy savings compared to top performing HID products.

The three most significant challenges facing the Company in the LED lighting market are (a) developing a recognizable brand name, (b) expanding our distribution network, and (c) driving down the cost of manufacturing and selling our products. Each of these issues is a priority for the Company at this time and going forward. In addition, as the LED lighting market continues to expand, the distribution efficiencies of the lighting market are likely to drive industry consolidation and product portfolio expansion as fixture companies compete for business across product lines.

Results of Operations for the Quarter ended March 31, 2013

For the three months ended March 31, 2013, the Company had a net loss of ($2,127,949), as compared to a net loss ($744,596) for the three months ended March 31, 2012, or an increase of $1,383,353. The significant factors contributing to this increase are discussed in more detail below.

Revenues

Revenues for the three months ended March 31, 2013 were $456,821, as compared to $611,228 for the three-month period ending March 31, 2012, which represented an decrease of $154,407 or approximately 25%. The decrease was the result of sales to fewer customers.

Gross Profit

The Company had a gross profit of $162,936, and a gross profit margin of 35.7% for the three months ended March 31, 2013, as compared to a gross profit of $221,837 or a gross profit margin of 36.3% for the three months ended March 31, 2012. The gross margin decreased slightly as a result of a changing product mix.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $1,426,522 for the three-month period ending March 31, 2013 from $713,945 for the three-month ended March 31, 2012, an increase of $712,577, or 100%. The major components are discussed below.

Compensation & Benefits

Compensation & Benefits expenses were $907,751 for the three months ended March 31, 2013, compared to $222,364 for the three months ended March 31, 2012, an increase of $685,387 or approximately 300%. $335,842 of this increase is related to non-cash expenses associated with stock options awarded to employees. The remaining increase, $349,545 is due to an increase in the number of employees,
14 (24 vs. 10).


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General and Administrative

General and administrative expenses are the expenses of operating the business on a daily basis that are not related directly to cost of goods and include travel and entertainment, legal and professional fees, selling and marketing, and occupancy and office expenses. For the three months ended March 31, 2013 the Company incurred aggregate expense of $518,771 in this area, compared to $491,581 for the three months ended March 31, 2012, an increase of $27,190 or 6%. The majority of this increase is related to increases in travel and entertainment, $109,377, occupancy and office, $32,574, sales and marketing, $42,744, and engineering, $14,530, offset by savings in consultants, $98,728, and legal and professional, $82,933.

Other Income and Expenses

Other income and expense reflects interest expense (net of interest income) as discussed below:

Total interest expense for the three months ended March 31, 2013 was $864,363 compared to $252,488 for the three months ended March 31, 2012, an increase of $611,875. $471,000 of this increase is attributable to the expense associated with the issuance of warrants during the period of $704,000 compared to $233,000 of debt conversion costs in 2012, while the remaining amount, $140,875, is related to an increase in total company borrowings.

Liquidity and Capital Resources

The Company's cash flow from operations is insufficient to meet its current obligations. In fiscal year 2012 and through the first quarter of 2013, the Company relied upon additional investment through sales of common stock, lines of credit, and debentures in order to fund its operations.

Cash Flows and Working Capital

To date, we have financed our operations primarily through the sale of equity and debt. As of March 31, 2013, we had $580,612 in cash and cash equivalents. We had receivables, net of allowances, of $93,411 and inventory of $1,321,190. Our current liabilities as of that date were $4,456,503.

Our sales cycle can be several months or longer, with some costs incurred up front, making our business working capital intensive. Also, because we build our products based upon a specific order, it can take up to 90 days to fulfill an order, followed by a period of time in which to collect our receivables.

The Company outsources its manufacturing; consequently, we do not have significant capital equipment expenditures, although tooling costs can reduce our product cost when justified by the level of sales.

For the Three Month Period Ended

                                 March 31, 2013       December 31, 2012
Cash flows used in Operations   $    (1,224,467)     $         (166,813)

Investing Activities            $       (59,061)     $                 -

Financing Activities            $        221,656     $         1,645,881

Cash at end of period           $        580,612     $         1,714,946

Operating Activities

Net cash used in operating activities for the three months ended March 31, 2013 totaled ($1,224,467) as compared to ($166,813) for the nine months ended March 31, 2012. During the period ended March 31, 2013, the cash used in operating activities consisted principally of the net loss from operations.

Investing Activities

Net cash used in investing for the three months ended March 31, 2013 was ($59,061) as compared to $0 for the three months ended March 31, 2012. The represents capital expenditures primarily associated with the purchase of the company's new trade show booth.

Financing Activities

Our net cash provided by financing activities for the three months ended March 31, 2013 was $221,656, which primarily consisted of proceeds from a line of credit and loans.


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Off-Balance Sheet Arrangements

We do not currently have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.

Our company has not entered into any transaction, agreement or other contractual arrangement with an entity unconsolidated with us under which we have

? an obligation under a guarantee contract, although we do have obligations under certain sales arrangements including purchase obligations to vendors
? a retained or contingent interest in assets transferred to the unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets,
? any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument, or
? any obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by us and material to us where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with us.

Plan of Operation

The Company is continuing to focus its operations on generating sales of LED products through our recently hired team of dedicated sales business development managers, regional sales managers, and our network of manufacturers' representatives, as well as reducing the cost of producing its LED products in order to make them more price-competitive in the market. In addition, the Company is completing the development of its next generation lighting products and has implemented targeted marketing of its product lines to the global marketplace. We are leveraging several key relationships with energy service companies and original equipment manufacturers to increase sales and to take advantage of price concessions associated with larger orders.

The Company leases office space/warehouse facilities in Sarasota, Florida under an operating lease. The lease term is for a period of sixty six months and commenced on April 14, 2010. The base rent over the term is approximately $497,346. The company is responsible for all taxes, insurance and utility expenses associated with the leased property.

On October 28, 2012, the Company completely vacated its operations from its former headquarters at 106 Cattlemen Road, Sarasota, FL, 34232 due to the presence of mold. Headquarters office operations were moved temporarily to 6151 Lake Osprey Drive, Sarasota, FL 34240 while the manufacturing division, which also includes its warehouse, was moved temporarily to 6225 21st Street, Bradenton, FL 34203. The current facilities are rented on a month to month basis for approximately $15,622 per month.

The Company was responsible for an aggregate of approximately $280,000 in future rent payments at the time it vacated the above leased property. The Company is negotiating a settlement with the landlord but it cannot be assured that a settlement will be reached and the Company may be liable for the balance of unpaid rent due. No accrual has been recorded for this contingency has been recorded at March 31, 2013.

As of May 14, 2013, the Company had 24 full-time employees and three active independent contractors.


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Effect of Changes in Prices

Prices of equivalent incandescent lighting are lower than the price of the Company's, and its competitors', LED lighting products. Subsidies and cost-savings achieved over the life of our LED products have supported sales; however, in order to remain competitive, it will be necessary for us to reduce the cost of our products. We have reduced the cost of our products and the sales prices of those products in a meaningful way over the current fiscal year and are continuing to focus efforts in this area.

Critical Accounting Policies and Estimates

Critical accounting estimates are those that management deems to be most important to the portrayal of our financial condition and results of operations, and that require management's most difficult, subjective or complex judgments, due to the need to make estimates about the effects of matters that are inherently uncertain. We have identified our critical accounting estimates which are discussed below.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. Actual results could differ from those estimates.

Accounts Receivable

Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to bad debt expense and a credit to an allowance for uncollectible accounts based on its assessment of the current status of individual accounts. Accounts receivable balances that remain outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for uncollectible accounts and a credit to accounts receivable.

Accounting for Derivative Instruments

Derivatives are required to be recorded on the balance sheet at fair value. These derivatives, including embedded derivatives in the Company's structured borrowings, are separately valued and accounted for on the Company's balance sheet. Fair values for exchange traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.

Research and Development

Research and Development ("R&D") expenses are charged to expense when incurred. The Company has consulting arrangements which are typically based upon a fee paid monthly or quarterly. Samples are purchased that are used in testing, and are expensed when purchased. R&D costs also include salaries and related personnel expenses, direct materials, laboratory supplies, equipment expenses and administrative expenses that are allocated to R&D based upon personnel costs.

Revenue Recognition

The Company recognizes revenue when the following conditions have been met:
there is persuasive evidence an arrangement exists which includes a fixed price; there is reasonable assurance of collection; the services or products have been provided and delivered to the customer; no additional performance is required and title and risk of loss has passed to the customer. Products may be placed on consignment to a limited number of resellers. Revenue for these consignment transactions will also be recognized as noted above.


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Share-Based Payments

Compensation cost relating to share-based payment transactions are recognized in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee's requisite service period (generally the vesting period of the equity award).

Recent Accounting Pronouncements

The Company does not believe that any recently issued accounting pronouncements will have a material impact on its financial statements.

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