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ILED > SEC Filings for ILED > Form 10-K/A on 28-Jan-2014All Recent SEC Filings

Show all filings for EVOLUCIA INC.

Form 10-K/A for EVOLUCIA INC.


28-Jan-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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 7, "Management's Discussion and Analysis or Plan of Operation," and elsewhere in this 10-K that does 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 on 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.

Overview

For the fiscal year ended December 31, 2012, the Company had a net loss of $6,578,296, as compared to a net loss of $4,160,638 for the fiscal year ended December 31, 2011, an increase of $2,417,658, or 58%. The increase resulted from two primary areas: a decrease in Gross Profit of $661,918 and an increase in general and administrative expenses of approximately $1.7 million. The loss from operations for the fiscal year ended December 31, 2012 was $6,390,857 as compared to a loss from operations in the fiscal year ended December 31, 2011 of $4,061,092, or an increase of 51.6%. The significant factors contributing to this operating loss are discussed in more detail below under "Results of Operations."

Certain events occurring after the end of the fiscal year had a significant impact on the Company's liquidity and cash available for operations. See "Subsequent Events".


Results of Operations

The following table sets forth the relationship to total revenues of principal items contained in the statement of operations of the consolidated financial statements included herewith for the fiscal years ending December 31, 2012 and December 31, 2011.

                                                 2012              2011
Sales                                        $   2,742,587     $   2,639,364
Cost of Sales                                    2,922,339         2,157,198
Gross Profit                                     (179,752)           482,166
Selling, General & Administrative Expenses       5,978,105         4,543,258
                                                        --                --
Total Operating Costs and Expenses               5,978,105         4,543,258
Operating Loss                                 (6,157,857)       (4,061,092)

Net Other Expense                                  420,439            99,546
Net Loss                                     $ (6,578,296)     $ (4,160,638)

Revenues

Revenues for the fiscal year ended December 31, 2012 were $2,742,587, which represented an increase of approximately 4% from the prior year of $2,639,634.

Costs of Goods Sold

Cost of Goods Sold (COGS) includes the costs of sale of our products, including material costs, manufacturing and labor, freight and shipping, warranty expense and sales commissions. COGS increased 36% in fiscal year 2012 to $2,922,339 from $2,157,198 in fiscal year 2011. This increase in primarily attributable to an increase in material costs associated with our first generation LED fixtures and the write off of obsolete inventory of $97,481. Material costs increased in three primary areas: 1) purchase of raw materials and finished goods, in the case of private label products, (including freight in), $525,942; 2) contract labor to assemble products, $53,579; and 3) manufacturing overhead, $24,005.

Gross Profit

The Company had a gross loss of $179,752 for the year ended December 31, 2012, as compared to a gross profit of $482,166, or 18.3%, for the fiscal year ended December 31, 2011. The decrease in gross profit is attributable primarily to a necessary price reduction of our first generation LED fixtures in response to an evolving and more competitive marketplace as well as to an increase in associated cost of goods sold.

Expenses

Total operating expenses increased 32%, to $5,978,105 in fiscal year 2012 compared to $4,543,258 in 2011.

The major categories of expense for the Company are discussed individually below.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for 2012 and 2011 were equal to total operating expenses, as the Company had no research and development expense in that period. The major components of Selling, General and Administrative Expenses are discussed below.


Product Development

Product development costs were $239,991 for the year ended December 31, 2012, compared to $339,435 for the year ending December 31, 2011, a decrease of $99,444. Product development expenses in 2012 represented refining existing designs and development of the next generation cobra head and shoebox products. In addition, in 2012, the Company hired additional personnel in an effort bring the development function in-house versus having outside consultants conduct these efforts in prior years.

General and Administrative

General and administrative expenses are the ordinary expenses of running the business, including overhead, managerial and professional salaries and occupancy expense. For the year ended December 31, 2012 the Company's general and administrative expenses were $5,578,208, compared to $4,173,063 in the prior year, an increase of $1,405,145 or 34%. $158,795 of this increase, relates to the issuance of stock and stock options issued to consultants. Additional notable increases included compensation and benefits, $386,355, Professional Fees (which include legal and consulting fees incurred for the filing of patents), $180,390, Consultants, $93,944, and Travel, $97,388.

Impairments - The Company incurred impairment expense of $103,008 associated with the write-off of an intangible asset.

Marketing & Sales

Marketing & Sales expenses totaled $163,906 in fiscal year 2012, as compared to $30,760 in fiscal year 2011, representing an increase of $133,146 or 433%. The increase reflects the company's efforts to re-brand the company and position it more effectively in the marketplace. Included in this category are product samples which were provided to customers for evaluation and potential future orders.

Research and Development

The Company did not incur any research and development expenses in 2012 or 2011. The Company anticipates adding additional personnel in research and development and product sourcing in future periods to enable it to compete in the LED marketplace both with the development and refinement of its own products and product upgrades and through the acquisition of private label products to fill in the product portfolio gaps in order to offer the full range of products our customers desire.

Other Income and Expenses

Other income and expense reflects interests costs (net of interest income), including derivatives and impairment costs, as discussed below:

Interest expense for the year ended December 31, 2012 was $420,434, compared to $99,546 for the year ended December 31, 2011. The increase in interest expense resulted from the sale of $1,000,000 in convertible debentures in June of 2011 that were outstanding for the full year of 2012 as well as interest expense associated with borrowings on a credit facility. In addition, the Company incurred a debt inducement expense of $300,000 related to the conversion of $450,000 of debt to common stock.

Liquidity and Capital Resources

The Company's cash flow from operations is insufficient to meet its current obligations. In fiscal year 2012, the Company relied upon additional investment through sales of common stock, lines of credit, and debentures in order to fund its operations. For recent financing activities See "Subsequent Events" below and Note M to the Financial Statements included elsewhere herein.

Cash Flows and Working Capital

As a result of losses we have incurred to date, we have financed our operations primarily through equity, lines of credit, and debentures. As of December 31, 2012, we had $1,642,464 in cash and cash equivalents. We had receivables, net of allowances, of $112,982 and inventory of $1,280,072. Our current liabilities were $2,780,461.

Our business cycle is working capital intensive. The sales cycle can be several months or longer and sales are not invoiced until the product has been built and shipped, requiring all cost of goods, and in some cases sales commissions, to be incurred prior to payment on an order. 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. As discussed in "Subsequent Events" below and Note M to the Financial Statements, we have two lines of credit with a total borrowing capacity of $2.5 million, $2 million of which was provided in cash to the Company and can be used for working capital purposes while the other $500,000 facility is available upon request for specific customer purchase orders pursuant to certain conditions. As of December 31, 2012, the Company had drawn an aggregate of $435,544 and had an available balance of $2,064,456. $360,130 was drawn on the $2 million facility and $75,414 was drawn on the $500 thousand facility.


As noted below, the Company accepted subscriptions for the sale of common stock in the aggregate amount of $2.5 million in the second quarter of 2012.

The Company uses contract manufacturers to produce its products and therefore does not have significant capital expenditures at this time.

Operating Activities

Net cash used in operating activities for the year ended December 31, 2012 totaled $2,993,531

Investing Activities

Net cash used in investing for the year ended December 31, 2012 was $66,578.

Financing Activities

Our net cash raised in financing activities for the fiscal year ended December 31, 2012 was $4,466,695, of which $2,500,000 resulted from the sale of common stock and $2,075,414 resulted from proceeds from a Line of Credit. In addition, the Company repaid short-term debt of $108,719 during 2012.

Cash Requirements

As of December 31, 2012, we had $1,642,464 in cash and cash equivalents. As discussed below, this is not adequate to maintain the Company's current level of operations through December 31, 2013. However, subsequent events have significantly improved the Company's cash position and ability to maintain its operations. See "Subsequent Events" below and Note M to the Financial Statements included herein.

Subsequent Events

On February 22, 2013 a private investor, shareholder, and director of the Company received a warrant for 107,000,000 shares at a purchase price per share of $0.025 pursuant to the investor making the entire Line of Credit available without restriction to the Company for use as working capital. The Warrant has a term of 10 years.

On February 27, 2013, a private investor, shareholder, and director of the Company received a warrant for 6,250,000 shares at a purchase price per share of $0.025 pursuant to the investor increasing the purchase order Line of Credit to $500,000. The Warrant has a term of 10 years

On March 4, 2013, the Company granted a stock option on 1,000,000 shares to an employee of the Company. This option has an exercise price of $.025 per share and vests ratably over a four year period. The option has a term of 10 years.

On March 20, 2013, the Company entered into a joint venture with Sunovia Energy Technologies Europe Sp. z o.o. (SETE), a Polish corporation which is unaffiliated with the Company. The agreement calls for the payment of $11 million to Evolucia by August 31, 2013 in exchange for the manufacture and distribution rights to the European markets. Under the joint venture agreement, a new entity called Evolucia Europe Sp. z o.o. will be created, with Evolucia Inc. holding a 51% ownership share and SETE holding the remaining 49% ownership. The joint venture agreement provides exclusive manufacturing rights to Evolucia Europe for the European markets. There is no assurance that this joint venture agreement will be completed.

On April 15, 2013 holders of an aggregate of $821,326 of notes payable and convertible debt extended the due dates of the debt to 2014 or have rolled over their principal plus the accrued interest into the current PPM

Recent Accounting Pronouncements

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


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. The Company's significant estimates include the valuation of stock based charges and the valuation of inventory reserves.

Accounts Receivable

The Company extends credit to its customers based upon a written credit policy. Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate for the amount of probable credit losses in the Company's existing accounts receivable. The Company establishes an allowance of doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. Receivable balances are reviewed on an aged basis and account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not require collateral on accounts receivable.

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.

Share-Based Payments

Compensation cost relating to share based payment transactions be 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).

Liquidity

Our consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. Although we have incurred losses from operations and have a significant accumulated deficit at December 31, 2012, we believe we have adequate resources, such as cash on-hand, our credit facilities, and the proceeds from a private placement during the first quarter of 2013 to meet our operating commitments for the next year (see Note O). In the event these resources and operating cash flows are not sufficient to fully fund our operating commitments or our growth, we would look to secure additional debt or equity financing. There can be no guarantee that we will be successful securing funding. In the event we are unable to fund our operations by positive operating cash flows or additional funding, we may be forced to reduce our expenses and slow down our growth rate. Accordingly, our consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.

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.


Except as discussed below, 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.

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