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As filed with the Securities and Exchange Commission on October 1, 2009
Registration No. 333-161768
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ENERGY FOCUS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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94-3021850 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
32000 Aurora Road
Solon, Ohio 44139
440.715.1300
(Address including zip code, and telephone number, including area code, of registrants principal executive offices)
Joseph G. Kaveski
Chief Executive Officer
Energy Focus, Inc.
32000 Aurora Road
Solon, Ohio 44139
440.715.1300
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copy to:
Gerald W. Cowden, Esq.
Thomas J. Talcott, Esq.
Cowden & Humphrey Co. LPA
4600 Euclid Avenue, Suite 400
Cleveland, Ohio 44103
216.241.2880
Approximate date of commencement of proposed sale to the public:
From time to time after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following
box. o
If this Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities
Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities
Act, check the following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer þ
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
CALCULATION OF REGISTRATION FEE
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Estimated |
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Proposed |
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Title of Each |
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Proposed |
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Maximum |
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Class of Securities |
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Maximum Offering |
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Aggregate |
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Amount of |
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to be Registered |
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Amount |
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Price |
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Offering |
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Registration |
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(1) |
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to be Registered |
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per Share |
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Price |
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Fee |
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Subscription Rights
to purchase Common
Stock, $0.0001 par
value per share |
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15,100,000 |
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(2) |
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(2) |
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(2) |
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Shares of Common
Stock underlying
the Rights |
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7,000,000 |
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$0.965 (3) |
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$6,755,000 (3) |
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$376.93 (3) |
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(1) |
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This registration statement relates to (a) the Rights to purchase
Common Stock and (b) the shares of Common Stock deliverable upon the
exercise of the Rights. |
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(2) |
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The Rights are being issued without consideration. Pursuant to Rule
457(g), no separate registration fee is payable with respect to the
Rights being offered hereby since the Rights are being registered in
the same registration statement as the securities to be offered
pursuant thereto. |
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(3) |
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Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
Represents the aggregate gross proceeds from the exercise of the
maximum number of rights that may be exercised. The registration fee
has been paid previously. |
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The registrant hereby amends this Registration Statement on such date or dates as may be necessary
to delay its effective date until the registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these
securities until the registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not permitted.
Preliminary Prospectus Subject To Completion, Dated October 1, 2009
Up to $3.5 million to be raised with up to 4,670,000 Shares of Common Stock Issuable Upon Exercise
of Rights to Subscribe for those Shares at $0.75 per Share.
We are distributing at no charge to the holders of our common stock on October 5, 2009, which
we refer to as the record date, subscription rights to purchase shares of our common stock. We
refer to this offering as the rights offering.
In this rights offering we are distributing to each shareholder one right for every share of
common stock that the shareholder owns on the record date. Shareholders presently own 15,078,979
shares of common stock. We are limiting the amount to be raised in this offering to no more than
$3.5 million, however, through the issuance of no more than 4,670,000 common shares upon the
exercise of rights. If shareholders subscribe for more than 4,670,000 shares, we will allocate that
number pro rata among those shareholders who subscribe according to their ownership of shares on
the record date.
Each subscription right entitles a shareholder to purchase one share of our common stock at a
subscription price of $0.75 per share, which we refer to as the basic subscription right. If a
shareholder fully exercises the basic subscription right, other shareholders do not fully exercise
their basic subscription rights, and shareholders subscribe for a total of less than 4,670,000
shares, the shareholder will be entitled to exercise an over-subscription right to purchase a
portion of the unsubscribed shares at the same price of $0.75 per share, subject to proration, to
the maximum number of 4,670,000 shares to be issued in this rights offering, and to reduction by us
in certain circumstances. To the extent that a shareholder properly exercises the basic
subscription right or the over-subscription right for an amount of shares that exceeds the number
of shares available to the shareholder, any excess subscription payment received by the
subscription agent will be returned promptly, without interest or penalty.
The subscription rights return to us if they are not exercised by 5:00 p.m., New York City
time, on October 30, 2009, the end of the initial subscription period, unless we extend the period.
Our board of directors reserves the right to cancel the rights offering at any time, for any
reason. If the rights offering is cancelled, all subscription payments received by the subscription
agent will be returned promptly.
You should carefully consider whether to exercise your subscription rights before the
expiration of the initial subscription period of the rights offering. All exercises of subscription
rights are irrevocable. The subscription rights may be transferred. Our board of directors is
making no recommendation regarding your exercise of the subscription rights.
All rights not exercised by shareholders by the expiration date of the initial subscription
period will return to us. During a second subscription period running from November 2, 2009
through November 13, 2009 at 5:00 p.m., New York City time, we will have the right to issue rights
to both shareholders and non-shareholders in our sole discretion to purchase any or all shares
available in the offering but not purchased in the initial subscription period.
This is not an underwritten offering. The shares of common stock are being offered directly by
us without the services of an underwriter or selling agent.
Shares of our common stock are, and we expect that the shares of common stock to be issued in
the rights offering will be, traded on the NASDAQ Global Market under the symbol EFOI. On
September 29, 2009, the closing sale price of our common stock was $1.06 per share. We urge you to
obtain a current market price for the shares of our common stock before making any determination
with respect to the exercise of your rights.
Exercising the rights and investing in our common stock involves a high degree of risk. In
addition, your holdings in our company will be diluted if you do not exercise the full amount of
your basic subscription right. We urge you to carefully read the section entitled Risk Factors
beginning on page 22 of this prospectus, and all other information included in this prospectus in
its entirety before you decide whether to exercise your rights.
Neither the United States Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed on the adequacy or accuracy of
this prospectus. Any representation to the contrary is a criminal offense.
If you have any questions or need further information about this rights offering, please call
BNY Mellon Shareowner Services, our information agent for the rights offering, at (201) 680-6579
(call collect) or at (866) 282-4940 (toll-free).
The date of this prospectus is October 6, 2009.
ABOUT THIS PROSPECTUS
Unless the context otherwise requires, all references to Energy Focus, we, us, our,
our company, or the Company in this prospectus refer to Energy Focus, Inc., a Delaware
corporation, and its subsidiaries, and their respective predecessor entities for the applicable
periods, considered as a single enterprise.
You should rely only on the information contained in this prospectus. We have not authorized
any other person to provide you with different information. If anyone provides you with different
or inconsistent information, you should not rely on it. For further information, please see the
section of this prospectus entitled Where You Can Find More Information. We are not making an
offer to sell these securities in any jurisdiction where the offer or sale is not permitted.
You should not assume that the information appearing in this prospectus is accurate as of any
date other than the date on the front cover of this prospectus, regardless of the time of delivery
of this prospectus or any sale of a security. Our business, financial condition, results of
operations, and prospects may have changed since those dates.
We obtained statistical data, market data, and other industry data and forecasts used
throughout this prospectus from market research, publicly available information, and industry
publications. Industry publications generally state that they obtain their information from sources
that they believe to be reliable, but they do not guarantee the accuracy or completeness of the
information. Similarly, while we believe that the statistical data, industry data, and forecasts
and market research are reliable, we have not independently verified the data, and we do not make
any representation as to the accuracy of the information. We have not sought the consent of the
sources to refer to their reports appearing in this prospectus.
This prospectus contains trademarks, trade names, service marks and service names of Energy Focus,
Inc. and other companies.
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QUESTIONS AND ANSWERS ABOUT THE RIGHTS OFFERING
The following are examples of what we anticipate may be common questions about the rights
offering. The answers are based on selected information from this prospectus. The following
questions and answers do not contain all of the information that may be important to you and may
not address all of the questions that you may have about the rights offering. This prospectus
contains more detailed descriptions of the terms and conditions of the rights offering and provides
additional information about us and our business, including potential risks related to the rights
offering, our common stock and our business.
Exercising the rights and investing in our securities involves a high degree of risk. We urge
you to carefully read the section entitled Risk Factors
beginning on page 22 of this prospectus
and all other information included in this prospectus in its entirety before you decide whether to
exercise your rights.
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What is a rights offering? |
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A rights offering is a distribution of subscription rights on a pro rata basis to all existing
shareholders of a company. We are distributing to holders of our common stock, at no charge, as of
the close of business on the record date, October 5, 2009, subscription rights to purchase shares
of our common stock. Each shareholder will receive one subscription right for every share of common
stock that the shareholder owns at the close of business on the record date. Shareholders presently
own 15,078,979 shares of common stock. We are limiting the amount to be raised in this offering to
no more than $3.5 million, however, through the issuance of no more than 4,670,000 common shares
upon the exercise of rights. If shareholders subscribe for more than 4,670,000 shares, we will
allocate that number pro rata among those shareholders who subscribe according to their ownership
of shares on the record date. The subscription rights will be issued electronically in registered,
book-entry form only on our records or on the records of our transfer agent, BNY Mellon Shareowner
Services. |
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Why are you undertaking the rights offering? |
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We are undertaking the rights offering to raise funds for general corporate and working capital
purposes, as well as to help fund the acquisition of the Stones River Companies of Nashville,
Tennessee, a leading lighting energy solutions provider, as part of our strategy to become a
turnkey lighting energy solutions company. Based on approximately $3.1 million of available cash
and cash equivalents as of September 30, 2009, we believe that we have sufficient capital to fund
our operations into December, 2009. If we fail to raise capital by November, 2009, we may need to
forego our purchase of Stones River Companies, significantly curtail operations, cease operations,
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Our board of directors has elected a rights offering over other types of financings because a
rights offering provides our existing shareholders the opportunity to participate in this offering
first. Our board believes this creates less percentage dilution of shareholder ownership interest
in our company than if we issued shares to new investors. |
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How much money will the company raise as a result of the rights offering? |
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Assuming shareholders subscribe for and purchase 4,670,000 shares of our common stock, we
estimate that the net proceeds from the rights offering will be approximately $3.1 million, after
deducting expenses related to this offering payable by us estimated at approximately $370,000. We
may decide to close the rights offering and accept such proceeds of the basic subscription rights
and over-subscription rights as we have received as of the expiration date of the rights offering
whether or not they are sufficient to meet the objectives we state in this prospectus, other
corporate milestones that we may set, or to meet our cash flow needs for operating in the future.
In no event, will we raise more than $3.5 million in this offering. |
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What is a right? |
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Each subscription right will entitle a shareholder to purchase one share of our common stock at
a subscription price of $0.75 per share, and carries with it a basic subscription right and an
over-subscription right. We will not issue or pay cash in place of fractional rights. Instead, we
will round up any fractional rights to the nearest whole right. We refer to this as the step-up
privilege. |
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What is a basic subscription right? |
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Each basic subscription right gives a shareholder the opportunity to purchase one share of our
common stock. A shareholder may exercise any number of the shareholders basic subscription rights
or may choose not to exercise any subscription rights at all. |
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For example, if you own 1,000 shares of our common stock on the record date and you are granted one
right for every share of our common stock that you own at that time, then you have the right to
purchase up to 1,000 shares of common stock, in each case subject to the maximum number of
4,670,000 shares to be issued in the offering and to adjustment to eliminate fractional rights. If
you hold your shares in the name of a broker, dealer, custodian bank, trustee, or other nominee who
uses the services of the Depository Trust Company, then the Depository Trust Company will issue one
right to the nominee for every share of our common stock that you own at the record date. |
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What is an over-subscription right? |
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If a shareholder elects to purchase all of the shares available to the shareholder pursuant to
the shareholders basic subscription right, the shareholder may then elect to subscribe for any
number of additional shares that remain unsubscribed as a result of any other shareholders not
exercising their basic subscription rights, subject to a pro rata adjustment if requests exceed
available shares, to the maximum number of 4,670,000 shares to be issued in this rights offering,
and to reduction or addition by us in certain circumstances, as more fully described below. |
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For example, if you own 1,000 shares of our common stock on the record date, and exercise your
basic subscription right to purchase all, but not less than all, 1,000 shares which are available
for you to purchase, then, you may also concurrently exercise your over-subscription right to
purchase additional shares of common stock that remain unsubscribed as a result of any other
shareholders not exercising their basic subscription rights, subject to the pro rata and other
adjustments described below. Payments for exercises of over-subscription rights are due at the time
payment is made for the basic subscription right. |
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What happens if holders exercise basic subscription rights or over-subscription rights to purchase
more than 4,670,000 shares to raise more than $3.5 million in this offering? |
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If the rights holders exercise their basic subscription rights to purchase more than 4,670,000
shares, we will allocate the 4,670,000 available shares pro rata among rights holders who exercise
their basic subscription rights, based on the number of shares they own on the record date. If the
rights holders exercise their basic subscription rights to purchase less than 4,670,000 shares, we
will allocate the remaining available shares pro rata among rights holders who exercise their
over-subscription rights, based on the number of shares they own on the record date. The allocation
process will assure that the total number of shares available for basic subscriptions and
over-subscriptions is distributed on a pro rata basis. The percentage of shares each rights holder
may acquire will be rounded up to result in delivery of whole shares. |
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Payments for basic subscription and over-subscription rights will be deposited upon receipt by the
subscription agent and held in a segregated account with the subscription agent pending a final
determination of the number of shares to be issued pursuant to the basic and over-subscription
rights. If the prorated amount of shares allocated to you in connection with your basic
subscription or over-subscription right is less than your basic subscription or over-subscription
request, then the excess funds held by the subscription agent on your behalf will be promptly
returned to you without interest or deduction. We will issue certificates representing your shares
of our common stock, or credit your account at your nominee holder with shares of our common stock,
electronically in registered, book-entry form only on our records or on the records of our transfer
agent, BNY Mellon Shareowner Services, that you purchased pursuant to your basic subscription and
over-subscription rights as soon as practicable after the rights offering has expired and all
proration calculations, reductions, and additions contemplated by the terms of the rights offering
have been effected. |
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Am I required to exercise all of the rights that I receive in the rights offering? |
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No. You may exercise any number of your subscription rights or you may choose not to exercise
any subscription rights. If you choose not to exercise your basic subscription rights in full,
however, the relative percentage of our shares of common stock that you own may decrease, as well
as well as your voting and other rights may be diluted. In addition, if you do not exercise your
basic subscription rights in full, you will not be entitled to participate in the over-subscription
rights. |
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Are there any limits on the number of shares that I may purchase in the rights offering or own
as a result of the rights offering? |
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No. |
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Will the companys officers, directors, and other significant shareholders be exercising their
rights? |
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Mr. David Gelbaum, one of our directors and together with his spouse a co-trustee of The
Quercus Trust, has advised us that they and the Trust intend to
exercise their basic subscription rights. The Gelbaum's and the Trust own approximately 17.9% of our shares of common stock. Some of our other officers, directors, and shareholders also have advised us that they intend to
participate in this offering. None of our officers, directors, or shareholders are obligated to
participate, however. |
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Will the shares of common stock that I receive upon exercise of my rights be tradable on the
NASDAQ Global Market, other stock exchange or market, or on the OTC Bulletin Board? |
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Our shares of common stock are listed for trading on the NASDAQ Global Market and we expect that
the shares of our common stock to be issued upon the exercise of the rights also will be listed for
trading on that Market. |
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How do I exercise my basic subscription rights? |
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You may exercise your subscription rights by properly completing and signing your subscription
rights form (Subscription Form). Your Subscription Form, together with full payment of the
subscription price, must be received by BNY Mellon Shareowner Services, the subscription agent for
this rights offering, on or prior to the expiration date of the rights offering. We sometimes refer
to BNY Mellon Shareowner Services, in this prospectus as the subscription agent. BNY Mellon
Shareowner Services is also the transfer agent and registrar for our common stock. |
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If you use the mail, we recommend that you use insured, registered mail, return receipt requested.
We will not be obligated to honor your exercise of subscription rights if the subscription agent
receives the documents relating to your exercise after the rights offering expires, regardless of
when you transmitted the documents. |
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How do I exercise my over-subscription rights? |
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In order to properly exercise your over-subscription right, you must:
(i) indicate on your Subscription Form that you submit with respect to
the exercise of the rights issued to you how many additional shares
you are willing to acquire pursuant to your over-subscription right
and (ii) concurrently deliver the subscription payment related to your
over-subscription right at the time you make payment for your basic
subscription rights. All funds from over-subscription rights that are
not honored will be promptly returned to investors, without interest
or deduction. |
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What happens if I choose not to exercise my subscription rights? |
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You will retain your current number of shares of common stock even if
you do not exercise your basic subscription rights. If you do not
exercise your basic subscription right in full, however, the
percentage of our common stock that you own will decrease, and your
voting and other rights will be diluted to the extent that other
shareholders exercise their subscription rights. |
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Is there more than one subscription period in the rights offering? |
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Yes. There are two subscription periods. The initial subscription
period runs from October 6, 2009 through October 30, 2009. The second
subscription period runs from November 2, 2009 through November 13,
2009. |
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When will the rights offering expire? |
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The initial subscription period of the rights offering will expire at
5:00 p.m., New York City time, on October 30, 2009, unless we decide
to terminate the rights offering earlier or extend the expiration date
for up to an additional thirty trading days at our sole discretion. If
we extend the expiration date, you will have at least ten trading days
during which to exercise your rights. Holders ownership interests in
any rights not exercised at or before that time will return to us
without any payment to the holders of those unexercised rights. The
subscription agent must actually receive all required documents and
payments before that time and date. |
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What will happen in the second subscription period? |
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All rights not exercised by shareholders by the expiration date of the
initial subscription period will return to us. During the second
subscription period running from November 2, 2009 through November 13,
2009 at 5:00 p.m., New York City time, we will have the right to issue
rights to both shareholders and non-stockholders in our sole
discretion to purchase any or all shares available in the offering but
not purchased in the initial subscription period. From time to time
in the second subscription period, we may instruct the subscription
agent to issue Subscription Forms. The agent promptly will follow
those instructions. The procedures and rules applicable to the first
subscription period will apply to the second subscription period,
except that no Notice of Guaranteed Delivery may be used in the second
period. |
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May I transfer or sell my subscription rights if I do not want to
purchase any or all of the shares to which I am entitled? |
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Yes. You may sell, transfer, or assign your subscription rights to
anyone in whole or in part. Subscription rights, however, will not be
listed for trading on the NASDAQ Global Market, any other stock
exchange or market, or on the OTC Bulletin Board. Any transferee of
any of your subscription rights must exercise those rights in the same
way and subject to the same conditions as apply to you when exercising
your rights, except as noted below. |
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Practically speaking, the subscription agent must receive a proper
transfer of a Subscription Form from a transferor by Monday, October
26, 2009 for the transferee to be able to properly exercise the
transferees own re-issued Subscription Form by Friday, October 30,
2009. |
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Subscription Forms, including those of transferees, not properly or
timely exercised in the first subscription period, but properly and
timely exercised within the three business-day Notice of Guarantee
Period, in our sole discretion may be treated as properly and timely
exercised in the initial subscription period, placed first in line in
the second subscription period, or not accepted. |
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Subscription Forms, including those of transferees, not properly or
timely exercised in the first subscription period or within the three
business-day Notice of Guarantee Period, in our sole discretion may be
accepted or not accepted in the second subscription period. |
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Will the company be requiring a minimum subscription to consummate the
rights offering? |
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No. There is no minimum subscription in the rights offering. Our
board of directors reserves the right, however, to cancel the offering
for any reason, including if it believes that there is insufficient
participation by our shareholders. |
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Can the board of directors cancel or terminate the rights offering? |
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Yes. Our board of directors may decide to cancel or terminate the
rights offering at any time and for any reason before the expiration
date. If our board of directors cancels or terminates the rights
offering, we will issue a press release notifying shareholders of the
cancellation or termination, and any money received from subscribing
shareholders will be promptly returned, without interest or deduction. |
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If the rights offering is not completed, will my subscription payment
be refunded to me? |
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Yes. The subscription agent will hold all funds it receives in a
segregated bank account until completion of the rights offering. If
the offering is not completed, all subscription payments received by
the subscription agent will be returned promptly, without interest or
penalty. If you own shares in street name, it may take longer for
you to receive payment because the subscription agent will return
payments to the record holder of your shares. |
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What should I do if I want to participate in the rights offering but
my shares are held in the name of my broker, dealer, custodian bank,
trustee, or other nominee? |
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Beneficial owners of our shares whose shares are held by a nominee,
such as a broker, dealer, custodian bank, or trustee, must contact
that nominee to exercise their rights. In that case, the nominee will
complete the Subscription Form on behalf of the beneficial owner and
arrange for proper payment by one of the methods described above. |
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What should I do if I want to participate in the rights offering, but
I am a shareholder with a foreign address? |
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Subscription Forms will not be mailed to foreign shareholders whose
addresses of record are outside the United States and Canada, or are
an Army Post Office (APO) address or Fleet Post Office (FPO). If you
are a foreign shareholder, you will be sent written notice of this
offering and a copy of this prospectus. The subscription agent will
hold your rights, subject to you making satisfactory arrangements with
the subscription agent for the exercise of your rights, and follow
your instructions for the exercise of the rights if such instructions
are received by the subscription agent at or before 11:00 a.m., New
York City time, on Monday, October 26, 2009, four business days prior
to the expiration date, or, if this offering is extended, on or before
four business days prior to the extended expiration date. If no
instructions are received by the subscription agent by that time, your
rights will return to us without any payment to you of those
unexercised rights. |
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7
Q: |
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Will I be charged a sales commission or a fee if I exercise my
subscription rights? |
|
A: |
|
We will not charge a brokerage commission or a fee to subscription
rights holders for exercising their subscription rights. If you
exercise your subscription rights and later sell any shares of our
common stock through a broker, dealer, custodian bank, trustee, or
other nominee, you may be responsible for any fees charged by your
broker, dealer, custodian bank, trustee, or other nominee. |
|
Q: |
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What is the recommendation of the board of directors regarding the
rights offering? |
|
A: |
|
Neither are we, our board of directors, the information agent, nor the
subscription agent are making any recommendation as to whether or not
you should exercise your subscription rights. You are urged to make
your decision in consultation with your own advisors as to whether or
not you should participate in the rights offering or otherwise invest
in our securities and only after considering all of the information
included in this prospectus, including the Risk Factors section that
follows. |
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|
Q: |
|
How was the $0.75 per share subscription price established? |
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A: |
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The subscription price per share for the rights offering was set by
our board of directors. In determining the subscription price, our
board of directors considered, among other things, our history, the
historical and current market price of our common stock, the fact that
holders of rights will have an over-subscription right component, the
terms and expenses of this offering relative to other alternatives for
raising capital, the size of this offering, and the general condition
of the securities market. Based upon the factors described above, our
board of directors determined that the subscription price per share
represented an appropriate subscription price. |
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|
Q. |
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If I also own warrants to purchase shares of common stock of the
company will I receive rights on those shares? |
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|
A: |
|
No, unless you exercise one or more warrants to purchase shares of our
common stock before October 5, 2009, the record date for this rights
offering. |
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|
Q: |
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Is exercising my subscription rights risky? |
|
A: |
|
The exercise of your subscription rights and over-subscription rights,
and the resulting ownership of our securities, involves a high degree
of risk. Exercising your subscription rights means buying additional
shares of our common stock and should be considered as carefully as
you would consider any other equity investment. You should carefully
consider the information under the heading Risk Factors and all
other information included in this prospectus before deciding to
exercise your subscription rights. |
8
Q: |
|
After I exercise my subscription rights, can I change my mind and
cancel my purchase? |
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|
A: |
|
No. Once you send in your Subscription Form and payment, you cannot
revoke the exercise of either your basic subscription or
over-subscription rights, even if the market price of our common stock
is below the $0.75 per share subscription price. You should not
exercise your subscription rights unless you are certain that you wish
to purchase additional shares of our common stock at the proposed
subscription price. Any rights not exercised at or before that time
will expire worthless without any payment to the holders of those
unexercised rights. |
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|
Q: |
|
What are the United States federal income tax consequences of
receiving or exercising my subscription rights? |
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|
A: |
|
A shareholder should not recognize income or loss for United States
federal income tax purposes in connection with the receipt or
exercise of subscription rights in the rights offering. You should
consult your own tax advisor as to the particular consequences to you
of the rights offering. |
|
|
Q: |
|
How many shares of our common stock will be outstanding after the
rights offering? |
|
A: |
|
The number of shares of our common stock that will be outstanding
immediately after the completion of the rights offering will be
19,748,979 shares, assuming 4,670,000 shares are issued in the rights
offering. |
|
Q: |
|
If I exercise my subscription rights, when will I receive shares of
common stock purchased in the rights offering? |
|
|
A: |
|
As soon as practicable after the rights offering has expired and all
calculations, reductions, and additions contemplated by the terms of
the rights offering have been effected, we will issue certificates
representing your shares of our common stock, or credit your account
at your nominee holder with shares of our common stock, electronically
in registered, book-entry form on our records or on the records of our
transfer agent, BNY Mellon Shareowner Services, that you purchase
pursuant to your basic subscription and over-subscription rights. |
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9
Q: |
|
Who is the subscription agent for the rights offering? |
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|
A: |
|
The subscription agent is BNY Mellon Shareowner Services. BNY Mellon Shareowner Services is
also the transfer agent and registrar for our common stock. The address and facsimile numbers
of the subscription agent are as follows: |
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By Mail:
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By Hand: |
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Energy Focus, Inc.
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Energy Focus, Inc. |
c/o BNY Mellon Shareowner Services
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c/o BNY Mellon Shareowner Services |
Attn: Corporate Action Dept.
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Attn: Corporate Action Dept. |
P.O. Box 3301
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480 Washington Blvd., 27th Floor |
South Hackensack, NJ 07606
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Jersey City, NJ 07310 |
By Overnight Courier:
Energy Focus, Inc.
c/o BNY Mellon Shareowner Services
Attn: Corporate Action Dept.
480 Washington Blvd., 27th Floor
Jersey City, NJ 07310
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Facsimile Transmission:
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To confirm receipts of |
(Eligible Institutions Only)
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facsimiles only: |
(201) 680-4626
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(201) 680-4860 |
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Your delivery to an address other than the address set forth above, or transmission to a
facsimile number other than the number set forth above, will not constitute valid delivery
and, accordingly, may be rejected by us. |
|
Q: |
|
What should I do if I have other questions? |
|
|
A: |
|
If you have any questions or need further information about this
rights offering, please call BNY Mellon Shareowner Services, our
information agent for the rights offering, at (201) 680-6579 (call
collect) or (866) 282-4940 (toll-free). |
|
10
PROSPECTUS SUMMARY
This summary highlights important features of this offering and the information included in
this prospectus. This summary does not contain all of the information that you should consider
before investing in our securities. You should read this prospectus carefully. This prospectus
contains important information that you should consider when making your investment decision.
About Energy Focus, Inc.
Founded in 1985, we have come to focus on the design, development, manufacture, marketing, and
installation of lighting systems and customer specific energy efficient lighting solutions for a
wide-range of uses. Our lighting technology offers significant energy savings, heat dissipation,
and maintenance cost benefits over conventional lighting for multiple applications. Over the
course of the past year, we have directed our efforts to become a leading provider of turnkey,
comprehensive, energy-efficient lighting systems. Just recently, we have decided to accelerate our
transition to become a fully-integrated, turnkey, energy systems and solutions provider through the
acquisition of a lighting retrofit business. On September 29, 2009, we announced that we intend to
acquire the Stones River Companies of Nashville, Tennessee, a leading lighting energy solutions
provider.
Overview. We are engaged in the design, development, manufacturing, marketing, and
installation of energy efficient lighting systems where we serve two principal markets:
commercial/industrial lighting and pool lighting. Our business strategy has evolved into providing
our customer base with turnkey, comprehensive energy efficient lighting solutions focused on our
patented and proprietary technology. Our solutions include fiber optic (EFO), light-emitting
diode (LED), ceramic metal halide (CMH), high-intensity discharge (HID), and other highly
energy efficient lighting technologies. Our strategy also incorporates continued investment in
research into new and emerging energy sources including, but not limited to, solar energy. Typical
savings of current technology averages 80% in electricity costs, while providing full-spectrum
light closely simulating daylight colors.
Our product portfolio has been broadened recently to include offerings within LED, CMH, and
HID product lines. In 2008, we launched several new lighting products for application within
landscape, dock lighting, and cold storage markets. In 2009, we are continuing to broaden these
product lines, into landscape lighting markets for example, as well as explore new technologies and
markets. These new applications include LED track lighting and a LED
replacement tube for fluorescent
light tubes, which we expect to launch this year.
11
Our long-term strategy is to penetrate the $100 billion lighting market by providing turnkey,
comprehensive, energy-efficient lighting systems and solutions. Our targeted market
segments provide opportunities in the supermarket, commercial, industrial, and government
segments. The passage of the Energy Independence and Security Act of 2007 by Congress created a
natural market for our energy-efficient products. Under this Act, all incandescent light bulbs
must use 25% to 30% less energy than todays products by the years 2012 through 2014. Since many
of our EFO products already are 80% more efficient than incandescent bulbs, our focus is to
increase the publics knowledge of our technology and to establish comprehensive distribution
channels so that demand can be fulfilled quickly. Further, the passage of the American Recovery
and Reinvestment Act of 2009 by Congress authorizes the use of $38 billion (reduced from $50
billion) in government funds for advancement of energy conservation programs and $20 billion in tax
incentives for renewable energy and efficiency. Provisions of this Act which have the greatest
opportunity to benefit us include:
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$2 billion in loans for renewable energy projects, |
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$4.5 billion toward smart-grid applications, |
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$6.3 billion in state energy-efficient and clean-energy grants, and |
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$4.5 billion to make federal buildings more energy efficient. |
We will continue to focus on market niches where the benefits of our lighting solutions
offerings, combined with our technology, are most compelling. These market niches include
government facilities, retailers, supermarkets, marine applications, and museums.
We expect to continue our on-going leadership role in the United States governments Very High
Efficiency Solar Cell (VHESC) Consortium sponsored by the Defense Advanced Research Projects
Agency (DARPA), where we expect to be able to commercialize a solar cell technology that will
significantly surpass current solar efficiencies ranging from 6% 20%. Our proven optics
technology has already shown the ability to achieve approximately 40% efficiency in a laboratory
environment and we believe that this efficiency, or greater, can be achieved on a cost-effective,
commercially-viable scale.
Products. We produce, source, and market a wide variety of lighting technologies, which fall
into the following categories:
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Metal Halide and LED Fiber optic lighting systems (e.g. EFO-Ice®), ,
E-Luminator |
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|
LED and Metal Halide lightings systems (e.g. EFO Docklight, Cold Storage). |
12
In addition, we also produce customized components such as underwater lenses, color-changing
LED lighting fixtures, LED lighting fixtures, landscape lighting fixtures, and lighted water
features, including waterfalls and laminar-flow water fountains. Further, we continue to
aggressively penetrate the government and military lighting markets. In this regard, our company
has many products being actively marketed to the United States federal government agencies through
the General Services Administration.
Key features of our products:
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Many of our products meet the lighting efficiency standards
mandated for the year 2020. |
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Our products qualify for federal and state tax incentives for
commercial and residential consumers in certain states. |
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Our products make use of proprietary optical systems that enable
high efficiencies. |
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Certain utility companies continue to embrace our technology as an
energy-efficient alternative and are promoting our products to
their customers. |
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The heat source of the fiber optic lighting fixtures usually is
physically separated from the lamps, providing a cool
light. This unique feature has special application in grocery
stores, where reduction of food spoilage and melting due to heat
is an important goal. |
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Key benefits of our technology include: |
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Energy efficiency. Our products can provide our customers with
significant energy savings compared to other lighting systems
commonly used in similar applications and also satisfy government
and other regulatory regulations for energy-efficient lighting. |
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Better light. Our products can eliminate glare, provide
aesthetically pleasing light, and are available in a number of
colors. |
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Elimination of virtually all heat radiation. Our fiber optic and
LED systems are designed to prevent the infrared and ultra violet
radiation omitted by the lamp from being funneled through the
fiber. As a result, the light output omits virtually no infrared
or ultra violet light, which produce heat when absorbed by the
target. |
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Cost savings. Our products are able to significantly reduce
maintenance and replacement costs that normally are attributed to
traditional lighting systems. |
Long-Term Strategy. During the past year, we have formulated our objective to become a
leading provider of turnkey, comprehensive, energy-efficient, lighting systems and solutions. To
achieve this objective, we intend to pursue the following strategies:
13
|
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|
Capitalize on the growing need for high return on investment in
energy-efficient lighting systems. We intend to continue to
devote significant resources to our product development efforts to
maximize the energy efficiency and quality of our lighting systems
while reducing costs and enabling our customers to meet more
stringent government regulations. Further, we plan to continue to
develop new proprietary technologies and integrate new and
potentially more efficient lighting sources into our lighting
systems such as LED. |
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|
Focus on increased market penetration where the benefits of our
technology are most compelling. We intend to broaden the
penetration of our products within commercial, retail, and
supermarket channels, which all share urgent needs for highly
efficient, flexible, and financially economical lighting
solutions. Further, we continue to aggressively penetrate the
government and military lighting markets. To reach our target
markets, we are significantly increasing both the number and
experience level of our direct sales employees. Additionally, we
are actively restructuring our independent sales representative
network to increase sales volume and accountability of results. |
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Develop and expand strategic relationships. To expedite the
awareness of our technologies, we continue to actively pursue
strategic relationships with distributors, energy service
companies (ESCOs), lighting designers, and contractors who
distribute, recommend, and/or install lighting systems. We
continue to cultivate relationships with fixture manufacturers and
other participants in the general lighting market. |
|
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|
Develop a commercially-viable, cost-effective solar
technology. Through our on-going leadership role in the United
States governments VHESC Consortium sponsored by DARPA, we expect
to be able to commercialize a solar cell technology that will
significantly surpass current solar efficiencies ranging from 6% -
20%. Our proven optics technology has already shown the ability
to achieve approximately 40% efficiency in a laboratory
environment and we believe that this efficiency, or greater, can
be achieved on a cost-effective, commercially-viable scale. |
Intellectual Property. We have a policy of protecting our intellectual property through
patents, license agreements, trademark registrations, confidential disclosure agreements, and trade
secrets, as management deems appropriate. Our intellectual property portfolio consists of 67
issued United States and foreign patents, various pending United States patent applications, and
various pending Patent Cooperation Treaty, or PCT, patent applications filed with the World
Intellectual Property Organization that serves as the basis of national patent filings in countries
of interest. A total of 26 applications are pending. Our issued patents expire at various times
between January 2013 and June 2029. Generally, the term of patent protection is 20 years from the
earliest effective filing date of the patent application. There can be
14
no assurance, however, that
our issued patents are valid or that any patents applied for will be issued. In addition there can be no assurance that our competitors or customers will not copy
aspects of our lighting systems or obtain information that we regard as proprietary. There also
can be no assurance that others will not independently develop products similar to ours. The laws
of some foreign countries in which we sell or may sell our products do not protect proprietary
rights to products to the same extent as do the laws of the United States.
Acceleration of Long-Term Strategy. Against the backdrop of the slowing of the United States
and world economies, and mindful of our financial results for the past three years and the first
two quarters of 2009, we have re-examined our strengths and weaknesses as well as our long-term
strategy. We see as our special strengths:
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We have fundamental intellectual property and trade secrets in non-imaging optics
and coatings. |
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We have an ability to efficiently create, transport, and display light. |
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We have a broad and intimate understanding of lighting technologies. |
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We have a superior understanding of the existing building market and its desire and
need for lighting products and systems. |
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We have a core competence in solutions sales, including deal structuring and
financing. |
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We have a strong relationship with the federal government for conducting research
projects. |
To capitalize on those strengths and move away from areas where we lack a competitive
advantage, we have decided to accelerate our transition to a fully-integrated energy system and
solutions provider by taking the following steps.
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|
1. |
|
Intensify our focus on the existing building market through national
accounts, lighting system solutions, and the strategic acquisition of one or more
lighting retrofit business. On September 29, 2009, we announced that we intend to
acquire the Stones River Companies of Nashville, Tennessee, a leading lighting energy
solutions provider, as part of our strategy to become a turnkey lighting energy
solutions company. |
|
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2. |
|
Develop mainstream lighting technologies, including in the near future Track
LED Lighting and a Generation 1 LED Light Tube. |
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3. |
|
Raise additional working capital by doing a rights offering to existing
shareholders, with part of the proceeds of that offering to be used for the cash
portion of the purchase price of a lighting retrofit company. |
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|
4. |
|
Explore the divestiture of the following lines of our business: Fiberstars
Pools and United States commercial businesses, and our British and German
subsidiaries. |
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5. |
|
Reduce our monthly expenses by reducing executive management salaries and
eliminating other positions. |
15
We expect that taking these steps will result in the following outcomes:
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|
The potential divestiture of business units and the raising of additional capital
through a rights offering will provide necessary operating funds for 2009 and after. |
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We will have formed a streamlined organization that is focused on creating economic
value through turnkey lighting energy solutions and systems for existing business
owners. |
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We will develop mainstream lighting products for the existing building market that
are not currently available and that are differentiated by their performance, energy
consumption, longevity, and control ability. This product line up will begin with LED
track lighting and LED tube lighting products. |
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|
We will grow with the acquisition of one or more lighting retrofit businesses. This
will allow us to take advantage of the opportunity created by the federal government
stimulus package in public sector markets. This will replace the top-line sales of our
divested businesses. |
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|
All of these steps will accelerate our transformation into a turnkey,
fully-integrated, lighting, energy systems and solutions provider. |
We have already begun to implement the above steps. In particular, we are actively seeking to
acquire a lighting retrofit business. Part of the cash portion of the purchase price of a business
will come from the proceeds of the rights offering to our shareholders.
Principal Executive Offices
Our principal executive offices are located at 32000 Aurora Road, Solon, Ohio 44139. Our
telephone number is (440) 715-1300, fax number is (440) 715-1314, and our website address is
www.efoi.com. The information on our website is not incorporated by reference into this
prospectus and should not be relied upon with respect to this offering.
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The Rights Offering |
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Securities Offered
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|
We are distributing at no charge to the holders of our
common stock on October 5, 2009, which we refer to as
the record date, subscription rights to purchase shares
of our common stock. We are distributing one right to
the holder of record for every share of common stock
that is held by the holder on the record date.
Shareholders presently hold 15,078,979 shares of common
stock. We are limiting the amount to be raised in this
offering to no more than $3.5 million, however, through
the issuance of no more than 4,670,000 common shares
upon the exercise of rights. If shareholders subscribe
for more than 4,670,000 shares, we will allocate that
number among those shareholders who subscribe pro rata
according to their ownership of shares on the record
date. We expect the total purchase price for the
securities offered in this rights offering to be $3.5
million, assuming full participation in the offering. |
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16
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Basic Subscription Right
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|
Each right entitles the holder to purchase one
share of common stock at the subscription price
of $0.75 per share, which we refer to as the
basic subscription right. |
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|
Over-Subscription Right
|
|
Holders who fully exercise their basic
subscription rights will be entitled to subscribe
for additional shares that remain unsubscribed as
a result of any unexercised basic subscription
rights, which we refer to as the over-subscription
right. The over-subscription right allows a holder
to subscribe for an additional amount of shares
above that which the holder would otherwise be
entitled to subscribe. We will not issue or pay
cash in place of fractional rights. Instead, we
will round up any fractional rights to the nearest
whole right. We refer to this as the step-up
privilege. Rights may only be exercised for whole
numbers of shares. No fractional shares of common
stock will be issued in this offering. |
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Record Date
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Close of business on October 5, 2009. |
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Commencement Date
Initial Subscription
Period
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October 6, 2009. |
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Expiration
Date of Initial
Subscription Period
|
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5:00 p.m., New York City time, on October 30,
2009, unless extended by us as described in this
summary below under the caption entitled
Extension, Termination, and Cancellation. Any
rights not exercised at or before that time will
have no value to the holders and the holders
ownership interests in them will return to us
without any payment to the holders of those
unexercised rights. |
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Second Subscription
Period
|
|
All rights not
exercised by shareholders by the
expiration date of the initial subscription
period will return to us. During the second
subscription period running from November 2,
2009 through November 13, 2009 at 5:00 p.m.,
New York City time, we will have the right to
issue rights to both shareholders and
non-shareholders in our sole discretion to
purchase any or all shares available in the
offering but not purchased in the initial
subscription period. |
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17
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From time to time in the second subscription period, we may instruct the
subscription agent to issue Subscription Forms.
The agent promptly will follow those
instructions. The procedures and rules
applicable to the first subscription period
will apply to the second subscription period,
except that no Notice of Guaranteed Delivery
may be used in the second period. |
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Subscription Price
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$0.75 per share, payable in immediately available funds. |
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Use of Proceeds
|
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The proceeds from the rights offering, less fees and
expenses incurred in connection with the rights offering,
will be used primarily for general corporate and working
capital purposes, as well as to help fund the acquisition
of the Stones River Companies of Nashville, Tennessee, a
leading lighting energy solutions provider, as part of our
strategy to become a turnkey lighting energy solutions
company. |
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Transferability
|
|
You may sell, transfer, or assign your subscription rights
to anyone. Subscription rights, however, will not be
listed for trading on the NASDAQ Global Market, any other
stock exchange or market, or on the OTC Bulletin Board.
Any transferee of any of your subscription rights must
exercise those rights in the same way and subject to the
same conditions as apply to you when exercising your
rights, except as noted below. |
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Practically speaking, the subscription agent must receive
a proper transfer of a Subscription Form from a transferor
by Monday, October 26, 2009 for the transferee to be able
to properly exercise the transferees own re-issued
Subscription Form by Friday, October 30, 2009. |
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Subscription Forms, including those of transferees, not
properly or timely exercised in the first subscription
period, but properly and timely exercised within the three
business-day Notice of Guarantee Period, in our sole
discretion may be treated as properly and timely exercised
in the initial subscription period, placed first in line
in the second subscription period, or not accepted. |
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18
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Subscription Forms, including those of transferees, not
properly or timely exercised in the first subscription
period or within the three business-day Notice of
Guarantee Period, in our sole discretion may be accepted
or not accepted in the second subscription period. |
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No Recommendation
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Neither we nor our board of directors makes any
recommendation to you about whether you should exercise
any rights. You are urged to consult your own financial
advisors in order to make an independent investment
decision about whether to exercise your rights. Please
see the section of this prospectus entitled Risk
Factors for a discussion of some of the risks involved
in investing in our securities. |
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Minimum Condition
|
|
There is no minimum subscription in the rights offering.
Our board of directors reserves the right, however, to
cancel the offering for any reason, including if it
believes that there is insufficient participation by our
shareholders. |
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Maximum Offering
Size
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In no event,
will we raise more than $3.5 million in
this offering. |
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No Revocation
|
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If you exercise any of your basic subscription or
over-subscription rights, you will not be permitted to
revoke or change the exercise or request a refund of monies
paid. |
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United States
Federal
Income Tax
Considerations
|
|
A shareholder
should
not recognize
income, gain, or loss for United
States federal income tax purposes
in connection with the receipt or
exercise of subscription rights in
the rights offering. You should
consult your own tax advisor as to
the particular consequences to you
of the rights offering. For a
detailed discussion, see Material
United States Federal Income Tax
Considerations. |
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Extension,
Termination, and
Cancellation
|
|
Extension.
Our board of directors
may extend the expiration date for
exercising your subscription rights
for up to an additional thirty
trading days in their sole
discretion. If we extend the
expiration date, you will have at
least ten trading days during which
to exercise your rights. Any
extension of this offering will be
followed as promptly as practicable
by an announcement, and in no event
later than 9:00 a.m., New York City
time, on the next business day
following the previously scheduled
expiration date. |
19
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Termination; Cancellation. We may
cancel or terminate the rights
offering at any time and for any
reason prior to the expiration date.
Any termination or cancellation of
this offering will be followed as
promptly as practicable by
announcement thereof, and in no
event later than 9:00 a.m., New York
City time, on the next business day
following the termination or
cancellation. |
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Procedure for
Exercising
Rights
|
|
If you are
the record
holder of
shares of our common stock, to
exercise your rights you must
complete the Subscription Form and
deliver it to the subscription
agent, BNY Mellon Shareowner
Services, together with full payment
for all the subscription rights,
pursuant to both the basic
subscription right and the
over-subscription right, you elect
to exercise. The subscription agent
must receive the proper forms and
payments on or before the expiration
date. You may deliver the documents
and payments by mail or commercial
courier. If regular mail is used for
this purpose, we recommend using
registered mail, properly insured,
with return receipt requested. If
you are a beneficial owner of shares
of our common stock, you should
instruct your broker, dealer,
custodian bank, trustee, or other
nominee in accordance with the
procedures described in the section
of this prospectus entitled The
Rights OfferingRecord Date
Shareholders Whose Shares are Held
by a Nominee. |
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Subscription Agent
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BNY Mellon Shareowner Services. |
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Information Agent
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BNY Mellon Shareowner Services. |
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Questions
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If you have any questions or need further information about this
rights offering, please call BNY Mellon Shareowner Services at
(201) 680-6579 (collect) or at (866) 282-4940 (toll-free). |
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Shares Outstanding on the
Date Hereof
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15,078,979. |
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Shares Outstanding
after Completion
of the Rights
Offering
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19,748,979 shares
of our common
stock will
be outstanding, assuming
4,670,000 shares are issued in the
rights offering. |
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Issuance of our
Common Stock
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As soon as
practicable after the
rights offering has expired and all
proration calculations, reductions,
and additions contemplated by the
terms of the rights offering have
been effected, we will issue
certificates representing your
shares of our common stock, or
credit your account at your nominee
holder with shares of our common
stock, electronically in
registered, book-entry form only on
our records or on the records of our
transfer agent, BNY Mellon
Shareowner Services, that you
purchase pursuant to your basic and
over-subscription rights. |
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Risk Factors
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Investing in our securities involves a high degree of risk.
Shareholders considering making an investment in our
securities should consider the risk factors described in the
section of this prospectus entitled Risk Factors. |
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Fees and Expenses
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We will bear the fees and expenses relating to the
rights offering. |
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Trading Symbol
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Our common stock is presently traded on the NASDAQ Global
Market under the symbol EFOI, and the shares to be issued
in connection with the rights offering are expected to be
eligible and listed for trading there. |
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Key Dates
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Record Date:
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October 5, 2009. |
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Distribution Date:
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October 6, 2009. |
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Initial Subscription
Period:
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October 6, 2009 through
October 30, 2009. |
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Initial Period Expiration Date:
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October 30, 2009, unless
extended by us. |
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Second Subscription Period:
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November 2, 2009 through
November 13, 2009. |
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RISK FACTORS
An investment in our securities involves a high degree of risk. You should carefully consider
the risks described below and the other information before deciding to purchase the securities
offered in this rights offering. The risks described below are not the only ones facing our
company. Additional risks not presently known to us or that we currently consider immaterial may
also adversely affect our business. If any of the following risks actually happen, our business,
financial condition, and operating results could be materially adversely affected. In this case,
you could lose all or part of your investment.
Risks Related to the Rights Offering
Your interest in our company may be diluted as a result of this offering.
Shareholders who do not fully exercise their rights should expect that they will, at the
completion of this offering, own a smaller proportional interest in our company than would
otherwise be the case had they fully exercised their basic subscription rights.
None of our officers, directors, or shareholders are obligated to exercise their subscription
rights.
Mr. David
Gelbaum, one of our directors and together with his spouse a co-trustee of The Quercus Trust, has
advised us that they and the Trust intend to exercise their basic subscription rights. The
Gelbaum's and the Trust own approximately 17.9% of our shares of common stock. Some of our other officers,
directors, and shareholders have advised us that they intend to participate in this
offering. None of our officers, directors or shareholders are obligated to so participate, however. We
cannot guarantee you that any of our officers, directors, or shareholders will exercise their basic subscription
or over-subscription rights to purchase any shares issued in connection with this offering.
This offering may cause the price of our common stock to decrease.
The subscription price, together with the number of shares of common stock we propose to issue
and ultimately will issue if this offering is completed, may result in an immediate decrease in the
market value of our common stock. This decrease may continue after the completion of this offering.
If that occurs, you may have bought shares of common stock in the rights offering at a price
greater than the prevailing market price. Further, if a substantial number of rights are exercised
and the holders of the shares received upon exercise of those rights choose to sell some or all of
those shares, the resulting sales could depress the market price of our common stock. There is no
assurance that following the exercise of your rights you will be able to sell your common stock at
a price equal to or greater than the subscription price.
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You could be committed to buying shares of common stock above the prevailing market price.
Once you exercise your basic subscription and any over-subscription rights, you may not revoke
the exercise even if you later learn information that you consider to be unfavorable to the
exercise of your rights. On September 29, 2009, the closing sale price of our shares of common
stock on the NASDAQ Global Market was $1.06 per share. We cannot assure you that the market price
of our shares of common stock will not decline prior to the expiration of this offering or that,
after shares of common stock are issued upon exercise of the rights, a subscribing rights holder
will be able to sell shares of common stock purchased in this offering at a price equal to or
greater than the subscription price.
If we terminate this offering for any reason, we will have no obligation other than to return
subscription monies promptly.
We may decide, in our discretion and for any reason, to cancel or terminate the rights
offering at any time prior to the expiration date. If this offering is terminated, we will have no
obligation with respect to rights that have been exercised except to return promptly, without
interest or deduction, the subscription monies deposited with the subscription agent. If we
terminate this offering and you have not exercised any rights, such rights will expire worthless.
Our common stock price may be volatile after this rights offering.
The trading price of our common stock may fluctuate substantially. The price of the common
stock that will prevail in the market after this offering may be higher or lower than the
subscription price depending on many factors, some of which are beyond our control and may not be
directly related to our operating performance. These factors include, but are not limited to, the
following:
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price and volume fluctuations in the overall stock market from time to
time, including increased volatility due to the worldwide credit and
economic crisis; |
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significant volatility in the market price and trading volume of our
securities, including increased volatility due to the worldwide credit
and economic crisis; |
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actual or anticipated changes or fluctuations in our operating results; |
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material announcements by us regarding business performance,
financings, mergers and acquisitions, or other transactions; |
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general economic conditions and trends; |
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competitive factors; or |
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departures of key personnel. |
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The subscription price determined for this offering may not be an indication of the value of our
common stock.
The subscription price for the shares in this offering was set by our board of directors and
does not necessarily bear any relationship to the book value of our assets, results of operations,
cash flows, losses, financial condition, or any other established criteria for value. You should
not consider the subscription price as an indication of the value of our common stock. After the
date of this prospectus, our common stock may trade at prices above or below the subscription
price.
We will have broad discretion in the use of the net proceeds from this offering and may not use the
proceeds effectively.
Although we plan to use the proceeds of this offering primarily for general corporate and
working capital purposes, as well as to help fund the acquisition of the Stones River Companies of
Nashville, Tennessee, a leading lighting energy solutions provider, as part of our strategy to
become a turnkey lighting energy solutions company, we will not be restricted to such use and will
have broad discretion in determining how the proceeds of this offering will be used. Our discretion
is not substantially limited by the uses set forth in this prospectus in the section entitled Use
of Proceeds. While our board of directors believes the flexibility in application of the net
proceeds is prudent, the broad discretion it affords entails increased risks to the investors in
this offering. Investors in this offering have no current basis to evaluate the possible merits or
risks of any application of the net proceeds of this offering. Our shareholders may not agree with
the manner in which we choose to allocate and spend the net proceeds.
If you do not act on a timely basis and follow subscription instructions, your exercise of rights
may be rejected.
Holders of shares of common stock who desire to purchase shares of our common stock in this
offering must act on a timely basis to ensure that all required forms and payments are actually
received by the subscription agent prior to 5:00 p.m., New York City time, on the expiration date,
unless extended. If you are a beneficial owner of shares of common stock and you wish to exercise
your rights, you must act promptly to ensure that your broker, dealer, custodian bank, trustee, or
other nominee acts for you and that all required forms and payments are actually received by your
broker, dealer, custodian bank, trustee, or other nominee in sufficient time to deliver such forms
and payments to the subscription agent to exercise the rights granted in this offering that you
beneficially own prior to 5:00 p.m., New York City time on the expiration date, as may be extended.
We will not be responsible if your broker, dealer, custodian bank, trustee, or other nominee fails
to ensure that all required forms and payments are actually received by the subscription agent
prior to 5:00 p.m., New York City time, on the expiration date, as may be extended.
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If you fail to complete and sign the required subscription forms, send an incorrect payment
amount, or otherwise fail to follow the subscription procedures that apply to your exercise in this
offering, the subscription agent may, depending on the circumstances, reject your subscription or
accept it only to the extent of the payment received. Neither we nor the subscription agent
undertake to contact you concerning an incomplete or incorrect subscription form or payment, nor
are we under any obligation to correct such forms or payment. We have the sole discretion to
determine whether a subscription exercise properly follows the subscription procedures.
We cannot guarantee that you will receive any or all of the amount of shares for which you
subscribed or over-subscribed.
Holders who fully exercise their basic subscription rights will be entitled to subscribe for
an additional amount of shares. If the rights holders exercise their basic subscription rights to
purchase more than 4,670,000 shares, we will allocate the 4,670,000 available shares pro rata among
rights holders who exercise their basic subscription rights, based on the number of shares they own
on the record date. If the rights holders exercise their basic subscription rights to purchase
less than 4,670,000 shares, we will allocate the remaining available shares pro rata among rights
holders who exercise their over-subscription rights according to their ownership of shares on the
record date. The allocation process will assure that the total number of shares available for basic
subscriptions and over-subscriptions is distributed on a pro rata basis. The percentage of shares
each rights holder may acquire will be rounded up to result in delivery of whole shares. We will
not issue more than 4,670,000 shares to raise no more than $3.5 million in this offering. We cannot
guarantee that you will receive all of the shares for which you subscribed or all of the shares for
which you over-subscribed. If the prorated amount of shares allocated to you in connection with
your subscription right or over-subscription right is less than your subscription or
over-subscription request, then the excess funds held by the subscription agent on your behalf will
be returned to you promptly without interest or deduction and we will have no further obligations
to you.
If you make payment of the subscription price by uncertified check, your check may not clear in
sufficient time to enable you to purchase shares in this rights offering.
Any uncertified check used to pay for shares to be issued in this rights offering must clear
prior to the expiration date of this rights offering, and the clearing process may require five or
more business days. If you choose to exercise your subscription rights, in whole or in part, and to
pay for shares by uncertified check and your check has not cleared prior to the expiration date of
this rights offering, you will not have satisfied the conditions to exercise your subscription
rights and will not receive the shares you wish to purchase.
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The receipt of rights may be treated as a taxable distribution to you.
The distribution to shareholders of the rights in this offering should be a non-taxable
distribution under Section 305(a) of the Internal Revenue Code of 1986, as amended (the Code).
Please see the discussion on the Material United States Federal Income Tax Considerations below.
This position is not binding on the IRS, or the courts, however. If this offering is part of a
disproportionate distribution under Section 305 of the Code, your receipt of rights in this
offering may be treated as the receipt of a taxable distribution to you equal to the fair market
value of the rights. Any such distribution would be treated as dividend income to the extent of our
current and accumulated earnings and profits, if any, with any excess being treated as a return of
capital to the extent thereof and then as capital gain. Each holder of common stock is urged to
consult his, her or its own tax advisor with respect to the particular tax consequences of this
offering.
There is no market for the subscription rights.
Although the subscription rights are transferable, there is no trading market for them for you
to directly realize any value associated with them.
The rights offering does not have a minimum amount of proceeds, which means that if you exercise
your rights, you may acquire additional shares of our common stock when we require additional
capital.
There is no minimum amount of proceeds required to complete the rights offering. In addition,
an exercise of your subscription rights is irrevocable. Therefore, if you exercise the basic
subscription right or the over-subscription right, but we do not raise the desired amount of
capital in this rights offering and/or the rights offering is not fully subscribed, you may be
investing in a company that continues to require additional capital.
Risks Related to Our Company
Going Concern/Liquidity Risk.
Our previous independent registered public accounting firm issued an opinion relating to our
consolidated financial statements as of December 31, 2008 and for the three years then ended,
raising substantial doubt as to our ability to continue as a going concern. This opinion stems
from the combination of the historical losses we have incurred leading to an accumulated deficit of
$49,328,000 as of December 31, 2008, our history of not meeting management budgetary forecasts, and
our historical inability to generate sufficient cash flow to meet obligations and sustain
operations without obtaining additional external financing. In addition, our bank line of credit
is due in October 2009. The global credit market crisis has also had a dramatic effect on our
industry and customer base. The recession in the United States and Western Europe and the slowdown
of economic growth in the rest of the world has created a business environment where it is
substantially
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more
difficult to obtain equity funding and additional non-equity financing.
Furthermore, this environment has resulted in an increased risk of customer payment defaults. Our liquidity position, as well as our operating
performance, has been negatively affected by these economic and industry conditions and by other
financial and business factors, many of which are beyond our control.
Management acknowledges that sustaining our historical level of cash utilization is not
conducive to remaining a viable entity in this environment, and is in the process of aggressively
transforming our business into a turnkey, comprehensive, energy-efficient, lighting solutions
provider. In addition, management continues to aggressively reduce costs, as evidenced in the
$1,984,000 decrease in operating expenses, excluding loss on impairment in 2008, from 2007 levels.
Likewise, operating expenses decreased $2,296,000, excluding loss on impairment of fixed assets in
2009, for the six months ended June 30, 2009 as compared to the six months ended June 30, 2008.
These cost reductions have been achieved while simultaneously realigning and expanding our sales
and marketing organization. In this regard, we have been very successful in hiring highly
experienced salespeople from leading Fortune 500 firms including our new Vice President of Sales.
Further, we have aligned our entire engineering and research and development organization around
sales and marketing to expedite new product introductions into our served available markets. This
realignment is readily evidenced by the 2008 introduction of multiple new products including:
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MR-16 halogen replacement bulbs, |
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LED Cold Storage Globe lamps, |
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LED Lamps and Fixtures (PAL), |
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LED Light Rails, |
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LED Docklights, |
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HID High Bay Fixtures, |
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Fluorescent Fixtures, and |
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Compact Fluorescent Light Bulbs. |
Lastly, we expect to continue our on-going leadership role in the United States governments
Very High Efficiency Solar Cell (VHESC) Consortium sponsored by the Defense Advanced Research
Projects Agency (DARPA) where we expect to be able to commercialize a solar cell technology that
will significantly surpass current solar efficiencies ranging from 6% 20%. Our proven optics
technology has already shown the ability to achieve approximately 40% efficiency in a laboratory
environment and we believe that this efficiency, or greater, can be achieved on a cost-effective,
commercially-viable scale.
Although we are optimistic about obtaining the funding necessary for us to continue as a going
concern through internal means, there can be no assurances that this objective will be successful.
Therefore, in the event that our cash reserves and bank lines of credit are deemed by management to
not be sufficient to continue to fund operations throughout 2009, we will aggressively pursue one
or more of the following external funding sources:
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obtain loans and/or grants available through federal, state, and/or local
governmental agencies, |
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obtain loans and/or grants from various financial institutions, |
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obtain loans from non-traditional investment capital organizations, |
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sale and/or disposition of one or more operating units, and |
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obtain funding from the sale of our common stock or other equity instruments. |
Obtaining financing through the above-mentioned mechanisms contains risks, including:
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government stimulus and/or grant money is not allocated to us
despite our focus on the design, development, and manufacturing of
energy efficient lighting systems, |
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loans or other debt instruments may have terms and/or conditions,
such as interest rate, restrictive covenants, and control or
revocation provisions, which are not acceptable to management or
our Board of Directors, |
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the current global economic crisis combined with our current
financial condition may prevent us from being able to obtain any
debt financing, |
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financing may not be available for parties interested in pursuing
the acquisition of one or more of our operating units, and |
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additional equity financing may not be available to us in the
current economic environment and could lead to further dilution of
shareholder value for current shareholders of record. |
Recently, Silicon Valley Bank (SVB) has reduced the maximum amount of our line of credit
from $4 million to $2 million, tightened the borrowing base formula, begun applying collections in
our lock box to the outstanding principal balance of our loan, informed us that it does not
intend to renew the line of credit when it expires in October 2009, and informed us that we need to repay all borrowings in November 2009. We are also in
discussions with other potential financing sources to replace the SVB line, including the
possibility of replacing it through a debt facility. In the event that we are required to pay off
the SVB loan in October 2009 and are unable to replace it with another suitable form of financing,
we will need to deplete our cash and cash equivalents and may have to significantly curtail our
operations.
Global Economic Risk.
We may continue to be adversely impacted by the weakness in the general economic environment
including the current recessionary and inflationary pressures. Deteriorating economic and market
conditions including declines in real estate values and new construction, rising unemployment,
tightened credit markets, and weakened consumer confidence are not expected to improve during 2009
and may continue to contribute towards weak product sales. Specifically, the downturn in housing
construction has adversely affected the sale of pool lighting products, while the consumer credit
crisis may continue to cause retail sales to decrease. Furthermore, material and
labor costs may increase as a result of inflationary pressures on certain raw material prices.
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We have significant international activities and customers and plan to continue these efforts.
These activities subject us to additional business risks including logistical complexity and the
general economic conditions in those markets. Because the market for our products tends to be
highly dependent upon general economic conditions, a continued decline in the general world-wide
economic environment is likely to continue to adversely impact our traditional product based
operating results.
Risks we face in conducting business internationally include the following:
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multiple, conflicting, and changing laws and regulations, export and import
restrictions, employment laws, regulatory requirements, and other
government approvals, permits, and licenses; |
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difficulties and costs in staffing and managing foreign operations such as
our offices in Germany and the United Kingdom; |
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difficulties and costs in recruiting and retaining individuals skilled in
international business operations; |
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increased costs associated with maintaining international marketing efforts; |
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potentially adverse tax consequences; |
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political and economic instability, including wars, acts of terrorism,
political unrest, boycotts, curtailments of trade, and other business
restrictions; and |
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currency fluctuations. |
In addition, we face additional risks in the Asia/Pacific region associated with disease,
increased political tensions between countries in that region, potentially reduced protection for
intellectual property rights, government-fixed foreign exchange rates, relatively uncertain legal
processes, and developing telecommunications infrastructures. In addition, some countries in this
region, such as China and Japan, have adopted laws, regulations, and policies that impose
additional restrictions on the ability of foreign companies to conduct business in their countries
or otherwise place them at a competitive disadvantage in relation to domestic companies.
Competitive Risk.
Global competition exists in all of the markets we serve, including our energy solutions
market. A number of companies offer directly competitive products and services, including colored
halogen lighting for swimming pools and incandescent and fluorescent lighting for commercial
decorative and accent lighting. We also compete with LED products in industrial lighting and pool
related products. In addition, many of our competitors in the pool lighting market bundle their
lighting products with other pool-related products, which many customers find to be an attractive
alternative. Our competitors include large and well-established companies such as General
Electric, Sylvania, Philips, Schott, 3M, Bridgestone, Pentair, Mitsubishi, and OSRAM/Siemens. Our
company also competes with lighting energy solutions companies.
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Furthermore, many of our competitors have substantially greater financial, technical, and
marketing resources than we do. We may not be able to adequately respond to technological
developments or fluctuations in competitive pricing. We anticipate that any future growth in
energy-efficient lighting will be accompanied by continuing increases in competition, which could
adversely affect our operating results if we cannot compete effectively. To stay competitive, we
must continue to allocate sufficient resources to research and development, which could negatively
impact our gross margins. If we are unable to provide more efficient lighting technology than our
competitors, our operating results will be adversely affected.
Technological Risk.
The markets for our products are characterized by rapidly changing technology, evolving
industry standards, and speed of new product introductions. Our operating results depend on our
ability to develop and introduce new products into existing and emerging markets, and to reduce the
production costs of existing products. Many of our strategic initiatives are aimed at developing
increasingly complex energy efficient lighting solutions. The process of developing this new
technology is complex and uncertain, and if we fail to accurately predict customers changing needs
and emerging technological trends, our business could be harmed. We must commit significant
resources to developing new products before knowing with certainty that our investments will result
in products the market will accept. Furthermore, we may not be able to execute successfully
because of technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate
resources. This could result in competitors providing those solutions before we do and loss of
market share, net sales, and earnings.
The success of new products depends on several factors, including proper new product
definition, component costs, timely completion and introduction of these products, differentiation
of new products from those of our competitors, and market acceptance of these products. There can
be no assurance that we will successfully identify new product opportunities, develop and bring new
products to market in a timely manner, or achieve market acceptance of our products or that
products and technologies developed by others will not render our products or technologies obsolete
or noncompetitive. Specifically, the products and technologies that we identify as emerging
technologies, may not prove to have the market success we anticipate, and we may not successfully
identify and invest in other emerging or advanced technologies as appropriate.
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Supplier Risk.
We require substantial amounts of purchased materials from selected vendors. With specific
materials, we purchase 100% of our requirement from a single vendor. Included in purchased
materials are small diameter stranded fiber, plastic fixtures, lamps, reflectors, and power
supplies. Substantially all of the materials we require are in adequate supply. However, the
availability and costs of materials may be subject to change due to, among other things, new laws
or regulations, suppliers allocation to other purchasers, interruptions in production by
suppliers, and changes in exchange rates and worldwide price and demand levels. Our inability to
obtain adequate supplies of materials for our products at favorable prices could have a material
adverse effect on our business, financial position, or results of operations by decreasing our
profit margins and by hindering our ability to deliver products to our customers on a timely basis.
We have experienced an increase in the costs of certain petroleum-based materials. Although we
may determine that it is necessary to pass on the material price increases to our customers, in
certain circumstances, it may not be possible for us to pass on these increases. Even if we are
able to pass on some or all of these increases, there may be a delay between when we have to pay
for the increases and when our customers pay us based on the increased prices. If we are not able
to reduce or eliminate the effect of these cost increases through lowering other costs of
production or successfully implementing price increases to our customers, such material cost
increases could have a negative effect on our operating and financial results.
Third-Party Risk.
Three strategic pieces of our equipment are operated by third parties. Failure to properly
maintain the equipment and/or the creation of any delays or inabilities to meet our production
requirements on the part of any of these suppliers will result in disruption of promised delivery
to our clients.
Credit Risk.
In this climate of global financial and banking crisis, the ability of our customers to
maintain credit availability has become more challenging. In particular, certain customers in the
pool lighting market and companies that are highly leveraged represent an increasing credit risk.
Some customers have reduced their purchases because of these credit constraints. Moreover, our
disciplined credit policies have, in some instances, resulted in delayed customer sales. In 2008,
we experienced an increase in customer bankruptcies and voluntary liquidations. Continued
deterioration of global economic conditions could result in additional customer credit constraints,
particularly within our pool lighting market. These actions could have a materially adverse effect
on our financial condition, operating results, and cash flows.
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Intellectual Property Risk.
As of August 31, 2009, our intellectual property portfolio consisted of 67 issued United
States and foreign patents, various pending United States patent applications, and various pending
Patent Cooperation Treaty, or PCT, patent applications filed with the World Intellectual Property
Organization that serves as the basis of national patent filings in countries of interest. As of
August 31, 2009 a total of 26 applications were pending. Our issued patents expire at various
times between January 2013 and June 2029. Generally, the term of patent protection is 20 years
from the earliest effective filing date of the patent application.
There can be no assurance, however, that our issued patents are valid or that any patents
applied for will be issued. There can be no assurance that our competitors or customers will not
copy aspects of our lighting systems or obtain information that we regard as proprietary. There
also can be no assurance that others will not independently develop products similar to ours. The
laws of some foreign countries in which we sell or may sell our products do not protect proprietary
rights to products to the same extent as do the laws of the United States.
Key Employee Risk.
Our future success will depend to a large extent on the continued contributions of certain
employees, such as our current chief executive officer, president, chief financial officer, chief
operating officer, and chief technical officer. These and other key employees would be difficult
to replace. Our future success will also depend on our ability to attract and retain qualified
technical, sales, marketing and management personnel, for whom competition is very intense. The
loss of, or failure to attract, hire, and retain, any such persons could delay product development
cycles, disrupt our operations, or otherwise harm our business or results of operations. We have
been successful in hiring experienced energy solutions salespeople from leading firms in the
industry including our new Vice President of Sales. However, if these individuals are not
successful in achieving our expectations, then planned sales may not occur and the anticipated
revenues may not be realized.
Risk of Losing Governmental Funding for Research.
Historically, approximately 43.7% of our research and development efforts have been supported
directly by government funding. For the six months ended June 30, 2009, approximately 39.2% of our
research and development funding came from government sources. In 2008, approximately 29.0% of our
research and development funding came from government sources. For both periods, research and
development funding was contracted over short periods, generally one to two years. If government
funding is reduced or eliminated, there is no guarantee that we would be able to continue to fund
our research and development efforts in technology and products at their current levels, if at all.
If we are unable to support our research and development efforts, there is no guarantee that we
would be able to develop enhancements to our current products or develop new products.
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Litigation Risk.
At any given time, we may be subject to litigation, the disposition of which may have a
material adverse effect upon our business, financial condition, or results of operation. We
currently are not involved in any material litigation and we do not anticipate becoming involved in
any in the foreseeable future.
Foreign Risk.
We use plants in Mexico, India, and Taiwan to manufacture and assemble many of our pool
lighting products. The supply of these finished goods may be impacted by local political or social
conditions as well as the financial strength of the companies with which we do business.
Risks Related to Our Common Stock
We have not been in compliance with the continued listing requirements of the NASDAQ Global Market.
From time to time during the last several months, we have not met the NASDAQ Global Market
continued listing requirement that calls for the maintenance of a minimum bid price of our common
stock of $1.00 per share. We have not received a notice of noncompliance. If our common stock
trading value does not meet NASDAQ minimum trade requirements to remain on the Market Exchange, we
will be required to either revalue existing shares of common stock or perform other necessary
remedial actions. If we are unable to raise the price high enough and if our common stock is to be
delisted from trading on NASDAQ Global Market, trading, if any, of our common stock, including the
shares of common stock underlying the rights, could then be conducted either in the
over-the-counter market or in the OTC Bulletin Board system.
We could issue additional common stock, which might dilute the book value of our common stock.
Our board of directors has authority, without action or vote of our shareholders, to issue all
or a part of our authorized but unissued shares. Such stock issuances could be made at a price that
reflects a discount or a premium from the then-current trading price of our common stock. In
addition, in order to raise capital, or acquire businesses in the future, including a lighting
retrofit business, we may need to issue securities or promissory notes that are convertible into or
exchangeable for a significant amount of our common stock. These issuances would dilute your
percentage ownership interest, which would have the effect of reducing your influence on matters on
which our shareholders vote, and might dilute the book value of our common stock. You may incur
additional dilution if holders of stock options, whether currently outstanding or subsequently
granted, exercise their options, or if warrant holders exercise their warrants to purchase shares
of our common stock. If this rights
33
offering is fully subscribed, we may have insufficient
authorized and unissued shares of common stock to issue in connection
with a subsequent equity financing or acquisition transaction, as a result of which we may be
required to call a special meeting of our shareholders to authorize additional shares before
undertaking or as a condition to completing an offering or acquisition.
We may need to request our shareholders to authorize additional shares of common stock in
connection with subsequent equity finance or acquisition transactions.
We are authorized to issue 30,000,000 shares of common stock, of which 15,078,979 shares are
issued and outstanding. Assuming full participation in the rights offering, we will have 19,748,979
shares issued and outstanding after the offering. An additional 6,262,206 shares have been reserved
for issuance upon exercise of stock options and warrants outstanding prior to this rights offering.
If this offering is fully subscribed, we may have insufficient available shares of common stock to
issue in connection with a subsequent equity financing or acquisition transaction, as a result of
which we may be required to call a special meeting of our shareholders to authorize additional
shares before undertaking or as a condition to completing an offering or transaction. We cannot
assure you that our shareholders would authorize an increase in the number of shares of our common
stock.
As a thinly-traded stock, large sales can place downward pressure on our stock price.
Our common stock, despite certain increases of trading volume from time to time, experiences
periods when it could be considered thinly traded. Financing or acquisition transactions
resulting in a large number of newly issued shares that become readily tradable, or other events
that cause current shareholders to sell shares, could place downward pressure on the trading price
of our stock. In addition, the lack of a robust resale market may require a shareholder who desires
to sell a large number of shares to sell the shares in increments over time to mitigate any adverse
impact of the sales on the market price of our stock.
Shares eligible for future sale may adversely affect the market for our common stock.
As of October 5, 2009, we had a significant number of convertible or derivative securities
outstanding, including: (i) 1,896,188 shares of common stock issuable upon exercise of outstanding
stock options at a weighted average exercise price of $ 4.09 per share, and (ii) 3,837,639
shares of common stock issuable upon exercise of our outstanding warrants at a weighted average
exercise price of $3.18 per share. If or when these securities are exercised into shares of our
common stock, the number of our shares of common stock outstanding will increase. Increases in our
outstanding shares, and any sales of shares, could have a material adverse effect on the market for
our common stock and the market price of our common stock.
34
In addition, from time to time, certain of our shareholders may be eligible to sell all or
some of their shares of common stock by means of ordinary brokerage transactions in the open market
pursuant to Rule 144, promulgated under the Securities Act of 1933, which we refer to in this
prospectus as the Securities Act, or pursuant to resale prospectuses. Any substantial sale of our
common stock pursuant to Rule 144 or pursuant to any resale prospectus may have a material adverse
effect on the market price of our securities.
Our executive officers, directors, and their affiliates maintain the ability to substantially
influence all matters submitted to shareholders for approval.
As of October 5, 2009, our executive officers, directors, and their affiliates beneficially
owned shares representing approximately 27.6% of our common stock. The number of shares that will
be purchased by our executive officers, directors, and their affiliates in this rights offering can
only be determined upon the completion of the offering. If our executive officers, directors, and
their affiliates purchase their pro rata portion of the shares offered in this offering.
Accordingly, our current executive officers, directors, and their affiliates have and will continue
to have substantial influence over the outcome of corporate actions requiring shareholder approval,
including the election of directors, a merger, consolidation, or sale of all or substantially all
of our assets, or any other significant corporate transactions, as well as management and affairs.
This concentration of ownership may delay or prevent a change of control of us at a premium price
if these shareholders oppose it, even if it would benefit our other shareholders.
Provisions in our charter documents and our Rights Agreement may prevent or frustrate attempts by
our shareholders to change our management and hinder efforts to acquire a controlling interest in
us.
Provisions of our corporate charter and bylaws, and of our Rights Agreement, dated as of
October 25, 2006 with Mellon Shareowner Services may discourage, delay, or prevent a merger,
acquisition, or other change in control that shareholders may consider favorable, including
transactions in which you might otherwise receive premium for your shares. These provisions may
also prevent or frustrate attempts by our shareholders to replace or remove our management. These
provisions include:
|
|
|
limitation on the removal of directors; |
|
|
|
|
advanced notice requirements for shareholder proposals and nominations; |
|
|
|
|
the inability of shareholders to act by written consent or to call a special
meeting; |
|
|
|
|
the ability of our board of directors to designate the terms of and issue new
series of preferred stock without shareholder approval; and |
|
|
|
|
the poison pill contained in our Rights Agreement. |
35
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains, in addition to historical information, forward-looking statements
within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. These statements relate to future events or our future financial performance and can be
identified by the use of forward-looking terminology such as project, may, could, expect,
anticipate, estimate, continue or other similar words. These forward-looking statements are
based on managements current expectations and are subject to a number of factors and uncertainties
which could cause actual results to differ materially from those described in these statements. The
following are some of the important factors that could cause our actual performance to differ
materially from those discussed in the forward-looking statements:
|
|
|
We have incurred significant operating losses and cannot assure you
that we will generate profit. |
|
|
|
|
Our previous auditors have indicated there is uncertainty about our
ability to continue as a going concern. |
|
|
|
|
If we fail to raise capital and implement our business plan, we may
need to forego the acquisition of a lighting retrofit business,
significantly curtail operations, cease operations, or seek federal
bankruptcy protection. |
|
|
|
|
We are subject to significant competition. |
We caution you that actual results or business conditions may differ materially from those
projected or suggested in forward-looking statements as a result of various factors including, but
not limited to, those described above and in the Risk Factors section of this prospectus. We cannot
assure you that we have identified all the factors that create uncertainties. Moreover, new risks
emerge from time to time. It is not possible for our management to predict all risks, nor can we
assess the impact of all risks on our business or the extent to which any risk, or combination of
risks, may cause actual results to differ from those contained in any forward-looking statements.
You should not place undue reliance on forward-looking statements. We undertake no obligation to
publicly release the result of any revision of these forward-looking statements to reflect events
or circumstances after the date they are made or to reflect the occurrence of unanticipated events.
USE OF PROCEEDS
Assuming full participation in the rights offering, we estimate that the net proceeds from the
rights offering will be approximately $3.1 million, after deducting expenses related to this
offering payable by us estimated at approximately $370,000. We intend to use the net proceeds
received from the exercise of the rights for general corporate working capital purposes, as well as
to help fund the acquisition of the Stones River Companies of Nashville, TN, a leading lighting energy
solutions provider, as part of our strategy to become a turnkey lighting energy solutions company.
36
If we fail to raise capital in October and November 2009, we may need to forego the
acquisition of Stones River Companies, significantly curtail operations, cease operations, or seek
federal bankruptcy protection.
CAPITALIZATION
The following table sets forth our capitalization, cash, and cash equivalents:
|
|
|
on an actual basis as of June 30, 2009; and |
|
|
|
|
|
on a pro forma as adjusted basis to give effect to the sale of
4,670,000 shares of our common stock to raise a maximum of $3.5
million in this rights offering, assuming a subscription price of
$0.75 per share and our receipt of the net proceeds from that sale. |
|
This table should be read in conjunction with our Managements Discussion and Analysis of
Financial Condition and Results of Operations and our consolidated financial statements and the
related notes included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009 |
|
|
|
|
|
|
|
Pro Forma |
|
|
|
Actual |
|
|
As Adjusted |
|
|
|
(dollars in thousands) |
|
Cash and cash equivalents |
|
$ |
5,613 |
|
|
$ |
8,743 |
|
|
|
|
|
|
|
|
|
Total liabilities excluding debt |
|
$ |
2,691 |
|
|
$ |
2,691 |
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
1,847 |
|
|
|
1,847 |
|
|
|
|
|
|
|
|
|
Common stock, $0.0001 par value (30,000,000
shares authorized; 15,078,979 issued and
outstanding at June 30, 2009) |
|
|
1 |
|
|
|
1 |
|
|
Accumulated other comprehensive income |
|
|
369 |
|
|
|
369 |
|
|
Additional paid-in capital |
|
|
66,238 |
|
|
|
69,368 |
|
|
Accumulated deficit |
|
|
(54,718 |
) |
|
|
(54,718 |
) |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
$ |
11,890 |
|
|
$ |
15,020 |
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
16,428 |
|
|
$ |
19,558 |
|
|
|
|
|
|
|
|
37
DILUTION
Existing shareholders will experience an immediate dilution of the pro forma net tangible book
value per share of our common stock and purchasers in the rights offering will experience an
immediate increase. Our net tangible book value as of June 30, 2009 was approximately $11.9
million, or $0.79 per share of our common stock, based upon 15,078,979 shares of our common stock
outstanding. Net tangible book value per share is equal to our total net tangible book value, which
is our total tangible assets less our total liabilities, divided by the number of shares of our
outstanding common stock. Dilution per share equals the difference between the net tangible book
value per share of our common stock immediately before the rights offering and the net tangible
book value per share immediately after the rights offering.
Based on the aggregate offering of $3.5 million and after deducting estimated offering
expenses payable by us of $370,000, and the application of the estimated $3.1 million of net
proceeds from the rights offering, our pro forma net tangible book value as of June 30, 2009 would
have been approximately $15.0 million, or $0.76 per share. This represents an immediate decrease in
pro forma net tangible book value, or dilution, to existing shareholders of $0.03 per share and an
immediate increase to purchasers in the rights offering of $0.01 per share.
The
following table illustrates these per share changes, assuming a fully subscribed rights
offering of 4,670,000 shares at the subscription price of $0.75 per share to raise a maximum of
$3.5 million in this offering.
|
|
|
|
|
Subscription price |
|
$ |
0.75 |
|
|
Net tangible book value per share prior to the rights offering |
|
|
0.79 |
|
|
Pro forma net tangible book value per share after the rights offering |
|
|
0.76 |
|
|
|
|
|
|
Dilution in net tangible book value per share to existing shareholders |
|
|
0.03 |
|
|
|
|
|
|
Increase per
share attributable to purchasers in the rights offering |
|
$ |
0.01 |
|
|
|
|
|
38
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the fiscal years ended
December 31, 2008, 2007, 2006, 2005, and 2004 have been derived from our consolidated financial
statements. Our consolidated financial statements as of December 31, 2008 and 2007 and for the
fiscal years ended December 31, 2008, 2007, and 2006 are included elsewhere in this prospectus. Our
consolidated financial statements as of December 31, 2006, 2005, and 2004 and for the fiscal years
ended December 31, 2005 and 2004 are not included in this prospectus. The selected condensed
consolidated financial data presented below as of June 30, 2009 and for the six months ended June
30, 2009 and 2008 have been derived from our condensed financial statements included elsewhere in
this prospectus, and include, in the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of our financial position and
results of operations as of and for these periods. Data from interim periods are not necessarily
indicative of the results to be expected for a full year. This selected consolidated financial data
should be read in conjunction with Capitalization, Managements Discussion and Analysis of
Financial Condition and Results of Operations and our consolidated financial statements and the
related notes included elsewhere in this prospectus.
39
(IN THOUSANDS EXCEPT PER SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS |
|
|
FISCAL YEAR ENDED DECEMBER 31, |
|
ENDED JUNE 30, |
|
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
|
2009 |
|
2008 |
OPERATING SUMMARY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
22,950 |
|
|
$ |
22,898 |
|
|
$ |
27,036 |
|
|
$ |
28,337 |
|
|
$ |
29,731 |
|
|
$ |
6,620 |
|
|
$ |
12,453 |
|
Gross profit |
|
|
5,503 |
|
|
|
6,282 |
|
|
|
7,785 |
|
|
|
10,626 |
|
|
|
11,511 |
|
|
|
1,117 |
|
|
|
3,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net sales |
|
|
24 |
% |
|
|
27.4 |
% |
|
|
28.8 |
% |
|
|
37.5 |
% |
|
|
38.7 |
% |
|
|
16.9 |
% |
|
|
29.6 |
% |
Net research and development expenses |
|
|
2,188 |
|
|
|
2,907 |
|
|
|
2,341 |
|
|
|
2,190 |
|
|
|
1,188 |
|
|
|
483 |
|
|
|
593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net sales |
|
|
9.5 |
% |
|
|
12.7 |
% |
|
|
8.7 |
% |
|
|
7.7 |
% |
|
|
4 |
% |
|
|
7.3 |
% |
|
|
4.8 |
% |
Sales and marketing expenses |
|
|
8,551 |
|
|
|
9,789 |
|
|
|
9,774 |
|
|
|
9,595 |
|
|
|
8,595 |
|
|
|
3,530 |
|
|
|
5,590 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net sales |
|
|
37.3 |
% |
|
|
42.8 |
% |
|
|
36.2 |
% |
|
|
33.9 |
% |
|
|
28.9 |
% |
|
|
53.3 |
% |
|
|
44.9 |
% |
General and administrative expenses |
|
|
5,080 |
|
|
|
4,651 |
|
|
|
4,956 |
|
|
|
3,135 |
|
|
|
2,459 |
|
|
|
2,426 |
|
|
|
2,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net sales |
|
|
22.1 |
% |
|
|
20.3 |
% |
|
|
18.3 |
% |
|
|
11.1 |
% |
|
|
8.3 |
% |
|
|
36.7 |
% |
|
|
20.5 |
% |
Loss on impairment |
|
|
4,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net sales |
|
|
18.8 |
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
|
|
2.5 |
% |
|
|
|
% |
Restructure expenses |
|
|
|
|
|
|
456 |
|
|
|
734 |
|
|
|
3,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net sales |
|
|
|
% |
|
|
2 |
% |
|
|
2.7 |
% |
|
|
11 |
% |
|
|
|
% |
|
|
|
% |
|
|
|
% |
Loss before tax |
|
|
(14,698 |
) |
|
|
(11,127 |
) |
|
|
(9,537 |
) |
|
|
(7,314 |
) |
|
|
(762 |
) |
|
|
(5,390 |
) |
|
|
(5,008 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net sales |
|
|
(64.0 |
)% |
|
|
(48.6 |
)% |
|
|
(35.3 |
)% |
|
|
(25.8 |
)% |
|
|
(2.6 |
)% |
|
|
(81.4 |
)% |
|
|
(40.2 |
)% |
Net loss |
|
|
(14,448 |
) |
|
|
(11,317 |
) |
|
|
(9,650 |
) |
|
|
(7,423 |
) |
|
|
(704 |
) |
|
|
(5,390 |
) |
|
|
(5,088 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a percentage of net sales |
|
|
(63.0 |
)% |
|
|
(49.4 |
)% |
|
|
(35.7 |
)% |
|
|
(26.2 |
)% |
|
|
(2.4 |
)% |
|
|
(81.4 |
)% |
|
|
(40.9 |
)% |
Net loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(1.02 |
) |
|
$ |
(0.98 |
) |
|
$ |
(0.85 |
) |
|
$ |
(0.90 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.36 |
) |
|
$ |
(0.38 |
) |
Diluted |
|
$ |
(1.02 |
) |
|
$ |
(0.98 |
) |
|
$ |
(0.85 |
) |
|
$ |
(0.90 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.36 |
) |
|
$ |
(0.38 |
) |
Shares used in per share calculation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
14,182 |
|
|
|
11,500 |
|
|
|
11,385 |
|
|
|
8,223 |
|
|
|
7,269 |
|
|
|
14,877 |
|
|
|
13,521 |
|
Diluted |
|
|
14,182 |
|
|
|
11,500 |
|
|
|
11,385 |
|
|
|
8,223 |
|
|
|
7,269 |
|
|
|
14,877 |
|
|
|
13,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FINANCIAL POSITION SUMMARY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
23,652 |
|
|
$ |
29,125 |
|
|
$ |
40,592 |
|
|
$ |
46,209 |
|
|
$ |
27,018 |
|
|
$ |
16,428 |
|
|
$ |
33,353 |
|
Cash and cash equivalents |
|
|
10,568 |
|
|
|
8,412 |
|
|
|
15,968 |
|
|
|
23,578 |
|
|
|
3,609 |
|
|
|
5,613 |
|
|
|
12,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
|
12,514 |
|
|
|
12,512 |
|
|
|
22,410 |
|
|
|
31,530 |
|
|
|
14,541 |
|
|
|
12,028 |
|
|
|
12,512 |
|
Credit line borrowings |
|
|
1,904 |
|
|
|
1,159 |
|
|
|
1,124 |
|
|
|
47 |
|
|
|
|
|
|
|
1,776 |
|
|
|
328 |
|
Current portion of long-term borrowings |
|
|
54 |
|
|
|
1,726 |
|
|
|
778 |
|
|
|
342 |
|
|
|
38 |
|
|
|
|
|
|
|
1,374 |
|
Long-term borrowings |
|
|
245 |
|
|
|
314 |
|
|
|
1,862 |
|
|
|
1,089 |
|
|
|
484 |
|
|
|
71 |
|
|
|
308 |
|
Shareholders equity |
|
|
16,789 |
|
|
|
21,618 |
|
|
|
30,880 |
|
|
|
38,184 |
|
|
|
21,202 |
|
|
|
11,890 |
|
|
|
26,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares outstanding |
|
|
14,835 |
|
|
|
11,623 |
|
|
|
11,394 |
|
|
|
11,270 |
|
|
|
7,351 |
|
|
|
15,079 |
|
|
|
14,832 |
|
40
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
Overview
We are engaged in the design, development, manufacturing, marketing, and installation of
energy-efficient lighting systems where we serve two principal markets; commercial/industrial
lighting and pool lighting. Our business strategy has evolved into providing our customers with
turnkey, comprehensive energy-efficient lighting solutions which include, but are not limited to,
our patented and proprietary technology. Our solutions include fiber optic (EFO), light-emitting
diode (LED), ceramic metal halide (CMH), high-intensity discharge (HID), and other highly
energy efficient lighting technologies. Our strategy also incorporates continued investment in
research into new and emerging energy sources including, but not limited to, solar energy. Typical
savings of current technology averages 80% in electricity costs, while providing full-spectrum
light closely simulating daylight colors.
We expect to continue our on-going leadership role in the United States governments Very High
Efficiency Solar Cell (VHESC) Consortium sponsored by the Defense Advanced Research Projects
Agency (DARPA), where we expect to be able to commercialize a solar cell technology that will
significantly surpass current solar efficiencies ranging from 6% 20%. Our proven optics
technology has already shown the ability to achieve approximately 40% efficiency in a laboratory
environment and we believe that this efficiency, or greater, can be achieved on a cost-effective,
commercially-viable scale.
Results of Operations
Three and Six Months Ended June 30, 2009 Compared to Three and Six Months Ended June 30, 2008
Cash utilization was $1,187,000 for the three months ended June 30, 2009; a 54.2% decrease
compared to the three months ended June 30, 2008. Cash utilization for the three months ended June
30, 2008 was $2,589,000. Cash utilization was $4,955,000 for the six months ended June 30, 2009; a
13.9% decrease compared to the six months ended June 30, 2008. Cash utilization for the six months
ended June 30, 2008 was $5,753,000.
Net sales were $3,815,000 for the three months ended June 30, 2009; a decrease of 49.9%
compared to the three months ended June 30, 2008. The decline primarily resulted from decreased
pool lighting sales, $1,365,000, decreased sales by our European subsidiaries, $1,806,000, and
decreased government sales, $534,000, from second quarter 2008 levels. EFO sales were $1,765,000
for the three months ended June 30, 2009; a decrease of $2,166,000, or 55.1%, from the three months
ended June 30, 2008.
41
Net sales were $6,620,000 for the six months ended June 30, 2009; a decrease of 46.8% compared
to the six months ended June 30, 2008. The decline primarily resulted from decreased pool lighting
sales, $2,301,000, decreased sales by our European subsidiaries, $2,734,000, and decreased
government sales, $803,000, from first half 2008 levels. EFO sales were $3,308,000 for the six
months ended June 30, 2009; a decrease of $2,707,000, or 45.0%, from first half 2008 levels.
EFO sales in 2009 and 2008 include sales from EFO fiber optic lighting, EFO LED, EFO Controls,
and EFO Government products.
Gross profit was $799,000 for the three months ended June 30, 2009; a 67.3% decrease compared
to the three months ended June 30, 2008. Gross profit was $1,117,000 for the six months ended June
30, 2009; a 69.7% decrease compared to the six months ended June 30, 2008. The gross profit margin
as a percentage of sales decreased to 20.9% and 16.9% for the three and six months ended June 30,
2009, respectively, as compared to 32.1% and 29.6% for the three and six months ended June 30,
2008, respectively. These decreases are primarily a result of the decline in pool lighting
sales, which have historically provided higher gross profit margins as compared to our other
product lines.
Deteriorating global economic conditions within the housing and construction industries have
had an adverse impact not only on our ability to expand within current markets, but also to
penetrate new markets. For 2009, we continue to combat these global economic pressures by focusing
sales resources in new and existing market channels including food retailers, cold storage, and
government facilities. Furthermore, we will continue to implement strategic sourcing and
operational cost reductions on a global basis. Selected price increases will also be implemented.
Lastly, we are accelerating our transition into a turn-key energy solutions service provider.
Net research and development expenses were $253,000 for the three months ended June 30, 2009;
an increase of $61,000, or 31.8%, as compared to the three months ended June 30, 2008. Gross
expenses for research and development decreased by 20.3% from prior year levels primarily due to
lower project costs in the United States. Net research and development expenses were $483,000 for
the six months ended June 30, 2009; a decrease of $110,000, or 18.6%, as compared to the six months
ended June 30, 2008. Gross expenses for research and development decreased by 20.0% from prior
year levels primarily due to lower project costs in the United States.
Our gross research and development expenses are reduced on a proportional performance basis
under DARPA Small Business Innovation Research (SBIR) development contracts. In 2007, SBIR
contracts were signed totaling $1,500,000 to be reimbursed over a two-year recovery period. During
the first quarter of 2009, additional SBIR contracts were signed totaling $198,000 to be reimbursed
over an eight month recovery period. At June 30, 2009, $127,000 remained as unrecognized
reductions of gross research and development expenses for these contracts. We are currently
pursuing additional contracts through various government agencies, and anticipate being granted
additional contracts during the remainder of 2009. The gross research and development
spending along with credits from government contracts is shown in the table (in thousands):
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Gross expenses for research and
development |
|
$ |
390 |
|
|
$ |
489 |
|
|
$ |
794 |
|
|
$ |
993 |
|
Deduct: credits from DARPA contracts |
|
|
(137 |
) |
|
|
(297 |
) |
|
|
(311 |
) |
|
|
(400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
253 |
|
|
$ |
192 |
|
|
$ |
483 |
|
|
$ |
593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing expenses decreased 39.2% to $1,650,000 for the three months ended June 30, 2009
as compared to $2,712,000 for the three months ended June 30, 2008. Sales and marketing expenses
decreased 36.9% to $3,530,000 for the six months ended June 30, 2009 as compared to $5,590,000 for
the six months ended June 30, 2008. These decreases are primarily due to lower salaries and
benefits and advertising expenses on a global basis, as well as managements efforts to reduce
costs.
General and administrative expenses increased 1.7% to $1,202,000 for the three months ended
June 30, 2009 as compared to $1,182,000 for the three months ended June 30, 2008. General and
administrative expenses decreased 4.9% to $2,426,000 for the six months ended June 30, 2009 as
compared to $2,552,000 for the six months ended June 30, 2008. The decrease is primarily due to
lower professional fees in the United States, as well as managements efforts to reduce costs.
During the three months ended June 30, 2009, we recognized a non-cash expense of $165,000 for
the impairment of certain fixed assets being held for sale. This asset impairment stemmed from the
sale of the office building owned and occupied by our German subsidiary, as well as other
associated fixed assets. There was no impairment of fixed assets during the first six months of
2008.
We recorded a net loss of $2,349,000 for the three months ended June 30, 2009, a 43.3%
increase from the net loss of $1,639,000 for the three months ended June 30, 2008. We recorded a
net loss of $5,390,000 for the six months ended June 30, 2009, a 5.9% increase from the net loss of
$5,088,000 for the six months ended June 30, 2008.
Fiscal Year Ended December 31, 2008 Compared to Fiscal Year Ended December 31, 2007 Compared to
Fiscal Year Ended December 31, 2006
43
Net Sales
Our sales breakdowns, by product lines, with EFO products as a separate line item, are as
follows (in thousands):
Product Line Breakdown
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
EFO |
|
$ |
10,888 |
|
|
$ |
7,011 |
|
|
$ |
5,316 |
|
Traditional Pool |
|
|
5,034 |
|
|
|
9,002 |
|
|
|
11,958 |
|
Traditional Commercial Lighting |
|
|
7,028 |
|
|
|
6,885 |
|
|
|
9,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,950 |
|
|
$ |
22,898 |
|
|
$ |
27,036 |
|
|
|
|
|
|
|
|
|
|
|
EFO sales reported in 2006 have been reclassified for comparability with EFO products included in
2008 and 2007.
Net sales increased less than 1% to $22,950,000 for the twelve months ended December 31, 2008.
The increase was primarily a result of a $2,281,000 increase in net sales by our European
subsidiaries, as well as an increase of $1,569,000 in United States traditional and EFO commercial
lighting and government EFO lighting sales. These increases were offset by a $3,798,000 decrease
in traditional pool and EFO pool lighting sales. During 2008, $1,292,000 of revenue was recognized
from the delivery of certain milestones to E.I. DuPont de Nemours and Company as part of the Very
High Efficiency Solar Cell (VHESC) Consortium being funded by DARPA.
EFO sales were $10,888,000 for the twelve months ended December 31, 2008, or 47.4% of total
net sales, compared to $7,011,000 for 2007 and $5,316,000 for 2006. EFO sales in 2008, 2007, and
2006 include sales from EFO fiber optic lighting, EFO LED, EFO Controls, and EFO Government
products. In 2008, international sales increased significantly to exceed comparable 2007 and 2006
levels resulting from improved penetration of EFO in the Middle East and India construction
markets. However, deteriorating global economic conditions within the housing and construction
industries did have an adverse impact on the magnitude of our continued expansion within the Middle
East and India markets during the second half of 2008.
In 2007, net sales decreased by 15.3% to $22,898,000, compared to $27,036,000 in 2006. The
2007 decrease was a result of lower sales of pool products, excluding EFO, of 24.7%, or $2,956,000,
and commercial lighting products of 29.5%, or $2,877,000, which was partially offset by increased
sales of EFO products of 31.9%, or $1,695,000. The decrease in traditional pool lighting sales was
due primarily to a decrease in sales from our in-ground and jazz lighting products. The decrease
in traditional commercial lighting sales was due to lower sales in the United States and Germany.
44
International Sales
We have foreign manufacturing operations in the United Kingdom and Germany, and revenue and
expenses from these operations are denominated in local currency,
thereby creating exposures to changes in exchange rates. Fluctuations in these operations
respective currencies may have an impact on our business, results of operations, and financial
position. We currently do not use financial instruments to hedge our exposure to exchange rate
fluctuations with respect to our international operations. As a result, we may experience
substantial foreign currency translation gains or losses due to the volatility of other currencies
compared to the United States dollar, which may positively or negatively affect our results of
operations attributed to these operations. International sales accounted for approximately 43.8%
of net sales in 2008, as compared to 34.7% of net sales in 2007 and 30.6% in 2006. The impact of
changes in foreign currency exchange rates resulted in a reduction in reported net sales for 2008
of $406,000 from 2007 levels as compared to an increase in reported net sales for 2007 of $759,000
from 2006 levels. On a local currency basis, net sales increased 27.4% for our international
operations from 2007 levels. The breakdown of our geographic sales is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
United States Domestic |
|
$ |
12,902 |
|
|
$ |
14,949 |
|
|
$ |
18,776 |
|
Germany |
|
|
2,918 |
|
|
|
3,136 |
|
|
|
2,998 |
|
United Kingdom |
|
|
6,764 |
|
|
|
4,265 |
|
|
|
4,817 |
|
Others |
|
|
366 |
|
|
|
548 |
|
|
|
445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,950 |
|
|
$ |
22,898 |
|
|
$ |
27,036 |
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
We had gross profit of $5,503,000 in 2008, a decrease of 12.4%, compared to $6,282,000 in
2007. Total gross profit as a percentage of total net sales was 24.0% in 2008, compared to 27.4%
in 2007. Included in the 2008 gross profit is total expense in the amount of $1,071,000 related to
our modification of the definition of slow-moving and obsolete inventory reserve. Management deems
this increase appropriate as technology within the lighting industry continues to accelerate.
Gross profit was also favorably impacted by a mid-year price increase within the commercial
lighting business unit. For 2009, we intend to continue to combat global economic pressures by
focusing sales resources in new and existing market channels including food retailers, cold
storage, and government facilities. Further, we will continue to implement strategic sourcing and
operational cost reductions on a global basis. Selected price increases will also be implemented.
In 2007, we had gross profit of $6,282,000, compared to $7,785,000 in 2006. As a percentage of
sales, the gross profit for 2007, was 27.4% compared to 28.8% in 2006. Lower margins from
commercial lighting and pool sales contributed towards much of the decline in 2007.
45
Operating Expenses
Research and Development
Gross research and development expenses were $3,083,000 in 2008, a 10.0% decrease from
$3,424,000 in 2007. Gross research and development expenses were $3,424,000 in 2007, a 3.7%
decrease from $3,556,000 in 2006. The decrease in 2008 was primarily due to a $145,000 decrease in
salaries and benefits, and a $195,000 decrease in project related costs. The decrease in 2007 from
2006 levels was primarily due to a decrease in temporary labor and consultant fees of $369,000,
offset by an increase in salaries and benefits of $193,000. Our research and development expenses
are reduced on a proportional performance basis under DARPA SBIR development contracts. These
contracts were signed in 2007, for a total of $1,500,000 to be reimbursed over the two-year life of
the contracts. The gross and net research and development spending along with credits from
government contracts is shown in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Gross Research and Development Expense and Government
Reimbursement: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses for research and development |
|
$ |
3,083 |
|
|
$ |
3,424 |
|
|
$ |
3,556 |
|
Deduct: incurred and accrued credits from Government
contracts |
|
|
(895 |
) |
|
|
(517 |
) |
|
|
(1,215 |
) |
|
|
|
|
|
|
|
|
|
|
Net research and development expense |
|
$ |
2,188 |
|
|
$ |
2,907 |
|
|
$ |
2,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Credits Received and Revenue Recognized on
Government Projects: |
|
|
|
|
|
|
|
|
|
|
|
|
Incurred and accrued credits from Government contracts |
|
$ |
895 |
|
|
$ |
517 |
|
|
$ |
1,215 |
|
Revenue recognized for completed deliveries |
|
|
1,670 |
|
|
|
542 |
|
|
|
1,979 |
|
|
|
|
|
|
|
|
|
|
|
Net credits received and revenue recognized |
|
$ |
2,565 |
|
|
$ |
1,059 |
|
|
$ |
3,194 |
|
|
|
|
|
|
|
|
|
|
|
Credits received from government contracts for research for which we are the beneficiary
during the fiscal year are recorded as a reduction to research and development expense. The amount
of credits incurred and accrued from government contracts were $895,000 in 2008, compared to
$517,000 in 2007, and $1,215,000 in 2006. Net research and development expenses were 9.5% of sales
in 2008, compared to 12.7% of sales in 2007, and 8.7% in 2006.
When the government contract is for the delivery of a product or service, we recognize revenue
from those government projects according to proportional performance method or actual deliveries
made. Costs related to the completion of the sale are charged to cost of sales. In 2008, revenue
recognized from completed deliveries was $1,670,000. The revenue recognized for completed
deliveries of products or services was $542,000 in 2007 and $1,979,000 in 2006. For further
information on our revenue recognition policy, please refer to Critical Accounting Policies and
Estimates within this section of the report.
Net credits received from government reimbursement are the combination of revenue and credits
against gross research and development costs. In 2008, our net credits were $2,565,000, compared
to $1,059,000 in 2007 and $3,194,000 in 2006.
46
Sales and Marketing
Sales and marketing expenses were $8,551,000 in 2008, compared to $9,789,000 in 2007, a
decrease of 12.7%. In 2008, sales and marketing expenses for pool lighting amounted to $2,149,000,
or 25.1% of total sales and marketing cost, whereas sales and marketing expense for commercial
lighting was $6,402,000, or 74.9% of total marketing costs. The decrease in 2008 was primarily a
result of a $693,000 decrease in salaries and benefits, a $406,000 decrease in advertising and
trade show expenses, and a $133,000 decrease in expenses related to stock-based compensation.
Contributing to the overall decrease in salaries versus 2007 levels was the termination of the Vice
President of Pool Lighting Sales, and the subsequent reorganization of the pool lighting,
commercial lighting, and customer service organizations under new leadership. This reorganization
enabled us to re-energize the Fiberstars brand name under common leadership. Further, we have
aggressively recruited experienced energy solutions focused salespeople from leading firms in the
industry, and have successfully hired a new Vice President of Sales and seasoned account
executives. These new employees, combined with our sales consultants, possess more than 211 years
of energy solutions/business development experience.
In 2007, sales and marketing expenses were $9,789,000, an increase of less than 1.0% compared
to the $9,774,000 in 2006. In 2007, sales and marketing expenses for pool lighting amounted to
$2,676,000, or 27.3% of total sales and marketing cost, whereas sales and marketing expense for
commercial lighting was $7,113,000, or 72.7% of total marketing costs. In 2006, sales and
marketing expenses for pool lighting amounted to $3,087,000, or 31.6% of total sales and marketing
cost, whereas sales and marketing expense for commercial lighting was $6,687,000, or 68.4% of total
marketing costs.
General and Administrative
General and administrative expenses were 22.1% of sales in 2008, compared to 20.3% of sales in
2007, and 18.3% of sales in 2006. General and administrative expenses were $5,080,000 in 2008, a
9.2% increase, as compared to $4,651,000 in 2007. This increase was largely a result of a $604,000
increase in salaries and benefits primarily due to the May 2008 appointment of our new Chief
Executive Officer as well as the reclassification of certain executives out of manufacturing and
research and development. Also causing the increase was a $95,000 increase in audit and legal
service fees and a $71,000 increase in travel expenses. These increases were offset by reductions
in temporary labor and consulting fees, professional service fees, and bad debt expense.
General and administrative expenses were $4,651,000 in 2007, a 6.2% decrease, as compared to
$4,956,000 in 2006. This decrease was largely a result of a $241,000 decrease in stock-based
compensation compared to 2006, as well as managements efforts to reduce overall costs.
47
General and administrative cost reduction efforts during 2007 were offset by a one-time charge
of $409,000 for severance, $172,000 of which was in the general and administrative expenses
category. The rest of the severance expenses were related to other line items such as sales and
marketing and restructuring expenses. In 2007, we also incurred a non-recurring general and
administrative charge of $342,000 in the third quarter for bad debts which was due to a change in
policy for calculating the reserve. Without these two non-recurring charges, the general and
administrative expenses for 2007 would have been $4,137,000, a decrease of 16.5% from 2006.
In the fourth quarter of 2008, as a result of our annual test for impairment required under
SFAS 142, and based on an assessment of its present and future operations, we recognized a non-cash
expense of $4,305,000 for the impairment of our goodwill. The goodwill was originally recorded at
the time of the acquisitions of Fiber Optic International, Crescent Lighting Limited, LBM
Lichleit-Fasertechnik, Unison Fiber Optic Lighting Systems, and Lightly Expressed Limited. As of
December 31, 2008, we have no remaining goodwill on our books. There was no impairment of goodwill
in 2007 or 2006.
The restructuring expenses in 2007 were $456,000, compared to $734,000 in 2006, a decrease of
37.9 %. The 2007 cost is associated with relocating the fiber production operation from Mexico to
Solon, Ohio. The 2006 restructuring costs were for the relocation of the corporate headquarters
from Fremont, California to Solon, Ohio.
Excluding the non-cash loss on impairment charge of $4,305,000 in 2008, total operating
expenses decreased $1,984,000, or 11.1%, from 2007 levels.
Other Income and Expenses
We had interest income of $208,000 and interest expense of $198,000 in 2008. Interest income
consists of interest earned on deposits. Interest expense is for bank interest on our line of
credit, equipment loans, and on a building loan for our corporate office in Germany. Our interest
income was $605,000 in 2007, compared to $760,000 in 2006. Our interest expense was $321,000 in
2007, compared to $277,000 in 2006.
Income Taxes
For 2008, we had a full valuation allowance against our United States and German deferred tax
assets. The net deferred tax assets for 2008 amounted to $15,000 and were for our United Kingdom
subsidiary, which reported income in 2008 and has been profitable prior to 2007. The income tax
benefit from the United States operations in 2008 relates to the reversal of the 2007 deferred tax
liability of $252,000 for goodwill as a result of the book impairment. There were no Federal tax
expenses for the United States operations in 2008, as any expected benefits were offset by an
increase in the valuation allowance. A tax provision of $2,000 was recorded for our United Kingdom
operation, and no tax benefits were recorded for the 2008 German operations loss.
48
For 2007, we had a full valuation allowance against our deferred tax assets in the United
States and Germany. There was a tax expense of $13,000 for our U.K. operations in 2007. There were
no tax expenses or benefits for our German operations. In 2007, all expected benefits were offset
by an increase in our valuation allowance. We had a tax expense of $177,000 in the United States,
resulting from a tax liability associated with tax treatment for goodwill.
For 2006, we had a full valuation allowance against our deferred tax assets in the United
States and Germany. There was no tax expense or benefit for our German operation in 2006 as any
expected benefit was offset by an increase in our valuation allowance. We had a tax expense of
$75,000 in the United States resulting from a tax liability associated with the tax treatment for
goodwill. In addition we had a $38,000 tax expense shown for 2006 is a result of tax expense for
our United Kingdom operations which experienced a profit for 2006.
Net Loss
The net loss in 2008 was $14,448,000, an increase of 27.7% from our net loss of $11,317,000 in
2007. Included in the 2008 net loss is total expense in the amount of $1,071,000 related to our
increase in slow-moving and obsolete inventory reserves. Also included in the 2008 net loss is a
non-cash expense of $4,305,000 for the impairment of our goodwill.
For 2007, the net loss of $11,317,000 was an increase of 17.3% compared to the net loss of
$9,650,000 in 2006.
Liquidity and Capital Resources
Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Cash and Cash Equivalents
At June 30, 2009, our cash and cash equivalents were $5,613,000 as compared to $10,568,000 at
December 31, 2008, a net cash decrease of $4,955,000 for the six months ended June 30, 2009. This
compares to a net cash increase of $3,837,000 for six months ended June 30, 2008 resulting from the
receipt of $9,335,000 of proceeds, net of expenses, from the March 14, 2008 equity financing.
Cash Used in Operating Activities
Net cash used in operating activities primarily consists of net loss adjusted by non-cash
items, including impairment charges, depreciation, amortization, stock-based compensation, and the
effect of changes in working capital. Cash decreased during the six months ended June 30, 2009, by
a net loss of $5,390,000, compared to a net loss of $5,088,000 for the three months ended June 30,
2008. After adjustments, net cash used in operating activities was $4,702,000 for the six months
ended June 30, 2009, an increase of 15.9% compared to a net cash usage of $4,058,000 for the six
months ended June 30, 2008.
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Cash Provided by (Used in) Investing Activities
Net cash provided by investing activities was $169,000 for the six months ended June 30, 2009;
compared to a net cash usage of $298,000 for the six months ended June 30, 2008. This decrease
is primarily due to the proceeds generated from the sale of fixed assets associated with our
German subsidiary partially offset by acquisitions of fixed assets during the period.
Cash (Used in) Provided by Financing Activities
Net cash used in financing activities was $331,000 for the six months ended June 30, 2009.
This cash usage was due to payments on our lines of credit, $2,027,000, and long-term bank
borrowings, $288,000, offset by borrowings on our lines of credit of $1,904,000. For the six
months ended June 30, 2008, financing activities contributed $8,262,000. This net contribution was
due primarily to cash proceeds from issuances of common stock and warrants to purchase shares of
our common stock for $9,335,000.
Our bank line of credit in the United States is based on an agreement with Silicon Valley Bank
(SVB) dated October 15, 2008, modified effective January 31, 2009 and further modified effective
June 12, 2009. As of June 30, 2009, this agreement provides for a $2,000,000 revolving line of
credit, renewable on a month-to-month basis. The amount of borrowings available to the company is
the lesser of $2,000,000 or 75% of eligible accounts receivable, as defined by the agreement.
Borrowings under this agreement are collateralized by our assets, including intellectual
property, and bear interest at the SVB Prime Rate plus 1.50%, as of June 30, 2009. If we terminate
the facility prior to maturity, we will be required to pay a 1.00% termination fee. We are
required to maintain all of our cash and cash equivalents in operating and investment accounts with
SVB and its affiliates. We are also required to comply with certain covenant requirements,
including a tangible net worth covenant. As of June 30, 2009, we were not in compliance with this
financial covenant as defined by the original credit agreement. The interest rate at June 30, 2009
was 5.50% and 5.00% at December 31, 2008. Borrowings under the revolving line of credit were
$1,776,000 at June 30, 2009 and December 31, 2008. Available borrowings under this revolving line
of credit were $256,000 at June 30, 2009 and $263,000 at December 31, 2008. The revolving line of
credit borrowings are recorded in the consolidated balance sheets as a current liability.
Effective January 31, 2009, we entered into a First Loan Modification and Forbearance Agreement
with SVB which modified the one year credit agreement entered into on October 15, 2008. This
modification to the terms of the 2008 credit agreement states that borrowings bear interest at the
SVB Prime Rate plus 1.50%. SVB also agreed to forebear from exercising its rights and remedies
against the company as a result of violating its
tangible net worth covenant as of December 31, 2008. This forbearance expired on February 15,
2009.
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Effective June 12, 2009, we entered into a Second Loan Modification and Forbearance Agreement
with SVB which further modified the one year credit agreement entered into on October 15, 2008, and
modified January 31, 2009. This second modification to the terms of the 2008 credit agreement
states that borrowings bear interest at the SVB Prime Rate plus 1.50% through June 30, 2009.
Beginning July 1, 2009 through, and including, September 30, 2009, borrowings bear interest at the
SVB Prime Rate plus 2.00%. Beginning October 1, 2009 and thereafter, borrowings bear interest at
the SVB Prime Rate plus 3.00%. While we remained in violation of our tangible net worth covenant,
we continued to cooperate with SVB to restructure the existing bank line of credit. In addition,
SVB agreed to forebear from exercising its rights and remedies against us as a result of violating
our tangible net worth covenant as of June 30, 2009. This forbearance expired on June 30, 2009.
Effective July 22, 2009, we entered into a Third Loan Modification and Forbearance Agreement
with SVB which modifies the one year credit agreement entered into on October 15, 2008, and
modified January 31, 2009 and June 12, 2009. This third modification to the terms of the 2008
credit agreement revised the amount of borrowings available to us to be the lesser of $2,000,000 or
the sum of (i) 75% of eligible accounts receivable, and (ii) other cash equivalents on deposit with
SVB. While we remained in violation of our tangible net worth covenant, we continued to cooperate
with SVB to restructure the existing bank line of credit. In addition, SVB agreed to forebear from
exercising its rights and remedies against us as a result of violating our tangible net worth
covenant as of July 31, 2009. This forbearance expired on July 31, 2009.
Effective August 25, 2009, we entered into a Forbearance Agreement with SVB in which SVB
agreed to forbear from exercising its rights and remedies against us as a result of violating our
tangible net worth covenant as of August 31, 2009. This forbearance was due to expire on August
31, 2009.
SVB has informed us that it does not intend to renew our line of credit when it expires on
October 15, 2009 and that we need to repay all borrowings by November 15, 2009.
On May 27, 2009, we entered into a Promissory Note (Note) with The Quercus Trust (The
Trust) in the amount of $70,000. Under the terms of this Note, we agree to pay The Trust the
principal sum of the Note and interest accruing at a yearly rate of 1.00% in one lump sum payment
on or before June 1, 2109. We received the funds on June 9, 2009.
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Through our United Kingdom subsidiary, we maintain a bank overdraft facility of $415,000 (in
British pounds sterling, based on the exchange rate at June 30, 2009) under an agreement with
Lloyds Bank Plc. There were no borrowings against this facility as of June 30, 2009 or December
31, 2008. This facility is renewed annually on January 1. The interest rate on the facility was
2.75% at June 30, 2009, and 7.25% at December 31, 2008.
Through our German subsidiary, we maintained a credit facility under an agreement with
Sparkasse Neumarkt Bank. This credit facility was put in place to finance the building of offices
in Berching, Germany, which were owned and occupied by our German subsidiary. In June, 2009, we
paid, in its entirety, the balance due on the credit facility with proceeds received from the sale
of the office building in Berching, Germany. Borrowings against this facility were $299,000 at
December 31, 2008 (in Euros, based on the exchange rate at December 31, 2008). The interest rate
was 5.49% at December 31, 2008.
In addition, our German subsidiary has a revolving line of credit with Sparkasse Neumarkt
Bank. As of June 30, 2009, there were no borrowings against this line of credit and borrowings of
$128,000 (in Euros, based on the exchange rate at December 31, 2008) at December 31, 2008. This
revolving facility is renewed annually on January 1. The interest rate on this line of credit was
11.00% at December 31, 2008.
We have continued to incur losses which have been attributable to operational performance,
restructuring, and miscellaneous non-cash charges. This trend has, in turn, led to negative cash
flows and ongoing bank debt covenant violations. We have managed our liquidity during this period
through a series of previously announced cost reduction initiatives, bank debt restructuring, and
asset disposals. However, the ongoing global financial crisis has continued to have a dramatic
effect on our industry and customer base. Further, the ongoing recession in the United States and
Western Europe, combined with the slowdown of economic growth in the rest of the world, continues
to foster a business environment where it is extremely difficult and costly to obtain either equity
or non-equity financing. This environment has also increased the potential for customer payment
defaults. Our liquidity position, as well as our operating performance, has been negatively
affected by these economic and industry conditions and by other financial and business factors,
many of which are beyond its control.
Management acknowledges that the level of negative cash utilization experienced during the six
months ended June 30, 2009, if sustained, could result in the insolvency of the company in 2009
without the infusion of additional equity or non-equity financing. Therefore, we are aggressively
pursuing all of the following sources for working capital funding:
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obtain loans from various financial institutions, |
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obtain loans from one or more non-traditional investment capital organizations, |
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sale and/or disposition of one or more operating units, and |
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obtain funding from the sale of our common stock or other equity instruments. |
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Obtaining financing through the above mentioned mechanisms contain risks, including:
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loans or other debt instruments may have terms and/or conditions, such as interest
rate, restrictive covenants, and control or revocation provisions, which are not
acceptable to management or our Board of Directors, |
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the current global economic crisis combined with our current financial condition may
prevent us from being able to obtain any debt financing, |
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financing may not be available for parties interested in pursuing the acquisition of
one or more of our operating units, and |
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additional equity financing may not be available to us in the current economic
environment and could lead to further dilution of shareholder value for current
shareholders of record. |
We continue to aggressively reduce costs, as evidenced in the $2,296,000 decrease in operating
expenses, net of a non-cash loss on impairment of fixed assets of $165,000, for the six months
ended June 30, 2009, as compared to the six months ended June 30, 2008. Our cash utilization was
$1,187,000 for the three months ended June 30, 2009; a 54.2% decrease compared to the cash
utilization for the three months ended June 30, 2008 of $2,589,000. Management is executing
further cost reductions and organizational realignments in an effort to sustain our ongoing
viability throughout the remainder of 2009.
In July 2009, we engaged a leading mergers and acquisitions advisory firm to assist us in
evaluating and valuing our individual operating business units and to support the potential
divestiture of one or more of those business units.
Fiscal Year Ended December 31, 2008 Compared to Fiscal Year Ended December 31, 2007 Compared to
Fiscal Year Ended December 31, 2006
Cash and Cash Equivalents
At December 31, 2008, our cash and cash equivalents were $10,568,000, compared to $8,412,000
at December 31, 2007. We had $245,000 in long-term borrowings and $1,958,000 in short-term
borrowings as of December 31, 2008. We had $314,000 in long-term borrowings and $2,885,000 in
short-term borrowings as of December 31, 2007.
On March 14, 2008, we received an additional $9,335,000 in equity financing, net of expenses.
The investment was made by several current Energy Focus shareholders. These investors agreed to an
at-market purchase of approximately 3,184,000 units for $3.205 per unit, based on the closing bid
price of Energy Focus common shares on March 13, 2008 of $3.08. Each unit comprised one share of
our common stock, par value $0.0001 per share, and one warrant to purchase one share of our common
stock at an exercise price of $3.08 per share. The warrants were immediately separable from the
units, immediately exercisable, and will expire March 14, 2013. This additional
financing is being used to fund working capital requirements and perform additional research
and development.
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Cash Used in Operating Activities
Net cash used by operating activities primarily consists of net loss adjusted by non-cash
items, including depreciation, amortization, stock-based compensation, loss on impairment, and the
effect of changes in working capital. Cash decreased during 2008, by a net loss of $14,448,000,
compared to net losses of $11,317,000 and $9,650,000 for 2007, and 2006 respectively. After
adjustments, net cash used by operating activities was $5,830,000 in 2008, compared to $7,502,000
for 2007 and $7,184,000 in 2006.
Our efforts to manage working capital provided cash of $1,601,000, net of the increase in
inventory reserve, during 2008 by reducing accounts receivable and inventory, as well as an
increase in accounts payable and accrued expenses. In 2007, cash in the amount of $3,501,000 was
provided by reducing accounts receivable and inventory, offset by a use of $2,365,000 of cash by
decreasing accounts payable and accrued expenses.
Cash (Used in) Provided by Investing Activities
In 2008, there was a usage of cash of $395,000 for the purchase of fixed assets. There was a
net contribution of cash of $11,842,000 in 2007, largely due to net sales of short-term securities
totaling $12,351,000. In 2006, the contribution of cash was $2,058,000, also due to net sales of
short-term investments totaling $5,761,000, partially offset by the acquisition of fixed assets of
$3,703,000.
Cash Provided by Financing Activities
In 2008, the net contribution to cash from financing activities was $8,493,000, compared to
$407,000 in 2007 and $2,908,000 in 2006. Proceeds from stock issuances, net of expenses, provided
$9,335,000 in cash in 2008. Also in 2008, additional bank borrowings of $5,633,000 were reduced by
debt payments of $6,608,000. In 2007, proceeds from issuances provided $964,000 in cash, and
additional bank borrowings of $289,000 were reduced by debt payments of $908,000. During 2006, the
net cash contribution was due to our receipt of $2,686,000 in proceeds from bank borrowings, of
which $1,609,000 was used to finance the purchase of manufacturing equipment.
As a result of the cash used in operating and financing activities, and the cash provided by
investing activities, there was a net increase in cash in 2008 of $2,156,000 that resulted in an
ending cash balance of $10,568,000 as of December 31, 2008. This compares to a net increase in
cash of $4,707,000 in 2007, resulting in an ending cash balance of $8,412,000 at the end of 2007,
and a net decrease in cash of $1,849,000 in 2006, resulting in an ending cash balance of $3,705,000
at the end of 2006.
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Critical Accounting Policies
The preparation of financial statements requires that we make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of contingencies, and the
reported amounts of revenue and expenses in the financial statements. Material differences may
result in the amount and timing of revenue and expenses if different judgments or different
estimates were utilized.
Critical accounting policies, judgments, and estimates that we believe have the most significant
impact on our financial statements are set forth below:
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Revenue recognition; |
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Allowances for doubtful accounts, returns and discounts; |
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Long-lived assets; |
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Valuation of inventories; |
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Accounting for income taxes; and |
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Share-Based compensation. |
Revenue Recognition
Revenue is recognized when it is realized or realizable, has been earned, and when all of the
following has occurred:
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persuasive evidence or an arrangement exists, e.g., a sales order, a purchase order, or
a sales agreement, |
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shipment has occurred (the standard shipping term is F.O.B. ship point) or services
provided on a proportional performance basis or installation have been completed, |
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price to the buyer is fixed or determinable, and |
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collectability is reasonably assured. |
Revenue from product sale generally is recognized upon shipping because of the following:
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all sales made by the company to its customer base are non-contingent, meaning that
they are not tied to that customers resale of products, |
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standard terms of sale contain shipping terms of F.O.B. ship point, meaning that title
is transferred when shipping occurs, and |
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there are no automatic return provisions that allow the customer to return the product
in the event that the product does not sell within a defined timeframe. |
Revenue from installation services, including design and integration services and other services
(where product sales are not incorporated into the contract), is recognized upon the following:
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proportional performance method using the ratio of labor cost incurred to the total
final estimated labor cost. Under this method, revenue recognized reflects the portion of
anticipated revenue that has been earned. |
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Revenue from product sales that incorporate specifically defined installation services is
recognized as follows:
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product sale at completion of installation and |
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installation service at completion of installation. |
We warrant our products against defects or workmanship issues. We set up allowances for
estimated returns, discounts, and warranties upon recognition of revenue and these allowances are
adjusted periodically to reflect actual and anticipated returns, discounts, and warranty expenses.
These allowances are based on past history and historical trends, current economic conditions, and
contractual terms. Our distributors obligation to us is not contingent upon the resale of our
products and as such does not prohibit revenue recognition.
Allowances for Doubtful Accounts, Returns, and Discounts
We establish allowance for doubtful accounts and returns for probable losses, based on past
history, current economic conditions, and contractual terms. The specific components are as
follows:
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Allowance for doubtful accounts for accounts receivable, and |
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Allowance for sales returns. |
In 2008, the total allowance was $486,000, with $356,000 related to accounts receivable and
$130,000 related to sales return. In 2007, the total allowance had a balance of $848,000 with
$698,000 related to accounts receivable and $150,000 related to sales return.
The company reviews these allowance accounts periodically and adjusts them according to
current conditions.
Long-lived Assets
Goodwill represents the excess of acquisition cost over the fair value of tangible and
identified intangible net assets of the businesses acquired. Goodwill is not amortized but is
subjected to an annual impairment test. Fixed assets are stated at cost and are depreciated using
the straight-line method over the estimated useful lives of the related assets (two to fifteen
years). Leasehold improvements are amortized on a straight-line basis over their estimated useful
lives or the lease term, whichever is shorter, generally three to seven years. When events or
changes in circumstances indicate that assets may be impaired, an evaluation is performed comparing
the estimated future undiscounted cash flows associated with the asset to the assets carrying
amount to determine whether a write-down to market value or discounted cash flow is required.
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We performed our annual goodwill impairment test at December 31, 2008. The impairment test
first utilized a market capitalization methodology to calculate the fair value of our goodwill as
of the test date, which was less than its respective carrying value, indicating impairment. As a
result, we performed Step two of our impairment analysis. Based on the results of the impairment
test, we recorded a non-cash impairment charge for goodwill of $4,305,000 in the fourth quarter of
2008, which represents the entire carrying balance of goodwill, net of foreign currency
translation.
Valuation of Inventories
We state inventories at the lower of standard cost (which approximates actual cost determined
using the first-in-first-out method) or market. We establish provisions for excess and obsolete
inventories after evaluation of historical sales, current economic trends, forecasted sales,
product lifecycles, and current inventory levels. During 2008, 2007, and 2006, we charged
$1,503,000, $677,000, and $868,000, respectively, to cost of sales for excess and obsolete
inventories. Included in 2008 is total expense in the amount of $1,071,000 related to our
modification of the definition of slow-moving and obsolete inventory reserve. Management deems
this increase appropriate as technology developments within the lighting industry continues to
accelerate. Adjustments to our estimates, such as forecasted sales and expected product
lifecycles, could harm our operating results and financial position.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to
estimate our income tax liability in each of the jurisdictions in which we do business. This
process involves estimating our actual current tax expense together with assessing temporary
differences resulting from differing treatment of items, such as deferred revenues, for tax and
accounting purposes. These differences result in deferred tax assets and liabilities, which are
included in our consolidated balance sheet. We then must assess the likelihood that these deferred
tax assets will be recovered from future taxable income and, to the extent that we believe that
recovery is not certain or is unknown; we must establish a valuation allowance.
Significant management judgment is required in determining our provision for income taxes, our
deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax
assets. At December 31, 2008, we have recorded a full valuation allowance against our deferred tax
assets in the United States and Germany, due to uncertainties related to our ability to utilize our
deferred tax assets, primarily consisting of certain net operating losses carried forward. The
valuation allowance is based upon our estimates of taxable income by jurisdiction and the period
over which our deferred tax assets will be recoverable.
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Share-Based Payments
In December 2004, the FASB issued FAS No. 123 (revised 2004) or FAS 123(R), Share-Based
Payments. FAS 123(R) requires all entities to recognize compensation expense in an amount equal to
the fair value of share-based payments, such as stock options granted to employees. The company has
applied FAS 123(R) using the modified prospective method. Under this method, we are required to
record compensation expense (as previous awards continue to vest) for the unvested portion of
previously granted awards that remain outstanding at the date of adoption. In March 2005, the SEC
released Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107), which provides
interpretive guidance related to the interaction between FAS 123(R) and certain SEC rules and
regulations. It also provides the SEC staffs views regarding valuation of share based payment
arrangements. The application of FAS 123(R) with SAB 107 had the effect of increasing stock-based
compensation expense and reducing earnings by $715,000 in 2008, $877,000 in 2007, and $1,118,000 in
2006.
We measure all employee stock-based awards as an expense based on the grant-date fair value of
these awards. The fair value of options is estimated using the Black-Scholes option pricing model.
Weighted average assumptions used in the model include the expected life of the options,
volatility, and risk-free interest rate. The estimated expected life of the option is calculated
based on the contractual life of the option, the vesting life of the option, and historical
exercise patterns of vested options. The volatility estimates are calculated using historical
pricing experience.
Recent Accounting Pronouncements
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements (FAS 157), which
defines fair value, establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. This guidance applies only when other guidance requires or permits assets
or liabilities to be measured at fair value; it does not expand the use of fair value in any new
circumstances. FAS 157 went into effect for fiscal years beginning after November 15, 2007
(effective January 1, 2008, for our company). In February 2008, the FASB issued Staff Position FAS
157-1, which provides that FAS 157 does not apply under FAS 13, Accounting for Leases, and other
accounting pronouncements that address fair value measurements for leases. We adopted the
financial assets and liabilities portion of this FASB and it had no effect. In February 2008, the
FASB also issued Staff Position FAS 157-2, which delays the effective date of FAS 157 for all
nonfinancial assets and liabilities, except those recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). For items within the scope of Staff
Position FAS 157-2, the effective date will be for fiscal years beginning after November 15, 2008
(January 1, 2009, for our company). FAS No. 157-2 did not have a material impact on our
consolidated financial statements.
In December 2007, the FASB issued FAS No. 141(R), Business Combinations (FAS 141(R)). The new
pronouncement requires the acquiring entity in a business combination to recognize only the assets
acquired and liabilities assumed in a transaction (e.g., acquisition costs must be expensed when
incurred), establishes the fair value at the date of acquisition as the initial measurement for all
assets acquired and
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liabilities assumed, and requires expanded disclosures. FAS 141(R) is in effect for fiscal years beginning after
December 15, 2008 (January 1, 2009, for our company). The adoption of FAS No. 141(R) did not have
a material impact on our consolidated financial statements.
In December 2007, the FASB issued FAS No. 160, Non-controlling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 51 (FAS 160). The new pronouncement requires all entities to
report non-controlling (minority) interests in subsidiaries as a component of shareholders equity.
FAS 160 is in effect for fiscal years beginning after December 15, 2008 (January 1, 2009, for our
company). The adoption of FAS No. 160 did not have a material impact on our consolidated financial
statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165 establishes
general standards of accounting for and disclosure of events that occur after the balance sheet
date but prior to the issuance of the financial statements. The statement requires disclosure of
the date through which subsequent events were evaluated and the basis for that date. SFAS 165 sets
forth the following: (1) the period after the balance sheet date during which management of a
reporting entity should evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements; (2) the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its financial
statements; and (3) the disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. SFAS 165 was effective for us for the period ending June 30,
2009 and requires prospective application. The adoption of SFAS No. 165 did not have a material
impact on our consolidated financial statements.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification
(Codification) and the Hierarchy of Generally Accepted Accounting Principles (SFAS 168) a
replacement of FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles.
Under the provisions of SFAS 168, the Codification will become the source of authoritative United
States GAAP recognized by the FASB to be applied by nongovernmental entities. The rules and
interpretive releases of the SEC under authority federal securities laws are also sources of
authoritative GAAP for SEC registrants. On the effective date of SFAS 168, the Codification will
supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered
non-SEC accounting literature not included in the Codification will become non-authoritative. The
provisions of SFAS 168 are effective for financial statements issued for interim and annual periods
ending after September 15, 2009. We are currently reviewing the provisions of SFAS 168 to determine
the impact on our consolidated financial statements.
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Quantitative and Qualitative Disclosures About Market Risk
As of June 30, 2009, we had $563,000 in cash held in foreign currencies based on the exchange
rates at June 30, 2009. The balances for cash held overseas in foreign currencies are subject to
exchange rate risk. We have a policy of maintaining cash balances in local currencies unless an
amount of cash is occasionally transferred in order to repay inter-company debts.
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BUSINESS
Energy Focus Inc. and subsidiaries (Energy Focus) design, develop, manufacture, market, and
install lighting systems and customer specific energy efficient lighting solutions for a wide-range
of use in both the general commercial market and the pool market. Energy Focus lighting
technology offers significant energy savings, heat dissipation and maintenance cost benefits over
conventional lighting for multiple applications.
Overview
We are engaged in the design, development, manufacturing, marketing, and installation of
energy-efficient lighting systems where we serve two principal markets; commercial/industrial
lighting and pool lighting. Our business strategy has evolved into providing our customers with
turnkey, comprehensive energy-efficient lighting solutions which include, but are not limited to,
our patented and proprietary technology. Our solutions include fiber optic (EFO), light-emitting
diode (LED), ceramic metal halide (CMH), high-intensity discharge (HID), and other highly
energy efficient lighting technologies. Our strategy also incorporates continued investment in
research into new and emerging energy sources including, but not limited to, solar energy. Typical
savings of current technology averages 80% in electricity costs, while providing full-spectrum
light closely simulating daylight colors.
Our product portfolio has been broadened recently to include offerings within LED, CMH, and
HID product lines. In 2008, we launched several new lighting products for application within
landscape, dock lighting, and cold storage markets. In 2009, our company continues to broaden
these product lines, into landscape lighting markets for example, as well as explore new
technologies and markets. These new applications include LED track lighting and LED replacement
for fluorescent light tubes which we expect to launch during 2009.
Our long-term strategy is to penetrate the $100 billion lighting market by providing turnkey,
comprehensive energy-efficient lighting solutions. Our targeted market segments provide
opportunities in the supermarket, commercial, industrial, and government segments. The passage of
the Energy Independence and Security Act of 2007 by Congress created a natural market for our
energy-efficient products. Under this Act, all incandescent light bulbs must use 25% to 30% less
energy than todays products by the years 2012 through 2014. Since many of our EFO products
already are 80% more efficient than incandescent bulbs, our focus is to increase the publics
knowledge of our technology and to establish comprehensive distribution channels so that demand can
be fulfilled quickly. Further, the passage of the American Recovery and Reinvestment Act of 2009
by Congress authorizes the usage of $38 billion (reduced from $50 billion) in government funds for
advancement of energy conservation programs and $20 billion in tax incentives for renewable energy
and efficiency. Provisions of this Act which have the greatest opportunity to benefit our company
include:
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$2 billion in loans for renewable energy projects, |
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$4.5 billion toward smart-grid applications, |
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$6.3 billion in state energy-efficient and clean-energy grants, and |
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$4.5 billion to make federal buildings more energy efficient. |
We will continue to focus on market niches where the benefits of our lighting solutions
offerings, combined with our technology, are most compelling. These market niches include
government facilities, retailers, supermarkets, marine applications, and museums.
We will also continue to focus on development of our solar technology through our continuing
leadership role in the United States governments Very High Efficiency Solar Cell (VHESC)
Consortium sponsored by the Defense Advanced Research Projects Agency (DARPA). The purpose of
the VHESC project is to develop 50% or greater efficient solar cell for United States military
applications which would also be available for commercial application.
Products
We produce, source, and market a wide variety of lighting technologies to serve two general
markets: commercial lighting and pool lighting. Our technology falls into the following
categories:
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Metal Halide and LED Fiber optic lighting systems (e.g. EFO-Ice®),
E-Luminator |
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LED and Metal Halide lightings systems (e.g. EFO Docklight, Cold Storage). |
In addition, we also produce customized components such as underwater lenses, color-changing
LED lighting fixtures, LED lighting fixtures, landscape lighting fixtures, and lighted water
features, including waterfalls and laminar-flow water fountains. Further, we continue to
aggressively penetrate the government and military lighting markets. In this regard, our company
has many products being actively marketed to the United States federal government agencies through
the General Services Administration website (https://www.GSAAdvantage.gov).
The key features of our products are as follows:
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Many of our products meet the lighting efficiency standards
mandated for the year 2020. |
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Our products qualify for federal and state tax incentives for
commercial and residential consumers in certain states. |
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Our products make use of proprietary optical systems that enable
high efficiencies. |
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Certain utility companies continue to embrace our technology as an
energy-efficient alternative and are promoting our products to
their customers. In 2007, Southern California Edison confirmed
that our patented product EFO-Ice used only 25% of the energy
of comparable fluorescent lighting systems and 33% of the energy
of comparable LED systems. |
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The heat source of the fiber optic lighting fixtures usually is
physically separated from the lamps, providing a cool light.
This unique feature has special application in grocery stores,
where reduction of food spoilage and melting due to heat is an
important goal. |
Long-Term Strategy
During the past year, we have formulated our objective to become the leading provider of
turnkey, comprehensive, energy-efficient, lighting systems and solutions. To achieve this
objective, we intend to pursue the following strategies:
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Capitalize on the growing need for high return on investment
energy-efficient lighting systems. We intend to continue to
devote significant resources to our product development efforts to
maximize the energy efficiency and quality of our lighting systems
while reducing costs and enabling our customers to meet more
stringent government regulations. Further, we plan to continue to
develop new proprietary technologies and integrate new and
potentially more efficient lighting sources into our lighting
systems such as LED. |
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Focus on increased market penetration where the benefits of our
technology are most compelling. We intend to broaden the
penetration of our products within commercial, retail, and
supermarket channels, which all share urgent needs for highly
efficient, flexible, and financially economical lighting
solutions. Further, we continue to aggressively penetrate the
government and military lighting markets. To reach our target
markets, we are significantly increasing both the number and
experience level of our direct sales employees. Additionally, we
are actively restructuring our independent sales representative
network to increase sales volume and accountability of results. |
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Develop and expand strategic relationships. To expedite the
awareness of our technologies, we continue to actively pursue
strategic relationships with distributors, energy service
companies (ESCOs), lighting designers, and contractors who
distribute, recommend, and/or install lighting systems. We
continue to cultivate relationships with fixture manufacturers and
other participants in the general lighting market. |
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Develop a commercially-viable, cost-effective solar technology.
Through our on-going leadership role in the United States
governments VHESC Consortium sponsored by DARPA, we expect to be
able to commercialize a solar cell technology that will
significantly surpass current solar efficiencies ranging from 6% -
20%. Our proven optics technology has already shown the ability
to achieve approximately 40% efficiency in a laboratory
environment and we believe that this efficiency, or greater, can
be achieved on a cost-effective, commercially-viable scale. |
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Sales, Marketing, and Distribution of our Offerings Portfolio
Products
Our products are sold through a combination of direct sales employees, independent sales
representatives, and various distributors in different geographic markets throughout the world.
Our distributors obligation to us is not contingent upon the resale of our products and as such
does not prohibit revenue recognition.
Within the commercial and pool lighting business units, we continue to focus on retailers,
hotels, museums, general contractors, and specifiers. Our recent successes include the Las Vegas
New York-New York Hotel, and the Miami Beach Fontainebleau Hotel. We also continue our penetration
into Whole Foods and Albertsons food retailers. Our typical product sales process includes a
testing phase, which starts with a demonstration of our products to key executives, followed by a
prototype installation in one store and then to multiple stores. Finally, we install in selected
stores within the same chain.
Solutions
Our solutions based sales are designed to enhance total value by providing turnkey,
high-quality, energy-efficient lighting application alternatives that positively impact customers
profitability, the environment, and the communities we serve. These solutions are sold through our
direct sales employees, and include not only our proprietary energy-efficient lighting systems, but
also sourced lighting systems, energy audits, and service agreements.
Within the solutions business unit, we are focusing on multi-location food retailers, cold
storage facilities, retailers, museums, and industrial/commercial real estate companies. Our
recent successes include projects completed at a leading regional supplier of cold storage services
as well as a building products supplier.
As of December 31, 2008, we had approximately 117 sales and independent sales representatives
throughout the United States and Europe. We have been successful in hiring experienced salespeople
from leading firms in the industry including our new Vice President of Sales.
Our ten largest customers accounted for 32.1% of our net sales for the twelve months ended
December 31, 2008. In 2008, there was no single customer who accounted for more than 10.0% of net
sales.
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Manufacturing and Suppliers
We produce our lighting systems through a combination of internal and outsourced manufacturing and
assembly. Our internal lighting system manufacturing consists primarily of fiber processing, final
assembly, testing, and quality control. We use independent contractors to manufacture some components and sub-assemblies and have worked with
a number of our vendors to design custom components to meet our specific needs. We manage
inventories of domestically produced component parts on a just-in-time basis when practicable. Our
quality assurance program provides for testing of all sub-assemblies at key stages in the assembly
process as well as testing of finished products.
Some of our products are manufactured off shore, resulting in cost savings. Under a
Production Share Agreement initiated in 2003 and renewed in August 2007, we conduct contract
assembly in Mexico through North American Production Sharing Inc. and Industrias Unidas de BC, SA
de CV, or North American. Under this agreement, North American provides administrative and
manufacturing services, including labor services and the use of manufacturing facilities in Mexico,
for the manufacturing and assembly of certain fiber optic systems and related equipment and
components. We also perform final assembly of products acquired from Australia, India, and Taiwan.
These suppliers supply products on a purchase order basis.
We currently purchase our small-diameter stranded fiber from multiple vendors, including
Mitsubishi. In sales volume, our products that incorporate small-diameter stranded fiber
historically have been the single largest fiber product that we sell and represent significant
sales volume.
Research and Development
Research and development has been a key focus of our company; accordingly, we have committed
substantial resources to this endeavor. Our research and development team is dedicated to
continuous improvement and innovation of our current lighting technologies, including fiber optics,
LED, and HID systems. Further, our research and development team plays a leading role in the
United States governments VHESC Consortium sponsored by DARPA. The purpose of the VHESC project
is to develop a 50% greater efficient solar cell for United States military applications which
would be available for commercial application.
Research and development expense, net of credits from the government, for the years ended
December 31, 2008, 2007, and 2006 were $2,188,000, $2,907,000 and $2,341,000, respectively.
Our recent achievements include:
2009: In March 2009, the Department of Defense selected Energy Focus to receive a Phase I
Small Business Innovative Research (SBIR) Grant to begin the development of a Solid State
Infrared Replacement for the M-278 Flare for the United States Armys Hydra Rocket System. In
July 2009 the Naval Research Warfare Center awarded us a $1.4 million contract to develop and
produce solid state lighting fixtures for use specifically on Virginia Class attack submarines. In
August 2009, the Defense Advanced Research Project Agency (DARPA) awarded us a $0.5 million SBIR
extension grant to develop and produce solid state lighting fixtures for general use on United
States Navy ships.
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2008: In November 2008, the United States Department of Energy named Energy Focus an Energy
Star Partner. Energy Star is a joint program of the United States Environmental Protection Agency
and Department of Energy helping Americans save money and protect the environment through energy
efficient products and practices. Also in November, DARPA, through their SBIR Program, awarded us
a contract to develop Explosion Proof LED fixtures. In December, the DARPA SBIR Program awarded us
a contract to develop berth lighting systems that will effectively reset a sailors body clock for
environments where the natural circadian rhythm is frequently disrupted. The two DARPA SBIR
contracts are for a total of $198,000. Also in December, we installed high efficiency lighting
fixtures to retrofit 100% of the high-bay lighting in a hangar deck on board an Arleigh Burke class
Naval Destroyer. This installation followed a year-long demonstration on board naval vessels that
replaced existing fluorescent, incandescent, and halogen lighting with various LED lighting
solutions.
2007: In August 2007, the VHESC Consortium reported a world record of 42.9% conversion
efficiency on photovoltaic devices (PV). Energy Focus is a member of this consortium, and these
solar cells make use of our proprietary optics technology. In November, we were awarded a
$1,000,000 contract with E.I. DuPont de Nemours and Company to develop advanced solar cell
technologies. Additionally, we were awarded additional Phase II contracts for two DARPA SBIR
projects to research lamp coating technologies and an extruded, large-core fiber processing method.
The two DARPA SBIR Phase II contracts are for a total of $1,500,000. Lastly, we were awarded the
prestigious DARPA Tech Award for Excellence in recognition of our outstanding achievement for
bridging the technology gap between inefficient traditional light sources and advanced
high-efficiency light systems.
2006: We entered into a DARPA agreement with the Navy for supplying our lighting on three
ships. Revenues from these ship installations totaled $1,979,000.
Intellectual Property
We have a policy of seeking to protect our intellectual property through patents, license
agreements, trademark registrations, confidential disclosure agreements, and trade secrets, as
management deems appropriate. As of August 31 2009 our intellectual property portfolio consisted
of 67, issued United States and foreign patents, various pending United States patent applications,
and various pending Patent Cooperation Treaty, or PCT, patent applications filed with the World
Intellectual Property Organization that serves as the basis of national patent filings in countries
of interest. A total of 26 applications are pending. Our issued patents expire at various times
between January 2013 and June 2029. Generally, the term of patent protection is 20 years from the
earliest effective filing date of the patent application. There can be no assurance, however, that
our issued patents are valid or that any patents applied for will be issued. There can be no
assurance that our competitors or
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customers will not copy aspects of our lighting systems or obtain information that we regard as proprietary. There also can be no
assurance that others will not independently develop products similar to ours. The laws of some
foreign countries in which we sell or may sell our products do not protect proprietary rights to
products to the same extent as do the laws of the United States.
We are aware that a large number of patents and pending patent applications exist in the field
of fiber optic technology and LED lighting. We are also aware that certain competitors hold and
have applied for patents related to fiber optic lighting and LED lighting. Although, to date, we
have not been involved in litigation challenging our intellectual property rights, we have in the
past received communications from third parties asserting rights over our patents or that our
technology infringes upon intellectual property held by such third parties. Based on information
currently available to us, we do not believe that any such claims involving our technology or
patents are meritorious. However, we may be required to engage in litigation to protect our patent
rights or to defend against the claims of others. There can be no assurance that third parties
will not assert claims that our products infringe upon third-party patents or other intellectual
property rights or that, in case of a dispute, licenses to such technology will be available, if at
all, on reasonable terms. In addition, we may need to take legal action to enforce our
intellectual property rights in the future. In the event of litigation to determine the validity
of any third-party claims or claims by us against third parties, such litigation, whether or not
determined in our favor could result in significant expense to us and divert the efforts of our
technical and management personnel from productive tasks. Also, in the event of an adverse ruling
in such litigation, we might be required to expend significant resources to develop non-infringing
technology or to obtain licenses to the infringing technology, and the licenses may not be
available on acceptable terms. In the event of a successful claim against us and our failure to
develop or license a substitute technology, our operating results could be adversely affected.
Acceleration of Long-Term Strategy.
Against the backdrop of the slowing of the United States and world economies, and mindful of
our financial results for the past three years and the first two quarters of 2009, we have
re-examined our strengths and weaknesses as well as our long-term strategy. We see as our special
strengths:
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We have fundamental intellectual property and trade secrets in non-imaging optics
and codings. |
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We have an ability to efficiently create, transport, and display light. |
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We have a broad and intimate understanding of lighting technologies. |
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We have a superior understanding of the existing building market and its desire and
need for lighting products and systems. |
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We are developing a core competence in solutions sales, including deal structuring
and financing. |
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We have a strong relationship with the federal government for research. |
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To capitalize on those strengths and move away from areas where we lack a competitive
advantage, we have decided to accelerate our transition to a fully-integrated energy system and
solutions provider by taking the following steps.
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Intensify our focus on the existing building market through national
accounts, lighting system solutions, and the strategic acquisition of one or more
lighting retrofit company. On September 29, 2009, we announced that we intend to
acquire the Stones River Companies of Nashville, Tennessee, a leading lighting energy
solutions provider, as part of our strategy to become a turnkey lighting energy
solutions company. |
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Develop mainstream lighting technologies, including in the near future Track
LED Lighting and a Generation 1 LED Light Tube. |
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Raise additional working capital by doing a rights offering to existing
shareholders, with part of the proceeds of that offering to be used for the cash
portion of the purchase price of a lighting retrofit company. |
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Explore the divestiture of the following lines of our business: Fiberstars
Pools and United States commercial businesses, and our British and German
subsidiaries. |
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Reduce our monthly expenses including reducing executive management salaries
and eliminating other positions. |
We expect that taking these steps will result in the following outcomes:
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The sale of business units and raising of additional capital in a rights offering
will provide necessary operating funds for 2009 and after. |
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We will have formed a streamlined organization that is very focused on creating
economic value through term key lighting energy solutions and systems for existing
business owners. |
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We will have developed mainstream lighting products for the existing building
market that are not currently available and that are differentiated by their
performance, energy consumption, longevity, and control ability. This product line up
will begin with LED track lighting and LED tube lighting products. |
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We will grow with the acquisition of one or more lighting retrofit businesses. This
will allow us to take advantage of the opportunity created by the federal government
stimulus package in public sector markets. This will replace the top-line sales of our
divested businesses. |
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All of these steps will accelerate our transformation into a fully-integrated,
lighting, energy systems and solutions provider. |
We have already begun to implement the above steps. In particular, we are actively looking
for a lighting retrofit business to acquire. Part of the cash portion of the purchase price of a
business will come from the proceeds of the rights offering to our shareholders.
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Backlog
We typically ship standard products within a few days after receipt of order. Custom products
are shipped within 30-60 days of receipt of order. Generally, there is not a significant backlog
of orders except at year-end. Our backlog at the end of 2008 was $860,000, compared to $983,000 at
the end of 2007.
Competition
Our commercial lighting products compete against a variety of lighting products, including
conventional light sources such as incandescent light bulbs, as well as metal halide lamps, LEDs,
compact fluorescent lamps, other fiber optic lighting systems, and decorative lighting. Our pool
lighting products compete with other sources of pool lighting in the areas of in-pool lighting,
including colored and color-changing underwater lighting, and pool accent lighting. Principal
competitive factors include price, performance, ease of installation, and maintenance requirements.
The market for lighting energy solutions is fragmented. We face competition from lighting
manufacturers, distributors, as well as electrical contractors, lighting maintenance contractors,
and other energy services companies. We compete primarily on the basis of technology, quality,
light quality and design, client relationships, lighting application knowledge, energy efficiency,
customer service, and marketing support.
We are pursuing a targeted type of customer and have products that are uniquely designed to
address opportunities and solve problems experienced by these target clients. Our solutions
business competes with in-house resources and non-traditional ESCOs. We typically do not directly
compete with the traditional ESCOs due to their focus on the municipality, university, school,
healthcare and federal government markets. There are approximately 45 traditional ESCOs in the
United States. However, since lighting is almost always an integral solution in their bundle of
energy efficiency measures, many of them are also prospective clients for our products. The
solutions business may also compete with lighting maintenance companies because our products often
last 5 50 times longer than the products we replace, and thus the maintenance companies see a
reduction in service revenues. However, these same companies are often also partners who perform
the installation on our projects as well as potential customers of the products we manufacture.
Principal competitive factors include the client relationship, price, access to competitive
financing, performance guarantees, and ongoing maintenance requirements.
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We expect that our ability to compete effectively will depend substantially upon our ability
to successfully provide our customers with greater performance at reduced costs. Principal
competitors in our markets include large lamp manufacturers, lighting fixture companies,
distributors, and ESCOs whose financial resources substantially exceed ours. These competitors
may introduce new or improved products that may reduce or eliminate some of the competitive
advantage of our products. We anticipate that the primary competition to our systems will come
from new technologies that offer increased energy efficiency, lower maintenance costs and/or lower
heat radiation. In
certain applications, we compete with LED systems produced by large lighting companies such as
Phillips and General Electric. In traditional commercial lighting applications, we compete
primarily with local and regional lighting manufacturers that, in many cases, are more established
in their local markets than our company. In traditional commercial lighting, fiber optic lighting
products are offered by a number of smaller companies, some of which compete aggressively on price.
Some of these competitors offer products with performance characteristics similar to those of our
products. Additionally, some conventional lighting companies now manufacture or license fiber
optic lighting systems that compete with our products. Many companies compete with us in Asia,
including Phillips, Mitsubishi, Bridgestone, and Toray. Mitsubishi also sells our BritePak® fiber
cables in Japan.
In 2008, we introduced numerous new product families, including:
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LED Cold Storage Globe lamps, |
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LED Lamps and Fixtures (PAL), |
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LED Light Rails, |
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LED Docklights, |
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HID High Bay Fixtures, |
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Fluorescent fixtures, and |
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Compact Fluorescent Light Bulbs. |
In the pool lighting market, we face competition from suppliers and distributors who bundle
lighting and non-lighting products and sell these packages to pool builders and installers. In
addition, we face competition directly from manufacturers who produce their own lighting systems
and components. For example, in this market, competitive products are offered by Pentairs
American Products Division, a major manufacturer of pool equipment and supplies, as well as Super
Vision International. In the spa lighting business, spa manufacturers install LED lighting systems
during the manufacturing process. We intend to develop new fiber optic and LED lighting products
that are complementary to traditional pool lights currently sold by pool equipment suppliers. To
maximize the sales of these new products, we continue to leverage our well-established presence in
the domestic pool lighting market and are expanding into the international pool lighting market.
Employees
As of December 31, 2008, we had 92 full-time employees, 18 of whom are located in the United
Kingdom, 8 in Germany, and 66 in the United States. We have 6 employees dedicated to developing
technology, research, and product development. We also have 37 people involved with sales and
sales support.
No employees are subject to any collective bargaining agreement, and we believe our employee
relations to be good.
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Business Segment
We operate in a single industry segment where we serve two principal markets;
commercial/industrial lighting and pool lighting. We market our products for worldwide
distribution primarily through independent sales representatives and distributors in North America,
Europe, and the Far East.
Properties
Our principal executive offices and commercial lighting manufacturing and assembly facilities
are located in a 79,000 square foot facility in Solon, Ohio, under a lease agreement expiring in
April 2011. Approximately 12,000 square feet of this space is subleased to another tenant through
June 2010. We also have leased sales facilities in Pleasanton, California, and Berkshire, United
Kingdom. In addition, we have a contract manufacturing facility near Tijuana, Mexico. We believe
that our current facilities are adequate to support our current and anticipated operations.
Legal Proceedings
From time to time, we occasionally become involved in ordinary routine litigation incidental
to our business. We currently are not involved in any material litigation, and we do not anticipate
becoming involved in any in the foreseeable future.
Principal Executive Offices
Our principal executive offices are located at 32000 Aurora Road, Solon, Ohio 44139. Our
telephone number is 440.715.1300, fax number is 440.715.1314, and our website address is
www.efoi.com. The information on our website is not incorporated by reference into this
prospectus and should not be relied upon with respect to this offering.
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MANAGEMENT
Directors and Officers
Our board of directors and executive officers are as follows.
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John M. Davenport
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2005 |
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Director and
President. Mr.
Davenport joined the
Company in November
1999 as Vice President
and Chief Technology
Officer and was
appointed Chief
Operating Officer in
July 2003 and
President in July
2005. He also served
as Chief Executive
Officer from July 2005
until May 2008. Prior
to joining Energy
Focus, Mr. Davenport
served as President of
Unison Fiber Optic
Lighting Systems, LLC,
from 1998 to 1999.
Mr. Davenport began
his career at GE
Lighting in 1972 as a
research physicist and
thereafter served 25
years in various
capacities including
GE Lightings research
and development
manager and as
development manager
for high performance
LED projects. He is a
recognized expert in
light sources,
lighting systems and
lighting applications,
with special emphasis
in low wattage
discharge lamps,
electronic ballast
technology and
distributed lighting
systems using fiber
optics. |
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J. James Finnerty
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2008 |
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Director. Mr.
Finnerty is currently
a Managing Director of
Terra Nova Capital, a
New York City-based
boutique investment
bank, where he focuses
on raising capital for
emerging growth
companies in the
energy, technology,
life sciences, and
specialty consumer
sectors. Mr.
Finnertys career has
spanned more than 30
years in the
institutional money
management community
having worked for
Kidder Peabody,
Hambrecht and Quist,
Deutsche Bank and
Merriman, Curhan, and
Ford. Mr. Finnerty
has focused his
efforts in the Boston
institutional
financial marketplace
where he successfully
covered all the major
accounts including
Fidelity, Putnam,
Wellington, etc. He
has been involved in
countless financings
including Adobe,
Pixar, Genzyme,
Amazon, Starbucks, and
The North Face to name
a few. Mr. Finnerty
has a Masters in
Business
Administration from
Cornell University and
a Bachelor of Arts in
Economics from Boston
College. Mr. Finnerty
is NASD Series 7 and
63 licensed. |
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David Gelbaum
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2009 |
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Director. Mr. Gelbaum has been a
private investor since 2002. From
1972 until 2002, he developed
quantitative models for stock price
returns and derivative securities
for TGS Management, and from 1972
until 1989 he worked at Oakley & |
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Sutton in a similar capacity. Mr.
Gelbaum has been a strong supporter
of the environment and outdoor
education and in 2006 was named the
9th Most Influential Person in
Southern California by the Los
Angeles Times Magazine for his work
in protecting the environment in
Southern California. Now, with his
wife, Monica, Mr. Gelbaum is a
trustee in the Quercus Trust.
Almost all of the Quercus Trusts
investments are in the Cleantech
space. In addition to holding
approximately 20% of Energy Focus
common stock, the Trust includes in
its holdings other alternate energy
names such as Applied Solar
Modules, Axion Power, EntechSolar,
and ThermoEnergy. In addition to
these public holdings, the fund has
interests in a number of privately
held companies in the Cleantech
space. Currently, Mr. Gelbaum
serves as Chairman of the Board of
Directors for EntechSolar. |
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Laurence V. Goddard
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2008 |
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Director. Mr. Goddard is a
director and the President of the
Parkland Group, Inc. which he
founded in 1989 to provide
specialized turnaround and business
improvement services. Mr.
Goddards experience includes
business performance and
profitability improvement,
turnarounds, workouts and
management support. Mr. Goddard
has extensive experience in
manufacturing businesses of all
types, as well as distribution,
retail, service and construction
businesses. From 1982 to 1990, Mr.
Goddard was the President and CEO
of WACO International, a national
manufacturer and distributor of
construction equipment and supplies
located in Cleveland, Ohio. At
WACO, Mr. Goddard led the
acquisition of eight companies
which resulted in the growth of
revenues from $8 million to over
$100 million. Mr. Goddard has also
held roles at Price Waterhouse in
Canada. He is a Canadian Chartered
Accountant (inactive), a Chartered
Business Valuator (inactive) a
Certified Turnaround Professional,
and was a director/chairman of the
Nominating and Governance Committee
and member of the Audit Committee
of Oglebay Norton from 2004 to
February 2008. |
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Michael A. Kasper
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2004 |
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Director. Mr. Kasper is a former
executive with Procter & Gamble and
Optical Coating Laboratory (now JDS
Uniphase) spanning 29 years in
industry. His primary background
was in Operations Management as a
Manufacturing Plant Manager and
Director of Operations with P&G.
He was Vice President and General
Manager of the Applied Photonics
Division at OCLI and served as
Senior Vice President of Human
Resources following the merger with
JDSU. He was also President & CEO
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|
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|
|
Way of Sonoma-Mendocino
Lake for three years and currently
is Principal of Complete
Executives, consulting on executive
development. Mr. Kasper is an
honors graduate of Lafayette
College with a Bachelors of
Science in Mechanical Engineering. |
|
|
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|
|
|
|
|
|
|
|
Joseph G. Kaveski
|
|
|
48 |
|
|
|
2008 |
|
|
Director and Chief executive
Officer. Mr. Kaveski joined the
Company in April 2008 as Vice
President for Business Development
and Global Marketing. On May 6,
2008 the Companys Board of
Directors appointed him as Chief
Executive Officer. Prior to
joining Energy Focus, Mr. Kaveski
led his own strategic engineering
consulting business, TGL Company,
Leawood, Kansas. As a consultant,
he worked with Energy Focus on
strategic planning initiatives from
September 2007 to April 2008. From
November 2004 through February
2006, Mr. Kaveski was Vice
President of Energy Management
Services and Strategic Projects and
a member of the senior management
team at Johnson Controls, Inc.,
Milwaukee, Wisconsin, a global
leader in automotive experience,
building efficiency and power
solutions. |
|
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|
|
|
|
Paul von Paumgartten
|
|
|
61 |
|
|
|
2008 |
|
|
Director. Mr. von
Paumgartten joined the
Board in October 2004, and
was appointed Lead
Director in October 2008.
From 1982 up to the
present he has held
various positions at
Johnson Controls, Inc.,
most recently serving as
Director, Energy &
Environment since October
1999. Prior to that, he
was Director of
Performance Contracts at
Johnson Controls, Inc.
Mr. von Paumgartten also
was instrumental in the
formation of LEED
TM (Leadership
in Energy and
Environmental Design), the
energy efficiency
qualification program of
the United States Green
Building Council. This is
a qualification program
for sustainable design
developed by an industry
coalition representing
many segments of the
building industry. Mr.
von Paumgartten serves as
treasurer for LEED
TM. |
|
|
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|
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|
|
|
|
|
|
David N. Ruckert
|
|
|
71 |
|
|
|
1987 |
|
|
Director. Mr. Ruckert
joined the Company in
November 1987 as
President, Chief Operating
Officer, and a director.
He served as Chief
Executive Officer of the
Company from October 1988
to July 2006 and served as
Secretary of the Company
from February 1990 to
February 1994. He retired
as CEO in June 2005 and as
President in September,
2005. From June 1985 to
October 1987, he was
Executive Vice President
of Greybridge, a toy
company which he
co-founded that was later
acquired by Worlds of
Wonder in 1987. Prior to
that time, he was
Executive Vice President
of Atari from October 1982
to June 1984 and was a
Manager/Vice President of
Bristol-Myers Company in
New York from October 1966
to October 1982. |
74
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|
Director or Officer |
|
|
Name |
|
Age |
|
Since |
|
Background |
|
|
|
|
|
|
|
|
|
|
|
Philip E. Wolfson
|
|
|
64 |
|
|
|
1986 |
|
|
Director. Since 1998, Dr.
Wolfson has served as
Chief Executive Officer of
Phytos, Inc., an herbal
medicine development
company. He has been
Assistant Clinical
Professor at the
University of California
School of Medicine in San
Francisco since 1986 and
has maintained a private
practice in psychiatric
medicine since 1982. Dr.
Wolfson also served as a
director and a consultant
to NTI from 1989 to 1992. |
|
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|
|
Nicholas G.
Berchtold, Jr.
|
|
|
42 |
|
|
|
2007 |
|
|
Vice President of Finance,
Chief Financial Officer,
and Secretary. Mr.
Berchtold was the division
controller at Wellman
Products Group, a division
of Hawk Corporation, from
2000 to 2007, where he was
responsible for global
financial reporting and
analysis. Additionally, he
served as the corporate
assistant controller at
Olympic Steel, Inc. from
1997 to 2000. |
|
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|
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|
|
Roger R. Buelow
|
|
|
36 |
|
|
|
2005 |
|
|
Chief Technology Officer.
Vice President of
Engineering from February
2003 to July 2005. Prior
to joining the Company in
2003, Mr. Buelow was the
director of engineering at
Unison Fiber Optic
Lighting Systems, LLC from
1998 to 1999. |
|
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|
|
Eric W. Hilliard
|
|
|
41 |
|
|
|
2006 |
|
|
Vice President and Chief
Operating Officer. Mr.
Hilliard served as a
Business Manager at Saint
Gobain Flight
Structures Business from
2002 to 2006.
Additionally, he served at
Goodrich Aerospace Company
and HJ Heinz Company for 7
years from 1994 to 2002. |
Board of Directors Meetings and Committees of the Board
Director Independence. The Board of Directors has determined each of the following directors
to be an Independent Director as that term is defined by applicable listing standards of The
NASDAQ Stock Market and SEC rules:
J. James Finnerty
David Gelbaum
Laurence V. Goddard
Michael A. Kasper
Paul von Paumgartten
David N. Ruckert
Philip E. Wolfson
These seven directors are referred to individually as an Independent Director and collectively as
the Independent Directors. Mr. von Paumgartten serves the board as its lead director.
75
Board Meetings and Committees; Annual Meeting Attendance. The Board of Directors held a total
of six meetings during the fiscal year ended December 31, 2008. All directors attended at least
75% of the aggregate number of meetings of the Board of Directors and of the committees on which
such directors serve. In 2008, Mr. Kaveski and Mr. Davenport represented the Board at the annual
meeting. The Board of Directors has appointed a Compensation Committee, an Audit and Finance
Committee, and a Nominating and Corporate Governance Committee. The Board has determined that each
director who serves on these committees is an Independent Director. The Board has approved a
charter for the Compensation Committee, the Audit and Finance Committee, and the Nomination and
Corporate Governance Committee, and has adopted Corporate Governance Guidelines for itself.
The Compensation Committee of the Board of Directors, which currently consists of Messrs.
Wolfson (Chairman), Kasper, and von Paumgartten, held nine meetings in 2008. The Compensation
Committees primary functions are to discharge the responsibilities of the Board of Directors
relating to compensation of the Companys executive officers and to produce a report on executive
compensation for inclusion in the Companys annual proxy statement. Other specific duties and
responsibilities of the Compensation Committee are to: review and recommend to the Board corporate
goals and objectives relevant to compensation of the Chief Executive Officer, evaluate his
performance in light of such goals and objectives and set his compensation level based on this
evaluation; develop and monitor compensation arrangements for executive officers of the Company,
including review and approval of individual compensation; recommend to the Board guidelines for the
review of the performance and establishment of compensation and benefit policies for all other
employees; make recommendations regarding compensation plans and policies; administer the Companys
stock option plans and other compensation plans; and make recommendations to the Board regarding
compensation of the Board of Directors.
The Board has approved a charter for the Compensation Committee. A copy of this charter can
be found on the Companys website at www.efoi.com.
The Audit and Finance Committee of the Board of Directors, which currently consists of Messrs.
Ruckert (Chairman), Goddard, and Finnerty, held six meetings in 2008. The Audit and Finance
Committees primary functions are to assist the Board of Directors in its oversight of the
integrity of the Companys financial statements and other financial information, the Companys
compliance with legal and regulatory requirements, the qualifications, independence and performance
of the Companys independent auditors and the performance of the Companys internal audit function.
Other specific duties and responsibilities of the Audit and Finance Committee are to: appoint,
compensate, evaluate and, when appropriate, replace the Companys independent auditors; review and
pre-approve audit and permissible non-audit services; review the scope of the annual
audit; monitor the independent auditors relationship with the Company; and meet with the
independent auditors and management to discuss and review the Companys financial statements,
internal controls, and auditing, accounting and financial reporting processes.
76
The Board of Directors has determined that Mr. Goddard is an audit committee financial
expert, as defined by the SEC rules, and that each Committee member is an Independent Director.
The Board has approved a charter for the Audit and Finance Committee. A copy of this charter can
be found on the Companys website at www.efoi.com.
The Nominating and Corporate Governance Committee of the Board of Directors, which currently
consists of Messrs. Kasper (Chairman), von Paumgartten, and Wolfson held two meeting in 2008. The
Nominating and Corporate Governance Committees primary functions are to seek, evaluate and
recommend nominees for election to the Board of Directors and to oversee matters of corporate
governance. Other specific duties and responsibilities of the Nominating and Corporate Governance
Committee are to: determine the composition of the committees of the Board; make recommendations
regarding candidates for director proposed by shareholders; consider and plan for executive officer
succession as well as review management development and succession programs; review on an annual
basis the performance of the Board and of management; and consider and make recommendations on
matters related to the practices, policies and procedures of the Board.
The Board has approved a charter for the Nominating and Corporate Governance Committee. A
copy of this charter can be found on the Companys website at www.efoi.com.
Prior to each annual meeting of shareholders, the Nominating and Corporate Governance
Committee identifies nominees first by evaluating the current directors whose terms will expire at
the annual meeting and who are willing to continue in service. These candidates are evaluated
based on the criteria described above, including as demonstrated by the candidates prior service
as a director, and the needs of the Board with respect to the particular talents and experience of
its directors. In the event that a director does not wish to continue in service, the Nominating
and Corporate Governance Committee determines not to re-nominate the director, or a vacancy is
created on the Board as a result of a resignation, an increase in the size of the board or other
event, the Committee will consider various candidates for Board membership, including those
suggested by the Committee members, by other Board members, by any executive search firm engaged by
the Committee and by shareholders. A shareholder who wishes to suggest a prospective nominee for
the Board should notify the Secretary of the Company or any member of the Committee in writing,
with any supporting material the shareholder considers appropriate, at the following address:
Energy Focus, Inc., 32000 Aurora Road, Solon, Ohio 44139.
The Company does not have a policy regarding attendance by the Directors at the Companys
Annual Meeting. Messrs. Kaveski and Davenport were present at the last meeting held on June 24,
2009.
77
No interlocking relationship exists between the Companys board of directors and board of
directors or compensation committee of any other company, nor has any interlocking relationship
existed in the past.
Summary Compensation Table
The following table sets forth information about compensation of our Chief Executive Officer,
our President, our Vice President of Finance and Chief Financial Officer, and our other two highest
paid executive officers (our Named Executive Officers):
78
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|
Change in |
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|
Pension |
|
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|
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|
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|
Value and |
|
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|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity |
|
Qualified |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive |
|
Deferred |
|
All |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option |
|
Plan |
|
Compensation |
|
Other |
|
|
Name and Principal |
|
|
|
|
|
Salary |
|
Bonus |
|
Awards |
|
Compensation |
|
Earnings |
|
Compensation |
|
Total |
Position |
|
Year |
|
($) |
|
($) (1) |
|
($) (2) |
|
($) (3) |
|
($) |
|
($) (4) |
|
($) |
Joseph G. Kaveski |
|
|
2008 |
|
|
|
176,919 |
|
|
|
|
|
|
|
20,134 |
|
|
|
|
|
|
|
|
|
|
|
44,585 |
|
|
|
241,638 |
|
Chief Executive
Officer (April 7, 2008
to present) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John M. Davenport |
|
|
2008 |
|
|
|
250,000 |
|
|
|
|
|
|
|
211,908 |
|
|
|
|
|
|
|
|
|
|
|
540 |
|
|
|
462,448 |
|
President |
|
|
2007 |
|
|
|
250,000 |
|
|
|
|
|
|
|
277,928 |
|
|
|
|
|
|
|
|
|
|
|
880 |
|
|
|
528,808 |
|
|
|
|
2006 |
|
|
|
250,000 |
|
|
|
|
|
|
|
294,039 |
|
|
|
|
|
|
|
|
|
|
|
773 |
|
|
|
544,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas G. Berchtold |
|
|
2008 |
|
|
|
175,000 |
|
|
|
|
|
|
|
35,860 |
|
|
|
|
|
|
|
|
|
|
|
540 |
|
|
|
211,400 |
|
Chief Financial |
|
|
2007 |
|
|
|
68,317 |
|
|
|
|
|
|
|
8,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,229 |
|
Officer and Vice
President of Finance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eric W. Hilliard |
|
|
2008 |
|
|
|
190,000 |
|
|
|
|
|
|
|
104,227 |
|
|
|
|
|
|
|
|
|
|
|
540 |
|
|
|
294,767 |
|
Chief Operating |
|
|
2007 |
|
|
|
180,000 |
|
|
|
|
|
|
|
90,517 |
|
|
|
|
|
|
|
|
|
|
|
612 |
|
|
|
271,129 |
|
Officer |
|
|
2006 |
|
|
|
28,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roger R. Buelow |
|
|
2008 |
|
|
|
175,000 |
|
|
|
|
|
|
|
47,713 |
|
|
|
|
|
|
|
|
|
|
|
6,720 |
|
|
|
229,433 |
|
Chief Technology |
|
|
2007 |
|
|
|
183,229 |
|
|
|
10,000 |
|
|
|
33,052 |
|
|
|
|
|
|
|
|
|
|
|
365 |
|
|
|
226,646 |
|
Officer |
|
|
2006 |
|
|
|
140,000 |
|
|
|
|
|
|
|
38,603 |
|
|
|
|
|
|
|
|
|
|
|
258 |
|
|
|
178,861 |
|
|
|
|
(1) |
|
Reflects discretionary bonus for Mr. Buelow. |
|
(2) |
|
Information about stock options granted to our Named Executive Officers during 2008 is set
forth in the 2008 Grants of Plan-BasedPlan-Based Awards Table. That Table also sets forth the
aggregate grant date fair value of the stock options granted during 2008 computed in accordance
with FAS 123(R). |
|
(3) |
|
The amounts set forth in this column reflect stock options granted to our Named Executive
Officers. The amounts listed are equalto the compensation cost recognized by the Company during
the year indicated for financial statement purposes in accordancewith FAS 123 ®. This valuations
method values stock options granted during the indicated year and previous years. A discussion
of the assumptions used in calculating the compensation cost is set forth in Note 9 of the Notes
to Consolidated Financial Statements in our 2008 Annual Report on Form 10-K. |
|
(4) |
|
The amounts set forth in this column for 2008 include: |
|
|
|
Company contributions for life insurance policies and automobile allowances; |
|
|
|
|
For Mr. Kaveski, consulting fees; |
79
2008 Grants of Plan-Based Awards
The following table sets forth information with respect to stock option awards granted to the
Named Executive Officers during 2008:
|
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|
All Other |
|
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|
|
|
|
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|
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|
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|
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|
|
|
|
Option |
|
|
|
|
|
Grant |
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
Awards |
|
Exercise |
|
Date Fair |
|
|
|
|
|
|
Estimated Possible Payouts |
|
Estimated Future Payouts |
|
Number of |
|
or Base |
|
Value of |
|
|
|
|
|
|
Under Non-Equity Incentive |
|
Under Equity Incentive |
|
Securities |
|
Price of |
|
Stock and |
|
|
|
|
|
|
Plan Awards |
|
Plan Awards |
|
Underlying |
|
Option |
|
Option |
|
|
Grant |
|
Threshold |
|
Target |
|
Maximum |
|
Threshold |
|
Target |
|
Maximum |
|
Options |
|
Awards |
|
Awards |
Name |
|
Date |
|
($) |
|
($) |
|
($) |
|
(#) |
|
(#) |
|
(#) |
|
(#) |
|
($/Sh) |
|
(1) |
|
|
|
Joseph G. Kaveski |
|
|
05/06/08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
|
|
2.00 |
|
|
|
106,000.00 |
|
|
|
|
11/24/08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
|
|
1.37 |
|
|
|
81,000.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas G.
Berchtold |
|
|
12/17/08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000 |
|
|
|
1.40 |
|
|
|
20,750.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John M.
Davenport |
|
|
05/06/08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,000 |
|
|
|
2.00 |
|
|
|
106,000.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eric W.
Hilliard |
|
|
10/23/08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,000 |
|
|
|
1.37 |
|
|
|
20,000.00 |
|
|
|
|
(1) |
|
The dollar values of stock options disclosed in this column are equal to the aggregate grant
date fair value computed in accordance with SFAS 123(R). A discussion of the assumptions used in
calculating the grant date fair value is set forth in Note 9 of the Notes to the Consolidated
Financial Statements in our 2008 Annual Report on Form 10-K. |
|
|
|
Stock Options. The stock options that we granted to our Named Executive Officers in 2008 were
granted under our 2004 Incentive Stock Plan and 2008 Incentive Stock Plan. In accordance with the
terms of those Plans, each option exercise price is equal to the market value of our common stock
on the date the option is granted. The market value is equal to the closing price of our common
stock on the date of grant on the NASDAQ Stock Market. The options vest over four years at the
rate of 25% of the shares covered by the option on each anniversary of the grant date. Stock
options are not transferable other than by will or the laws of descent and distribution. |
80
Outstanding Equity Awards at December 31, 2008
The following table includes certain information with respect to the value of all unexercised
options as of December 31, 2008 for our Named Executive Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards |
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards: |
|
|
|
|
|
|
Number of |
|
Number of |
|
Number of |
|
|
|
|
|
|
Securities |
|
Securities |
|
Securities |
|
|
|
|
|
|
Underlying |
|
Underlying |
|
Underlying |
|
|
|
|
|
|
Unexercised |
|
Unexercised |
|
Unexercised |
|
Option |
|
|
|
|
Options |
|
Options |
|
Unearned |
|
Exercise |
|
Option |
|
|
Exercisable |
|
Un-exercisable |
|
Options |
|
Price |
|
Expiration |
Name |
|
(#) |
|
(#) |
|
( #) |
|
($) |
|
Date |
|
Joseph G. Kaveski |
|
|
16,667 |
|
|
|
83,333 |
(1) |
|
|
|
|
|
|
2.00 |
|
|
|
05/06/18 |
|
|
|
|
3,125 |
|
|
|
96,875 |
(2) |
|
|
|
|
|
|
1.37 |
|
|
|
11/24/18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas G. Berchtold |
|
|
8,854 |
|
|
|
16,146 |
(3) |
|
|
|
|
|
|
6.05 |
|
|
|
08/10/17 |
|
|
|
|
6,771 |
|
|
|
18,229 |
(4) |
|
|
|
|
|
|
6.06 |
|
|
|
12/06/17 |
|
|
|
|
260 |
|
|
|
24,740 |
(5) |
|
|
|
|
|
|
1.40 |
|
|
|
12/17/18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John M. Daveport |
|
|
|
|
|
|
10,000 |
(6) |
|
|
|
|
|
|
4.50 |
|
|
|
02/28/12 |
|
|
|
|
100,000 |
|
|
|
|
|
|
|
|
|
|
|
3.96 |
|
|
|
07/01/12 |
|
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
7.23 |
|
|
|
12/04/13 |
|
|
|
|
20,000 |
|
|
|
|
|
|
|
|
|
|
|
8.60 |
|
|
|
05/19/14 |
|
|
|
|
59,000 |
|
|
|
|
(7) |
|
|
|
|
|
|
9.60 |
|
|
|
06/28/15 |
|
|
|
|
20,833 |
|
|
|
29,167 |
(8) |
|
|
|
|
|
|
6.53 |
|
|
|
04/19/17 |
|
|
|
|
16,667 |
|
|
|
83,333 |
(1) |
|
|
|
|
|
|
2.00 |
|
|
|
05/06/18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eric W. Hilliard |
|
|
40,625 |
|
|
|
34,375 |
(9) |
|
|
|
|
|
|
7.19 |
|
|
|
11/13/16 |
|
|
|
|
20,833 |
|
|
|
29,167 |
(10 |
|
|
|
|
|
|
6.36 |
|
|
|
04/26/17 |
|
|
|
|
1,302 |
|
|
|
23,698 |
(11) |
|
|
|
|
|
|
1.37 |
|
|
|
10/23/18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roger R. Buelow |
|
|
18,750 |
|
|
|
|
|
|
|
|
|
|
|
3.35 |
|
|
|
02/19/13 |
|
|
|
|
21,875 |
|
|
|
3,125 |
(12) |
|
|
|
|
|
|
10.64 |
|
|
|
07/01/15 |
|
|
|
|
6,771 |
|
|
|
18,229 |
(4) |
|
|
|
|
|
|
6.06 |
|
|
|
12/06/17 |
|
|
|
|
(1) |
|
Options will vest on May 6, 2012. |
|
(2) |
|
Options will vest on November 24, 2012. |
|
(3) |
|
Options will vest on August 10, 2011. |
|
(4) |
|
Options will vest on December 6, 2011. |
|
(5) |
|
Options will vest on December 17, 2012. |
|
(6) |
|
Options will vest on February 28, 2009. |
|
(7) |
|
141,000 options of the 200,000 granted on June 28, 2005 were forfeited on May 6, 2008 in
conjunction with a grant of 100,000 options. |
|
(8) |
|
Options will vest on April 19, 2011. |
|
(9) |
|
Options will vest on November 13, 2010. |
|
(10) |
|
Options will vest on April 26, 2011. |
|
(11) |
|
Options will vest on October 23, 2012. |
|
(12) |
|
Options will vest on July 1, 2009. |
81
Option Exercises
None of the Named Executive Officers exercised any stock options during 2008.
Equity Compensation Plan Information
The following table sets forth information with respect to our equity compensation plans as of
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares |
|
|
|
|
|
|
|
|
|
to be Issued |
|
|
|
|
|
|
|
|
|
Upon Exercise of |
|
|
Weighted Average |
|
|
Number of Shares |
|
|
|
Outstanding |
|
|
Exercise Price of |
|
|
Remaining |
|
|
|
Options, Warrants, |
|
|
Outstanding |
|
|
Available for |
|
|
|
and Rights |
|
|
Options, Warrants, |
|
|
Future Issuance |
|
Plan Category |
|
(1) |
|
|
and Rights |
|
|
(2) |
|
Equity compensation plans approved by
security holders |
|
|
1,491,178 |
|
|
$ |
5.29 |
|
|
|
828,498 |
|
Equity compensation plans not
approved by
security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,491,178 |
|
|
$ |
5.29 |
|
|
|
828,498 |
|
|
|
|
(1) |
|
This column represents the number of shares of common stock that may be issued in connection
with the exercise of outstanding stock options granted under our 1994 Stock Opion Plan, 1994
Directors Stock Options Plan, 2004 Incentive Stock Plan, and 2008 Incentive Stock Plan. |
|
(2) |
|
This column represents the number of shared of common stock remaining available for future
awards under our 2008 Incentive Stock Plan at December 31, 2008. |
Employment Agreements
On July 1, 2005, we entered into an Employment Agreement with Mr. Davenport. Under the
agreement, Mr. Davenport receives a base salary of $250,000 per year. He is eligible to receive a
minimum bonus of 25% of his base salary if the Company achieves the operating income plan
established for each year; or up to a maximum bonus of 50% of his base salary if the Company
exceeds the operating income plan. Each year the operating income plan is negotiated between Mr.
Davenport and the Board of Directors. Under the agreement, on June 28, 2005, Mr. Davenport
received an option to purchase 200,000 shares of our common stock at an exercise price equal to the
closing price of the Registrants common stock on the date of grant, which vests over four years at
the rate of 25% of the shares on each anniversary of the grant date. Through calendar year 2007,
Mr. Davenport was eligible to receive additional options to purchase from 50,000 shares up to
100,000 shares per year of our common stock which, if received, would be received
on or soon after the date the earnings for the preceding calendar year are released. Pursuant
to this agreement, Mr. Davenport was awarded options to purchase 50,000 shares on April 19, 2007.
For calendar
82
year 2008, Mr. Davenport was not entitled to any employment agreement-based stock
option bonus. However, on May 6, 2008 the Compensation Committee granted 100,000 shares to Mr.
Davenport under the 2004 Incentive Stock Plan upon the appointment of Mr. Kaveski as our Chief
Executive Officer and Mr. Davenports transition to President. In conjunction with this stock
option grant, Mr. Davenport voluntarily forfeited 141,000 of 200,000 shares granted on June 28,
2005.
On September 13, 2005, we entered into a Management Continuity Agreement with Roger Buelow.
Under the agreement, Mr. Buelow is entitled to receive severance payments in the event his
employment with us is involuntarily terminated around the time of a change of control, or if he
voluntarily terminates his employment with us following a change in control, as defined in the
agreement. Mr. Buelow will receive severance payments for a period of months equal to the total
number of years he was employed with the Company. The amount of his monthly severance payment will
equal the total monthly salary he was receiving immediately prior to the termination of his
employment plus the average commission or other contingent compensation received during the
preceding twelve months, excluding equity compensation.
Director Compensation
We use a combination of cash and stock-based awards to attract and retain qualified candidates
to serve on our Board. In setting director compensation, we consider the significant amount of
time that our directors expend in fulfilling their duties, as well as the skill level required by
us.
The following table sets forth the annual cash compensation for directors who are not also
employees:
|
|
|
|
|
Annual Retainer |
|
$ |
20,000 |
|
Additional Annual Retainers: |
|
|
|
|
Lead Director |
|
$ |
10,000 |
|
Compensation Committee Chairman |
|
|
3,000 |
|
Audit and Finance Committee Chairman |
|
|
3,000 |
|
Nominating and Corporate Governance Committee Chairman |
|
|
3,000 |
|
Under the terms of the Companys 2004 Stock Incentive Plan and 2008 Stock Incentive Plan, each
newly appointed non-employee director receives an option to purchase 10,000 shares of Common Stock
at an exercise price of 100% of the fair market value of the stock on the date of grant, which
option vests in twelve equal monthly installments following the date of grant. In addition,
following each annual meeting of the Companys shareholders, each non-employee director who will
continue to serve as a member of the Board of Directors automatically receives an option to
purchase 7,000 shares of Common Stock at an exercise price of 100% of the fair market value of the
stock on the date of grant, which option vests in twelve equal monthly installments following the
date of grant. The Lead Director, the Chairman of the Audit and Finance
Committee, and the Chairman of the Nominating and Corporate Governance Committee are to
receive an additional option to purchase 3,000 shares under the same terms.
83
The following table summarizes the compensation paid to non-employee directors during 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
|
|
|
|
Fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified |
|
|
|
|
|
|
Earned |
|
|
|
|
|
|
|
|
|
Non-Equity |
|
Deferred |
|
|
|
|
|
|
or Paid |
|
Stock |
|
Option |
|
Incentive Plan |
|
Compensation |
|
All Other |
|
|
|
|
in Cash |
|
Awards |
|
Awards |
|
Compensation |
|
Earnings |
|
Compensation |
|
Total |
Name |
|
($) |
|
($) |
|
($) (1) |
|
($) |
|
($) |
|
($) |
|
($) |
John B. Stuppin |
|
|
30,000 |
|
|
|
|
|
|
|
14,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,268 |
|
Michael A. Kasper |
|
|
25,750 |
|
|
|
|
|
|
|
17,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,928 |
|
Paul von Paumgartten |
|
|
18,500 |
|
|
|
|
|
|
|
12,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,398 |
|
Philip E. Wolfson |
|
|
17,000 |
|
|
|
|
|
|
|
12,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,898 |
|
Ronald A. Casentini |
|
|
10,000 |
|
|
|
|
|
|
|
14,268 |
|
|
|
|
|
|
|
|
|
|
|
7,500 |
|
|
|
31,768 |
|
David N. Ruckert |
|
|
14,750 |
|
|
|
|
|
|
|
1,377 |
|
|
|
|
|
|
|
|
|
|
|
29,864 |
|
|
|
45,991 |
|
Laurence V. Goddard |
|
|
8,000 |
|
|
|
|
|
|
|
4,771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,771 |
|
J. James Finnerty |
|
|
5,000 |
|
|
|
|
|
|
|
2,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,910 |
|
|
|
|
(1) |
|
Reflects the dollar amount recognized for financial reporting purposes for 2008 in accordance
with FAS 123(R) and equates to the fair value of the immediately vested option awards on the date
of grant. The method and assumptions used to determine the amount of expense recognized for options
is set forth in Note 9 to the Consolidated Finacial Statements in the Companys 2008 Annual Report
on Form 10-K. In 2008, each non-employee director received the following number of shares under our 2004
Incentive Stock Plan and 2008 Incentive Stock Plan: Mr. Kasper, 10,000, Mr. von Paumgartten,
10,000, Mr. Wolfson, 10,000, Mr. Goddard, 10,000, Mr. Ruckert, 7,000, and Mr. Finnerty, 10,000. |
|
(2) |
|
The amounts set forth in this column for 2008 include: |
For Mr. Casentini, consulting fees for post-resignation, one-year agreement entered into on
July 16, ; 2008; and
For Mr. Ruckert, stock-based compensation related to consulting agreement entered into on
February 3, 2006. See Certain Transactions below for further explanation.
Certain Transactions
On February 3, 2006, the company entered into a consulting agreement with David N. Ruckert, a
member of its Board of Directors. Mr. Ruckert was paid $76,000 during the year ending December 31,
2007 and $110,000 during the year ending December 31, 2006 under this agreement. This agreement
was terminated on June 30, 2007. No payments were made to Mr. Ruckert during the twelve months
ending December 31, 2008. Additionally, Mr. Ruckert was granted options to purchase 32,000 shares
of the Companys common stock. Stock expense incurred under FAS 123(R) related to these options
was $30,000 during the year ending December 31, 2008, compared to $30,000 during 2007, and $15,000
during 2006.
84
On September 14, 2007 the Company entered into a consulting agreement with Joseph G. Kaveski,
the Companys present Chief Executive Officer, for assistance with developing and helping implement
strategy and strategic initiatives. From September 2007 through March 2008, the Company paid him
$14,000 per month in consulting fees. The arrangement terminated in April 2008 when Mr. Kaveski joined the Company as Vice President
for Business Development and Global Marketing.
On March 14, 2008, the Company received an additional $9,335,000 in equity financing, net of
expenses. The investment was made by several current Energy Focus shareholders, including four
members of the Board of Directors. These investors agreed to an at-market purchase of
approximately 3.1 million units for $3.205 per unit, based on the closing bid price of Energy Focus
common shares on March 13, 2008 of $3.08. Each unit comprised one share of the Companys common
stock, par value $0.0001 per share, and one warrant to purchase one share of the Companys common
stock at an exercise price of $3.08 per share. The warrants were immediately separable from the
units and immediately exercisable, and will expire five years after the date of their issuance.
This additional financing is being used to fund working capital, pay debt, and perform additional
research and development. Among the investors were Ronald A. Casentini, John M. Davenport, John B.
Stuppin, and Philip E, Wolfson, all of whom were members of the Companys Board of Directors at the
time of the transaction, and who invested approximately $100,000 in the aggregate.
On July 16, 2008, the Company entered into a one-year consulting agreement with Ronald A.
Casentini upon Mr. Casentinis resignation from the Companys Board of Directors. Mr. Casentini
was engaged to provide support related to ongoing improvement initiatives within the Company. Mr.
Casentini is to receive total compensation of $15,000 over the course of the term of this
agreement. The Company paid Mr. Casentini $7,500 during the year ended December 31, 2008.
On May 29, 2009, the Company and its five most senior executive officers agreed that those
officers would take salary reductions for the balance of 2009 in exchange for the grant of them of
restricted shares under the Companys 2008 Stock Incentive Plan. Those executive officers and the
number of restricted shares awarded to each are: Joseph G. Kaveski, Chief Executive Officer, 23,679
shares; John M. Davenport, President, 94,719 shares; Nicholas G. Berchtold, Jr., Vice President of
Finance and Chief Financial Officer, 16,576 shares; Eric W. Hilliard, Vice President and Chief
Operating Officer, 17,997 shares; and Roger R. Buelow, Vice President and Chief Technology Officer
, 16,576 shares. Each of those officers accepted a ten percent salary reduction for the year,
except Mr. Davenport, who took a forty percent decrease. The number of shares for each officer was
based upon the dollar amount of his salary reduction divided by the closing price of a share of the
Companys common stock on the NASDAQ Global Market on May 29, 2009. Two other officers of the
Company also accepted salary reductions for the balance of the year in exchange for restricted
shares.
85
The shares are subject to forfeiture and to a restriction on transfer. Each officer will
forfeit his rights in his shares if he ceases to provide service to the Company as an employee,
director, or consultant prior to the closing of the first trading window after December 31, 2009
during which he does not posses material inside information about the Company, other than cessation
of service as a result of (i) his death or (ii) his total and permanent disability, or (iii) within
three months after a change in control of the
Company. Should the officer cease to provide service to the Company as a result of any of
these three things, this restriction will lapse and his shares will not be forfeited. The terms
service, total and permanent disability, and change in control are defined in the Companys
Plan. The term trading window means the first twenty calendar days after the second business day
following public disclosure of the Companys quarterly or annual financial results. Before the
forfeiture provision lapses by its terms, or by the officers earlier death or total and permanent
disability, or by his leaving the service of the company within three months after change in
control, the officer is not allowed to transfer any interest in his shares. Any attempt to
transfer the shares will be ineffective.
On May 29, 2009, two members of the Companys Board of Directors also voluntarily relinquished
director fees for the balance of 2009 in exchange for restricted shares on the same terms as the
shares granted to the officers. David Gelbaum gave up all of his director fees for 17,413
restricted shares. Philip E. Wolfson relinquished ten percent of his fees for 2,002 shares.
86
THE RIGHTS OFFERING
Terms of the Offer
We are distributing at no charge to the holders of our common stock on October 5, 2009, which
we refer to as the record date, subscription rights to purchase shares of our common stock. We are
distributing one right to the holder of record for every share of common stock that is held by the
holder on the record date. Shareholders presently hold 15,078,979 shares of common stock. We are
limiting the amount to be raised in this offering to no more than $3.5 million, however, through
the issuance of no more than 4,670,000 common shares upon the exercise of rights. If shareholders
subscribe for more than 4,670,000 shares, we will allocate that number pro rata among those
shareholders who subscribe according to their ownership of shares on the record date.
Each subscription right will entitle a shareholder to purchase one share of our common stock
at a subscription price of $0.75 the share, which we refer to as the basic subscription right. If a
shareholder fully exercises the basic subscription right, other shareholders do not fully exercise
their basic subscription rights, and shareholders subscribe for a total of less than 4,670,000
shares, the shareholder will be entitled to exercise an over-subscription right to purchase a
portion of the unsubscribed shares at the same price of $0.75 per share, subject to proration, to
the maximum number of 4,670,000 shares to be issued in this rights offering, and to reduction or
addition by us in certain circumstances. To the extent a shareholder properly exercises the basic
subscription right or the over-subscription right for an amount of shares that exceeds the number
of shares available to the shareholder, any excess subscription payment received by the
subscription agent will be returned promptly, without interest or penalty.
We expect the total purchase price for the securities offered in this rights offering to be
$3.5 million, assuming full participation in the offering.
We will not issue or pay cash in place of fractional rights. Instead, we will round up any
fractional rights to the nearest whole right. We refer to this as the step-up privilege. Rights
may only be exercised for whole numbers of shares. No fractional shares of common stock will be
issued in this offering. Instead, we will round up any fractional shares to the nearest whole
share. This is part of the step-up privilege. A shareholder must exercise the basic subscription
right and the over-subscription right at the same time.
There are two subscription periods. The initial subscription period runs from October 6, 2009
through October 30, 2009. The second subscription period runs
from November 2, 2009 through
November 13, 2009.
The initial subscription period of the rights offering will expire at 5:00 p.m. New York City
time, on October 30, 2009, unless we extend the rights offering. Holders ownership interests in
any rights not exercised at or before that time will return to us
without any payment to the holders of those unexercised rights. The subscription agent must
actually receive all required documents and payments before that time and date.
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All rights not exercised by shareholders by the expiration date of the initial subscription
period will return to us. During the second subscription period
running from November 2, 2009
through November 13, 2009 at 5:00 p.m., New York City time, we will have the right to issue rights
to both shareholders and non-shareholders in our sole discretion to purchase any or all shares
available in the offering but not purchased in the initial subscription period. From time to time
in the second subscription period, we may instruct the subscription agent to issue Subscription
Forms. The agent promptly will follow those instructions. The procedures and rules applicable to
the first subscription period will apply to the second subscription period, except that no Notice
of Guaranteed Delivery may be used in the second period.
A rights holder may sell, transfer, or assign the holders subscription rights to anyone in
whole or in part. Subscription rights, however, will not be listed for trading on the NASDAQ
Global Market, any other stock exchange or market, or on the OTC Bulletin Board.
Any transferee of any of a holders subscription rights must exercise those rights in the same
way and subject to the same conditions as apply to the holder when exercising the holders rights,
except as follows. Practically speaking, the subscription agent must receive a proper transfer of
a Subscription Form from a transferor by Monday, October 26, 2009 for the transferee to be able to
properly exercise the transferees own re-issued Subscription Form by Friday, October 30, 2009.
Subscription Forms, including those of transferees, not properly or timely exercised in the first
subscription period, but properly and timely exercised within the three business-day Notice of
Guarantee Period, in our sole discretion may be treated as properly and timely exercised in the
initial subscription period, placed first in line in the second subscription period, or not
accepted. Subscription Forms, including those of transferees, not properly or timely exercised in
the first subscription period or within the three business-day Notice of Guarantee Period, in our
sole discretion may be accepted or not accepted in the second subscription period.
Our board of directors reserves the right to cancel the rights offering at any time for any
reason. If the rights offering is cancelled, all subscription payments received by the
subscription agent will be returned promptly.
Shares of our common stock are, and we expect the shares of common stock to be issued in the
rights offering will be, traded on the NASDAQ Global Market under the symbol EFOI. On September
29, 2009, the closing sale price of our common stock was $1.06 per share. You should obtain a
current market price for the shares of our common stock before making any determination about the
exercise of your rights.
For purposes of determining the number of shares a rights holder may acquire in this offering,
brokers, dealers, custodian banks, trust companies, or others whose shares are held of record by
the Depository Trust Company or by any other depository or nominee,
will be deemed to be the holders of the rights that are issued to the Depository Trust Company
or the other depository or nominee on their behalf.
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Our board of directors reserves the right to cancel the rights offering if it believes that
there is insufficient participation in the offering by our shareholders, or for any other reason.
In no event will we raise more than $3.5 million in this offering.
Allocation and Exercise of Over-Subscription Rights
In order to properly exercise an over-subscription right, a rights holder must (i) indicate on
Subscription Form that the holder submits with respect to the exercise of the rights issued to the
holder how many additional shares the holder is willing to acquire pursuant to the holders
over-subscription right and (ii) concurrently deliver the subscription payment related to the
holders over-subscription right at the time the holder makes payment for the holder basic
subscription right.
If there are sufficient remaining shares, all over-subscription requests will be honored in
full. If requests for shares pursuant to the over-subscription right exceed the remaining shares
available, the available remaining shares will be allocated pro rata among rights holders who
over-subscribe, based on the number of shares they own on the record date. The percentage of
remaining shares each over-subscribing rights holder may acquire will be rounded up to result in
delivery of whole shares. The allocation process will assure that the total number of remaining
shares available for over-subscriptions is distributed on a pro rata basis. The operation of this
allocation process is subject to the limitation that we will issue no more than 4,670,000 common
shares upon the exercise of rights.
Rights payments for basic subscriptions and over-subscriptions will be deposited upon receipt
by the subscription agent and held in a segregated account with the subscription agent pending a
final determination of the number of shares to be issued pursuant to the over-subscription right.
If the prorated amount of shares allocated to you in connection with your basic or
over-subscription right is less than your over-subscription request, then the excess funds held by
the subscription agent on your behalf will be returned to you promptly without interest or
deduction. We will issue certificates representing your shares of our common stock, or credit your
account at your nominee holder with shares of our common stock, electronically in registered,
book-entry form on our records or on the records of our transfer agent, BNY Mellon Shareowner
Services, that you purchase pursuant to your basic or over-subscription rights as soon as
practicable after the rights offering has expired and all proration calculations, reductions, and
additions contemplated by the terms of the rights offering have been effected.
Brokers, dealers, custodian banks, trust companies, and other nominee holders of rights will
be required to certify to the subscription agent, before any over-subscription right may be
exercised with respect to any particular owner, as to the aggregate number of rights exercised
pursuant to the basic subscription right and the number of shares subscribed for pursuant to the
over-subscription right by such owner.
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Expiration of the Rights Offering and Extensions, Amendments, and Termination
Expiration and Extensions. You may exercise your subscription rights at any time before 5:00
p.m., New York City time, on October 30, 2009, the expiration date of the initial subscription
period of the rights offering, unless extended. Our board of directors may extend the expiration
date for exercising your subscription rights for up to an additional thirty trading days in its
sole discretion. If we extend the expiration date, you will have at least ten trading days during
which to exercise your rights. Any extension of this offering will be followed as promptly as
practicable by an announcement, and in no event later than 9:00 a.m., New York City time, on the
next business day following the previously scheduled expiration date.
We may choose to extend the expiration date of the rights in order to give investors more time
to exercise their subscription rights in the rights offering. We may extend the expiration date of
the rights offering by giving oral or written notice to the subscription agent and information
agent on or before the scheduled expiration date. If we elect to extend the expiration date, we
will issue a press release announcing such extension no later than 9:00 a.m., New York City time,
on the next business day after the most recently announced expiration date.
Any rights not exercised at or before that time will have no value and return to us without
any payment to the holders of those unexercised rights. We will not be obligated to honor your
exercise of subscription rights if the subscription agent receives the documents relating to your
exercise after the rights offering expires, regardless of when you transmitted the documents.
Termination; Cancellation. We may cancel or terminate the rights offering at any time prior to
the expiration date. Any cancellation or termination of this offering will be followed as promptly
as practicable by an announcement of termination.
Reasons for the Rights Offering; Determination of the Offering Price
We are making the rights offering to raise funds for general corporate and working capital
purposes, as well as to help fund the acquisition of the Stones River Companies of Nashville,
Tennessee, a leading lighting energy solutions provider, as part of our strategy to become a
turnkey lighting energy solutions company. Prior to approving the rights offering, our board of
directors carefully considered current market conditions and financing opportunities, as well as
the potential dilution of the ownership percentage of the existing holders of our common stock that
may be caused by the rights offering.
90
After weighing the factors discussed above and the effect of the $3.5 million in additional
capital, before expenses, that may be generated by the sale of shares pursuant to the rights
offering, our board of directors believes that the rights offering is in the best
interests of our company. As described in the section of this prospectus entitled Use of
Proceeds, the proceeds from the rights offering, less fees and expenses incurred in connection
with this offering, will be used to raise funds for general corporate and working capital purposes,
as well as to help fund the acquisition of the Stones River Companies of Nashville, Tennessee, a
leading lighting energy solutions provider, as part of our strategy to become a turnkey lighting
energy solutions company. Although we believe that the rights offering will strengthen our
financial condition, our board of directors is not making any recommendation as to whether you
should exercise your subscription rights.
The subscription price per share for the rights offering was set by our board of directors.
In determining the subscription price, our board of directors considered, among other things, our
history, the volume weighted average price per share of our common stock during the five-day and
twenty-day periods prior to the date of this prospectus, the historical and current market price of
our common stock, the fact that holders of rights will have an over-subscription right component,
the terms and expenses of this offering relative to other alternatives for raising capital, the
size of this offering, and the general condition of the securities market. Based upon these
factors, our board of directors determined that the subscription price per share represented an
appropriate subscription price.
Information Agent
BNY Mellon Shareowner Services will act as the information agent in connection with this
offering. The information agent will receive for its services a fee estimated to be approximately
$5,000.00 plus reimbursement of all reasonable out-of-pocket expenses related to this offering. The
information agent can be contacted as follows:
BNY Mellon Shareowner Services
Attention: Corporate Action Dept.
480 Washington Blvd., 27th Floor
Jersey City, New Jersey 07310
Collect: (201) 680-6579
Toll-free: (866) 282-4940
Subscription Agent
BNY Mellon Shareowner Services will act as the subscription agent in connection with this
offering. The subscription agent will receive for its administrative, processing, invoicing, and
other services a fee estimated to be approximately $20,000.00 plus reimbursement for all reasonable
out-of-pocket expenses related to this offering.
Completed Subscription Forms must be sent together with full payment of the subscription price
for all shares subscribed for through the exercise of the basic subscription right and the
over-subscription right to the subscription agent by one of the methods described below.
91
We will accept only properly completed and duly executed Subscription Forms actually received
at the address listed below, at or prior to 5:00 p.m., New York City time, on the expiration date
of this offering. See Payment for Shares below. In this prospectus, close of business means 5:00
p.m., New York City time, on the relevant date.
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By Mail:
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By Hand: |
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Energy Focus, Inc.
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Energy Focus, Inc. |
c/o BNY Mellon Shareowner Services
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c/o BNY Mellon Shareowner Services |
Attn: Corporate Action Dept.
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Attn: Corporate Action Dept. |
P.O. Box 3301
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480 Washington Blvd., 27th Floor |
South Hackensack, NJ 07606
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Jersey City, NJ 07310 |
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By Overnight Courier: |
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Energy Focus, Inc. |
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c/o BNY Mellon Shareowner Services |
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Attention: Corporate Action Dept. |
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480 Washington Blvd., 27th Floor |
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Jersey City, New Jersey 07310 |
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Facsimile Transmission:
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To confirm receipts of |
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(Eligible Institutions Only)
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facsimiles only: |
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(201) 680-4626
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(201) 680-4860 |
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Delivery to an address other than the address listed above, or transmission to a facsimile number
other than the number set forth above, will not constitute valid delivery and, accordingly, may be
rejected by us.
Any questions or requests for assistance concerning the method of subscribing for shares, or
for additional copies of this prospectus or Subscription Form, may be directed to the subscription
agent at its address listed above or at (866) 282-4940 (toll free). Shareholders may also contact
their broker, dealer, custodian bank, trustee, or other nominee for information with respect to
this offering.
Methods for Exercising Rights
Rights are issued in registered form in, and are evidenced by, Subscription Forms that, except
as described below under Foreign Shareholders, will be mailed to record date shareholders or, if
a record date shareholders shares are held by a depository or nominee on his, her, or its behalf,
to such depository or nominee. Rights may be exercised by completing and signing the Subscription
Form that accompanies this prospectus and mailing it in the envelope provided, or otherwise
delivering the completed and duly executed Subscription Form to the subscription agent, together
with payment in full for the shares at the subscription price by the expiration date of this
offering. Completed Subscription Forms and related payments must be received by the
subscription agent prior to 5:00 p.m., New York City time, on or before the expiration date,
at the offices of the subscription agent at the address set forth above.
92
Exercise of the Over-Subscription Right. Rights holders who fully exercise all basic
subscription rights issued to them may participate in the over-subscription right by indicating on
their Subscription Form the number of shares they are willing to acquire. If sufficient remaining
shares are available after the basic subscription, all over-subscriptions will be honored in full.
Otherwise, remaining shares will be allocated on a first-come, first-served basis as described
under Allocation of Over-Subscription Right above.
Record Date Shareholders Whose Shares are Held by a Nominee. Record date shareholders whose
shares are held by a nominee, such as a broker, dealer, custodian bank, trustee, or other nominee,
must contact that nominee to exercise their rights. In that case, the nominee will complete the
Subscription Form on behalf of the record date shareholder and arrange for proper payment by one of
the methods set forth under Payment for Shares below.
Nominees. Nominees, such as brokers, dealers, custodian banks, trustees, or depositories for
securities, who hold shares for the account of others, should notify the respective beneficial
owners of the shares as soon as possible to ascertain the beneficial owners intentions and to
obtain instructions with respect to the rights. If the beneficial owner so instructs, the nominee
should complete the Subscription Form and submit it to the subscription agent with the proper
payment as described under Payment for Shares below.
General. All questions as to the validity, form, eligibility, including times of receipt and
matters pertaining to beneficial ownership, and the acceptance of subscription forms and the
subscription price will be determined by us, which determinations will be final and binding. No
alternative, conditional, or contingent subscriptions will be accepted. We reserve the right to
reject any or all subscriptions not properly submitted or the acceptance of which would, in the
opinion of our counsel, be unlawful or trigger the poison pill set forth in our Rights Agreement
dated as of October 25, 2006 with Mellon Investor Services, LLC, as Rights Agent.
We reserve the right to reject any exercise if the exercise is not in accordance with the
terms of this rights offering, or not in proper form, or if the acceptance of the exercise or the
issuance of shares of our common stock could be deemed unlawful. We reserve the right to waive any
deficiency or irregularity with respect to any Subscription Form. Subscriptions will not be deemed
to have been received or accepted until all irregularities have been waived or cured within such
time as we determine in our sole discretion. We will not be under any duty to give notification of
any defect or irregularity in connection with the submission of Subscription Forms or incur any
liability for failure to give such notification.
93
The Rights are Not Tradable, but are Transferable
Although the rights will not be listed for trading on any stock exchange or market or on the
OTC Bulletin Board, they may be sold, transferred, or assigned before the expiration of the
subscription period.
Foreign Shareholders
Subscription Forms will not be mailed to foreign shareholders. A foreign shareholder is any
record holder of common stock on the record date whose address of record is outside the United
States and Canada, or is an Army Post Office (APO) address or Fleet Post Office (FPO) address.
Foreign shareholders will be sent written notice of this offering and a copy of this prospectus.
The subscription agent will hold the rights to which those Subscription Forms relate for those
shareholders accounts, subject to each shareholder making satisfactory arrangements with the
subscription agent for the exercise of the rights, and follow the instructions of the shareholder
for the exercise of the rights if the instructions are received by the subscription agent at or
before 11:00 a.m., New York City time, on October 26, 2009, four business days prior to the
expiration date, or, if this offering is extended, on or before four business days prior to the
extended expiration date. If no instructions are received by the subscription agent by that time,
the rights will expire worthless without any payment to the holders of those unexercised rights.
Payment for Shares
A participating rights holder may send the Subscription Form together with payment for the
shares subscribed for under the basic subscription right and any additional shares subscribed for
pursuant to the over-subscription right to the subscription agent based on the subscription price
of $0.75 per share. To be accepted, the payment, together with a properly completed and executed
Subscription Form, must be received by the subscription agent at the subscription agents offices
set forth above at or prior to 5:00 p.m., New York City time, on the expiration date.
All payments by a participating rights holder must be in United States dollars by certified
check or cashiers check drawn on a bank or branch located in the United States and payable to BNY
Mellon Shareowner Services. Payment also may be made by wire transfer to Mellon Investor Services
LLC, ABA No. 043-000-261, Account No. 0018518, BNY Mellon Shareowner Services, for the benefit of
(FBO) Energy Focus, Inc., with reference to the rights holders name. The subscription agent will
deposit all funds received by it prior to the final payment date into a segregated account pending
proration and distribution of the shares.
The method of delivery of Subscription Forms and payment of the subscription price to us will
be at the election and risk of the participating rights holders, but if sent by mail it is
recommended that such certificates and payments be sent by registered mail, properly insured, with
return receipt requested, and that a sufficient number of days be allowed to ensure delivery to the
subscription agent and clearance of payment prior to 5:00 p.m., New York City time, on the expiration date.
94
Whichever of the methods described above is used, issuance of the shares purchased is subject
to collection of checks and actual payment.
If a participating rights holder who subscribes for shares as part of the basic subscription
right or over-subscription right does not make payment of any amounts due by the expiration date,
the subscription agent reserves the right to take any or all of the following actions:
(i) reallocate the shares to other participating rights holders in accordance with the
over-subscription right; (ii) apply any payment actually received by it from the participating
rights holder toward the purchase of the greatest whole number of shares which could be acquired by
the participating rights holder upon exercise of the basic subscription and any over-subscription
right; and/or (iii) exercise any and all other rights or remedies to which it may be entitled,
including the right to set off against payments actually received by it with respect to such
subscribed-for shares.
All questions concerning the timeliness, validity, form, and eligibility of any exercise of
rights will be determined by us and our determinations will be final and binding. We, in our sole
discretion, may waive any defect or irregularity, or permit a defect or irregularity to be
corrected within the time that we may determine, or reject the purported exercise of any right.
Subscriptions will not be deemed to have been received or accepted until all irregularities have
been waived or cured within such time as we determine in our sole discretion. The subscription
agent will not be under any duty to give notification of any defect or irregularity in connection
with the submission of Subscription Forms or incur any liability for failure to give such
notification.
Participating rights holders will have no right to rescind their subscription after receipt of
their payment for shares.
Guaranteed Delivery Procedures
If you wish to exercise your rights, but you do not have sufficient time to deliver the
Subscription Form to the subscription agent before the expiration date, you may exercise your
rights by the following guaranteed delivery procedures:
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provide your payment in full of the subscription price for each share of
common stock being subscribed for pursuant to the basic subscription right and the
oversubscription right to the subscription agent before the expiration date; |
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deliver a notice of guaranteed delivery to the subscription agent at or
before the expiration date; and |
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deliver the properly completed Subscription Form relating to the rights being
exercised, with any required signatures guaranteed, to the subscription agent within three business days following the date the notice of
guaranteed delivery was received by the subscription agent and no later than three
business days following the expiration date. |
Your notice of guaranteed delivery must be substantially in the form provided with the
Instructions for Use of Letter of Transmittal distributed to you with your Subscription Form.
Your notice of guaranteed delivery must come from an eligible institution which is a member of, or
a participant in, a signature guarantee program acceptable to the subscription agent. In your
notice of guaranteed delivery you must state:
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your name; |
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the number of rights covered by your Subscription Form, the number of shares
of common stock you are subscribing for pursuant to the basic subscription right, the
number of shares of common stock, if any, you are subscribing for pursuant to the
oversubscription right; and |
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your guarantee that you will deliver to the subscription agent your
Subscription Form covering the rights you are exercising within three business days
following the date the subscription agent receives your notice of guaranteed delivery
and no later than three business days following the expiration date. |
You may deliver the notice of guaranteed delivery to the subscription agent in the same manner
as the Subscription Form at the addresses set forth under Subscription Agent above. Eligible
institutions may also transmit the notice of guaranteed delivery to the subscription agent by
facsimile transmission to (201) 680-4626. To confirm facsimile deliveries, you may call (201)
680-4860.
The information agent will send you additional copies of the form of notice of guaranteed delivery
if you need them. Please call the information agent at (866) 282-4940 (toll free).
Delivery of Share Certificates
We will issue certificates representing your shares of our common stock, or credit your
account at your nominee holder with shares of our common stock, electronically in registered,
book-entry form on our records or on the records of our transfer agent, BNY Mellon Shareowner
Services, that you purchased pursuant to your basic and over-subscription rights as soon as
practicable after the rights offering has expired and all proration calculations, reductions, and
additions contemplated by the terms of the rights offering have been effected.
96
ERISA Considerations
Retirement plans and other tax exempt entities, including governmental plans, should also be
aware that if they borrow in order to finance their exercise of rights, they may become subject to
the tax on unrelated business taxable income under Section 511 of the Code. If any portion of an
individual retirement account is used as security for a loan, the portion so used is also treated
as distributed to the IRA depositor. The Employee Retirement Income Security Act of 1974, as
amended (ERISA), contains fiduciary responsibility requirements, and ERISA and the Code contain
prohibited transaction rules that may impact the exercise of rights. Due to the complexity of these
rules and the penalties for noncompliance, retirement plans should consult with their counsel and
other advisers regarding the consequences of their exercise of rights under ERISA and the Code.
97
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Price Range of Common Stock
Our common stock trades under the symbol EFOI on the NASDAQ Global Market. The high and low
closing prices for our common stock as reported on the NASDAQ Global Market for the periods
indicated below were as follows:
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Fiscal Year Ended December 31, 2006 |
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First Quarter |
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$ |
9.33 |
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$ |
7.61 |
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Second Quarter |
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9.09 |
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6.91 |
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Third Quarter |
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8.85 |
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6.75 |
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Fourth Quarter |
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7.95 |
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5.42 |
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Fiscal Year Ended December 31, 2007 |
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First Quarter |
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$ |
8.75 |
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$ |
5.20 |
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Second Quarter |
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7.52 |
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5.60 |
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Third Quarter |
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7.85 |
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4.60 |
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Fourth Quarter |
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9.95 |
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4.80 |
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Fiscal Year Ended December 31, 2008 |
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First Quarter |
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7.31 |
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$ |
2.31 |
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Second Quarter |
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2.94 |
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1.78 |
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Third Quarter |
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2.75 |
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1.45 |
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Fourth Quarter |
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2.57 |
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1.00 |
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Fiscal Year Ended December 31, 2009 |
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First Quarter |
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$ |
1.73 |
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$ |
0.63 |
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Second Quarter |
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1.07 |
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0.58 |
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Third Quarter |
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1.39 |
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0.55 |
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Dividends
We have not declared cash dividends on our common stock since our company was formed.
Dividends are declared at the sole discretion of our board of directors. We do not intend to
declare cash dividends in the future and intend to retain all cash for our operations.
98
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth, as of June 30, 2009, certain information concerning the
beneficial ownership of our common stock by (i) each person known by us to own beneficially five
per cent (5%) or more of the outstanding shares of our common stock, (ii) each of our directors and
named executive officers, and (iii) all executive officers and directors as a group.
This table reports beneficial ownership of our shares and not ownership of our shares on the
record date. Record date ownership determines which shareholders are entitled to receive
subscription rights and how many rights each shareholder receives. For any shareholder, beneficial
ownership may include, in addition to record date ownership, shares as to which the shareholder has
a right to acquire presently or within the next sixty (60) days, such as under options or warrants,
shares owned by others, such as family members, and shares as to which the shareholder is
prohibited by regulation and/or agreement from acquiring without the satisfaction of a condition,
such as warrants held by The Quercus Trust. As a result, the number of shares listed in this table
as beneficially owned by a shareholder may not, and probably do not, indicate how many shares the
shareholder owns on the record date and therefore how many subscription rights the shareholder will
receive.
The number of shares beneficially owned by each 5% shareholder, director, or named executive
officer is determined under rules of the SEC. The information is not necessarily indicative of
beneficial ownership for any other purpose. Under those rules, beneficial ownership includes any
shares to which the individual has sole or shared voting power or investment power and also any
shares that the individual has the right to acquire within 60 days after June 30, 2009, or August
29, 2009, through the exercise of any stock option, warrant, or other right, or conversion of any
security. The inclusion in the table below of any shares deemed beneficially owned does not
constitute an admission of beneficial ownership of those shares.
The table should be read with the understanding that more than one person may be the
beneficial owner or possess certain attributes of beneficial ownership with respect to the same
shares.
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Shares Beneficially Owned (1) |
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Percent of |
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Outstanding |
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|
|
|
Common |
|
Name and Address |
|
Number |
|
|
Stock (2) |
|
5% Shareholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Quercus Trust |
|
|
4,245,541 |
(3) |
|
|
19.99 |
% |
2309 Santiago Drive
Newport Beach, California 92660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stiassni Capital Partners, L.P. |
|
|
1,262,702 |
(4) |
|
|
8.37 |
% |
2400 Palos Verdes Drive West
Rancho Palos Verdes, California 90275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midsummer Investment, Ltd. |
|
|
1,048,536 |
(5) |
|
|
6.95 |
% |
295 Madison Avenue
New York, New York 10017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diker GP, LLC |
|
|
996,166 |
(6) |
|
|
6.61 |
% |
745 Fifth Avenue
New York, New York 10151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Named Executive Officers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nicholas G. Berchtold |
|
|
48,349 |
|
|
|
|
* |
Roger R. Buelow |
|
|
69,310 |
|
|
|
|
* |
John M. Davenport |
|
|
558,105 |
|
|
|
3.70 |
% |
J. James Finnerty |
|
|
60,052 |
|
|
|
|
* |
David Gelbaum (3) |
|
|
24,913 |
|
|
|
|
* |
Laurence V. Goddard |
|
|
12,361 |
|
|
|
|
* |
Eric W. Hilliard |
|
|
109,146 |
|
|
|
|
* |
Michal A. Kasper |
|
|
48,667 |
|
|
|
|
* |
Joseph G. Kaveski |
|
|
76,804 |
|
|
|
|
* |
Paul von Paumgartten |
|
|
42,667 |
|
|
|
|
* |
David N. Ruckert |
|
|
314,531 |
|
|
|
2.09 |
% |
Phillip E. Wolfson |
|
|
108,800 |
|
|
|
|
* |
All directors and executive officers as a group |
|
|
1,473,705 |
|
|
|
9.77 |
% |
|
|
|
* |
|
Less than one percent |
|
(1) |
|
Unless otherwise indicated, each person has
sole investment and voting power, or shares
such power with his or her spouse, with
respect to the shares set forth in the above
table. |
|
(2) |
|
Based on 15,078,979 shares outstanding as of June 30, 2009. In
addition, shares issuable pursuant to options and warrants which may
be exercised through 60 days after June 30, 2009, or August 29, 2009,
are deemed to be issued and outstanding and have been treated as
outstanding in calculating the percentage ownership of those
individuals possessing such interest, but not for any other
individual. Thus, the number of shares to be outstanding for the
purposes for this table may vary depending on the individuals
particular circumstances. |
100
|
|
|
|
|
Includes the following number of shares of our common stock issuable
upon exercise of outstanding stock options that were exercisable
within 60 days after June 30, 2009, or August 29, 2009: |
|
|
|
|
|
|
|
Options Exercisable |
Directors and Named Executive Officers |
|
as of August 29, 2009 |
Nicholas G. Berchtold |
|
|
31,771 |
|
Roger R. Buelow |
|
|
63,073 |
|
John M. Davenport |
|
|
415,885 |
|
J. James Finnerty |
|
|
12,292 |
|
David Gelbaum |
|
|
8,125 |
|
Laurence V. Goddard |
|
|
12,986 |
|
Eric W. Hilliard |
|
|
91,146 |
|
Michal A. Kasper |
|
|
39,292 |
|
Joseph G. Kaveski |
|
|
53,125 |
|
Paul von Paumgartten |
|
|
36,292 |
|
David N. Ruckert |
|
|
59,583 |
|
Phillip E. Wolfson |
|
|
68,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
directors and executive officers as a group |
|
|
891,862 |
|
|
|
|
|
|
|
|
|
(3) |
|
The co-trustees of The Quercus Trust are David Gelbaum and Monica
Chavez Gelbaum. As noted above, Mr. Gelbaum is a member of our
board of directors. The Quercus Trust has filed with the Securities
and Exchange Commission a Schedule 13D/A dated March 3, 2009 which
reports the beneficial ownership in the aggregate of 4,245,541
shares, consisting of 2,685,479 shares owned and 1,560,062 shares
covered by warrants. As reported in that Schedule, The Quercus
Trust and its co-trustees entities have shared voting power for
4,245,451 shares and shared dispositive power for 4,245,541 shares.
The 4,245,541 shares shown in the table as beneficially owned by The
Quercus Trust do not include the 10,333 shares held under option by
and the 17,413 restricted shares granted to David Gelbaum as a
member of the Board of Directors under our 2008 Stock Incentive
Plan. |
|
|
|
The Quercus Trust is one of the 19 investors that participated in
our March 14, 2008 private placement of shares of common stock and
common share warrants. The terms of the warrant issued to each
investor in that private placement, including The Quercus Trust,
provide that the number of shares that may be acquired by any
investor upon exercise of a warrant is limited to the extent
necessary to ensure that, following the exercise, the total number
of shares of common stock owned by the investor and persons who are
beneficial owners through |
101
|
|
|
|
|
the investor does not exceed 19.99% of the
total number of the Companys outstanding shares. Because of the 19.99% limit in The Trusts warrant, the table lists that percentage
ownership for The Trust. Prior to that private placement, the
Company amended its Rights Agreement dated October 25, 2006, with
Mellon Shareowner Services, as Rights Agent, to permit The
Quercus Trust, and persons who are beneficial owners through The
Trust, to own up to 20% of our common stock without triggering the
rights under the Rights Agreement. The general limit in
the Agreement is 15%. |
|
(4) |
|
Stiassni Capital Partners, L.P. has filed with the Securities and
Exchange Commission a Schedule 13G dated December 31, 2008, which
reports beneficial ownership in the aggregate of 1,262,702
shares. As reported in that Schedule, Stiassni Capital Partners,
L.P. and its affiliated entities have shared voting power for
1,262,702 shares and shared dispositive power for 1,262,702 shares. |
|
(5) |
|
Midsummer Investment, Ltd. has filed with the Securities and
Exchange Commission a Schedule 13G dated May 5, 2009, which reports
beneficial ownership in the aggregate of 1,048,536 shares. As
reported in that Schedule, Midsummer Investment, Ltd. and its
affiliated entities have shared voting power for 1,048,536 shares
and shared dispositive power for 1,048,536 shares. |
|
(6) |
|
Diker GP, LLC has filed with the Securities and Exchange Commission
a Schedule 13G dated February 17, 2009, which reports beneficial
ownership in the aggregate of 996,166 shares. As reported in that
Schedule, Diker Group, LLC and its affiliated entities have shared
voting power for 996,166 shares and shared dispositive power for
996,166 shares. |
102
DESCRIPTION OF SECURITIES
The following summary of certain provisions of our securities does not purport to be complete.
You should refer to our certificate of incorporation, our by-laws, our Rights Agreement dated as of
October 25, 2006 with Mellon Investor Services, LLC, as Rights Agent, and our Designation of the
Series A Participating Preferred Stock, each of which is filed or incorporated by reference as an
exhibit to the registration statement of which this prospectus is a part. The summary below is also
qualified by provisions of applicable law.
General. The Company is authorized to issue 30,000,000 shares of common stock, par value
$0.0001 per share, and 2,000,000 shares of preferred stock, par value $0.0001 per share. As of
October 6, 2009, there were 15,078,979 shares of common stock outstanding and no shares of
preferred stock outstanding. All shares of common stock outstanding are fully paid and
nonassessable.
Voting. Holders of common stock are entitled to one vote per share on all matters to be voted
upon by shareholders. In accordance with Delaware law, the affirmative vote of a majority of the
shares represented and voting at a duly held meeting at which a quorum is present shall be the act
of the shareholders. The shares of common stock have no pre-emptive rights, no redemption or
sinking fund provisions, and are not liable for further call or assessment.
Dividends. The holders of common stock are entitled to receive dividends when and as declared
by the board of directors out of funds legally available for dividends. We have not declared or
paid any cash dividends and we do not anticipate paying cash dividends in the foreseeable future.
Liquidation. Upon a liquidation of the Company, our creditors and holders of our preferred
stock with preferential liquidation rights will be paid before any distribution to holders of our
common stock. The holders of common stock would be entitled to receive a pro rata distribution per
share of any excess amount.
Preferred Stock. Our certificate of incorporation empowers the board of directors to issue up
to 2,000,000 shares of preferred stock from time to time in one or more series. The board has fixed
the designation of our Series A Participating Preferred Shares, which are described below. The
board also may fix the designation, privileges, preferences and rights and the qualifications,
limitations and restrictions of those shares, including dividend rights, conversion rights, voting
rights, redemption rights, terms of sinking funds, liquidation preferences and the number of shares
constituting any additional series or the designation of the series. Terms selected could decrease
the amount of earnings and assets available for distribution to holders of our common stock or
adversely affect the rights and power, including voting rights, of the holders of our common stock
without any further vote or action by the shareholders. The rights of holders of common stock will
be subject to, and may be adversely affected by, the rights of the holders of any preferred stock
that may be issued by us in the future. The issuance of preferred stock could have the effect of
delaying or preventing a change in control of us or make removal of management more difficult. Additionally, the issuance of preferred stock
may have the effect of decreasing the market price of our common stock, and may adversely affect
the voting and other rights of the holders of common stock.
103
Series A Participating Preferred Stock and Rights to Purchase Series A Participating Preferred
Stock. The Purchase Rights for our Series A Participating Preferred stock are governed by a Rights
Agreement between us and Mellon Investor Services LLC.
Our board of directors has declared a dividend distribution of one Right for each
outstanding share of common stock to shareholders of record at the close of business on September
26, 2001. Except as set forth below, each Right, when exercisable, entitles the registered holder
to purchase from us one one-thousandth of a share of a new series of preferred stock, designated as
Series A Participating Preferred Stock (the Preferred Stock), at a price of Thirty Dollars
($30.00) per one one-thousandth of a share (the Purchase Price), subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement (the Rights Agreement)
between us and Mellon Investor Services LLC, as Rights Agent.
Initially, the Rights are attached to all common stock certificates representing shares then
outstanding, and no separate Rights certificates are distributed. The Rights will separate from the
common stock and a Distribution Date will occur upon the earliest of the following: (i) a public
announcement that a person, entity or group of affiliated or associated persons and/or entities (an
Acquiring Person) has acquired, or obtained the right to acquire, beneficial ownership of fifteen
percent (15%) or more of the outstanding shares of common stock (other than (A) as a result of
repurchases of stock by us or certain inadvertent actions by institutional or certain other
shareholders, (B) we, any subsidiary of us, or any employee benefit plan of us or any subsidiary,
and (C) certain other instances set forth in the Rights Agreement); or (ii) ten (10) business days
(unless such date is extended by the board of directors) following the commencement of a tender
offer or exchange offer which would result in any person, entity, or group of affiliated or
associated persons and/or entities becoming an Acquiring Person (unless such tender offer or
exchange offer is a Permitted Offer (defined below)).
Until the Distribution Date (or earlier redemption or expiration of the Rights, if
applicable), (i) the Rights will be evidenced by certificates for common stock and will be
transferred only with such common stock certificates, (ii) new common stock certificates issued
upon transfers or new issuances of the common stock will contain a notation incorporating the
Rights Agreement by reference, and (iii) the surrender for transfer of any certificates for
outstanding common stock will also constitute the transfer of the Rights associated with such
common stock. As soon as practicable following the Distribution Date, separate certificates
evidencing the Rights (Rights Certificates) will be mailed to holders of record of the common
stock as of the close of business on the Distribution Date, and the separate Rights Certificates
alone will evidence the Rights.
104
The Rights are not exercisable until the Distribution Date. The Rights will expire on the
earliest of (i) September 20, 2011, (ii) consummation of a merger transaction with a person,
entity, or group who (x) acquired common stock pursuant to a Permitted Offer (as defined below) and
(y) is offering in the merger the same price per share and form of consideration paid in the
Permitted Offer, or (iii) redemption or exchange of the Rights by us as described below.
The number of Rights associated with each share of common stock shall be proportionately
adjusted to prevent dilution in the event of a stock dividend on, or a subdivision, combination or
reclassification of, the common stock. The Purchase Price payable, and the number of one
one-thousandths of a share of Preferred Stock or other securities or property issuable, upon
exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the
event of a stock dividend on, or a subdivision, combination or reclassification of the Preferred
Stock, (ii) upon the grant to holders of the Preferred Stock of certain rights, options or warrants
to subscribe for Preferred Stock, certain convertible securities or securities having the same or
more favorable rights, privileges and preferences as the Preferred Stock at less than the current
market price of the Preferred Stock, or (iii) upon the distribution to holders of the Preferred
Stock of evidences of indebtedness or assets (excluding regular quarterly cash dividends out of
earnings or retained earnings) or of subscription rights, options or warrants (other than those
referred to above). With certain exceptions, no adjustments in the Purchase Price will be required
until cumulative adjustments require an adjustment of at least one percent (1%) in such Purchase
Price.
In the event that, after the first date of public announcement by us or an Acquiring Person
that an Acquiring Person has become such, we are involved in a merger or other business combination
transaction (whether or not we are the surviving corporation) or fifty percent (50%) or more of our
assets or earning power are sold (in one transaction or a series of transactions), proper provision
shall be made so that each holder of a Right (other than an Acquiring Person) shall thereafter have
the right to receive, upon the exercise thereof at the then current Purchase Price, that number of
shares of common stock of either us, in the event that it is the surviving corporation of a merger
or consolidation, or the acquiring company (or, in the event there is more than one acquiring
company, the acquiring company receiving the greatest portion of the assets or earning power
transferred) which at the time of such transaction would have a market value of two (2) times the
Purchase Price (such right being called the Merger Right). In the event that a person, entity or
group becomes an Acquiring Person (unless pursuant to a tender offer or exchange offer for all
outstanding shares of common stock at a price and on terms determined prior to the date of the
first acceptance of payment for any of such shares by at least a majority of the members of the
board of directors who are not officers of us and are not Acquiring Persons (or affiliated or
associated persons and/or entities thereof) to be fair to and in the best interests of us and our
shareholders (a Permitted Offer)), then proper provision shall be made so that each holder of a
Right will, for a sixty (60) day period (subject to extension under certain circumstances)
thereafter, have the right to receive upon exercise that number of shares of common stock (or, at
the election of us, which
105
election
may be obligatory if sufficient authorized shares of common stock are not available, a combination of common stock, property, other securities
(e.g., Preferred Stock) and/or cash (including by way of a reduction in the Purchase Price)) having
a market value of two (2) times the Purchase Price (such right being called the Subscription
Right). The holder of a Right will continue to have the Merger Right whether or not such holder
exercises the Subscription Right. Notwithstanding the foregoing, upon the occurrence of any of the
events giving rise to the exercisability of the Merger Right or the Subscription Right, any Rights
that are or were at any time after the Distribution Date owned by an Acquiring Person (or
affiliated or associated persons and/or entities thereof) shall immediately become null and void.
At any time prior to the earlier to occur of (i) a person, entity or group becoming an
Acquiring Person or (ii) the expiration of the Rights, we may redeem the Rights in whole, but not
in part, at a price of $0.001 per Right (the Redemption Price), which redemption shall be
effective upon the action of the board of directors. Additionally, we may, following a person,
entity, or group becoming an Acquiring Person, redeem the then outstanding Rights in whole, but not
in part, at the Redemption Price (i) if such redemption is incidental to a merger or other business
combination transaction or series of transactions involving us but not involving an Acquiring
Person (or certain related persons and/or entities) or (ii) following an event giving rise to, and
the expiration of the exercise period for, the Subscription Right if and for as long as the
Acquiring Person triggering the Subscription Right beneficially owns securities representing less
than fifteen percent (15%) of the outstanding shares of common stock and at the time of redemption
there are no other Acquiring Persons. The redemption of Rights described in the preceding sentence
shall be effective only as of such time when the Subscription Right is not exercisable. Upon the
effective date of the redemption of the Rights, the right to exercise the Rights will terminate and
the only right of the holders of Rights will be to receive the Redemption Price.
Subject to applicable law, the board of directors, at its option, may at any time after a
person, group, or entity becomes an Acquiring Person (but not after the acquisition by such
Acquiring Person of fifty percent (50%) or more of the outstanding shares of Common Stock),
exchange all or part of the then outstanding and exercisable Rights (except for Rights which have
become void) for shares of common stock at a rate of one share of common stock per Right (subject
to adjustment) or, alternatively, for substitute consideration consisting of cash, securities of us
or other assets (or any combination thereof).
The Preferred Stock purchasable upon exercise of the Rights will be nonredeemable and junior
to any other series of preferred stock we may issue (unless otherwise provided in the terms of such
stock). Each share of Preferred Stock will have a preferential quarterly dividend in an amount
equal to 1,000 times the dividend declared on each share of common stock, but in no event less than
$25.00. In the event of liquidation, the holders of shares of Preferred Stock will receive a
preferred liquidation payment equal, per share, to the greater of $1,000.00 or 1,000 times the
payment made per share of common stock. Each share of Preferred Stock will have 1,000 votes, voting
together with the shares of common
106
stock. In
the event of any merger, consolidation or other transaction in which shares of common stock are exchanged, each share of Preferred Stock
will be entitled to receive 1,000 times the amount and type of consideration received per share of
common stock. The rights of the Preferred Stock as to dividends, liquidation and voting, and in the
event of mergers and consolidations, are protected by customary antidilution provisions. Fractional
shares of Preferred Stock will be issuable; however, we may elect to (i) distribute depositary
receipts in lieu of such fractional shares and (ii) make an adjustment in cash, in lieu of
fractional shares other than fractions that are multiples of one one-thousandth of a share, based
on the market price of the Preferred Stock prior to the date of exercise.
Until a Right is exercised, the holder thereof, as such, will have no rights as a shareholder
of us, including, without limitation, the right to vote or to receive our dividends. Holders of
Rights may, depending upon the circumstances, recognize taxable income in the event (i) that the
Rights become exercisable for (x) common stock or Preferred Stock (or other consideration) or (y)
common stock of an acquiring company in the instance of the Merger Right as set forth above or (ii)
of any redemption or exchange of the Rights as set forth above.
We and the Rights Agent retain broad authority to amend the Rights Agreement. Following any
Distribution Date, however, any amendment may not adversely affect the interests of holders of
Rights.
THIS SUMMARY DESCRIPTION OF THE RIGHTS AND SERIES A PARTICIPATING PREFERRED STOCK DOES NOT
PURPORT TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE RIGHTS AGREEMENT AND TO
THE CERTIFICATE OF DESIGNATION.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock, rights, and warrants is BNY Mellon
Shareowner Services, 525 Market Street, Suite 3500, San Francisco, CA 94105.
107
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law (the DGCL) empowers a corporation to
indemnify its directors and officers and to purchase insurance with respect to liability arising
out of their capacity or status as directors and officers, provided that these provisions shall not
eliminate or limit the liability of a director: (i) for any breach of the directors duty of
loyalty to the corporation or its shareholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) arising under Section 174
of the DGCL, or (iv) for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder shall not be
deemed exclusive of any other rights to which the directors and officers may be entitled under the
corporations bylaws, any agreement, vote of shareholders or otherwise.
Article XI and Article XII of our certificate of incorporation (the Certificate) provide
that the liability of our officers and directors shall be eliminated or limited to the fullest
extent authorized or permitted by the DGCL. Under the DGCL, the directors have a fiduciary duty to
us which is not eliminated by these provisions of the Certificate and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will
remain available to us. These provisions also do not affect the directors responsibilities under
any other laws, such as the federal securities laws or state or federal environmental laws. We have
obtained liability insurance for our officers and directors.
Article VI of our bylaws provides that we shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than an action by us or
in our right), by reason of the fact that such person is or was a director or officer of us, or is
or was a director or officer of us serving at our request as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise, against expenses
(including attorneys fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or proceeding.
Article VI of our bylaws further provides that in the event a director or officer has to bring
suit against us for indemnification and is successful, we will pay such directors or officers
expenses of prosecuting such claim; that indemnification provided for by the bylaws shall not be
deemed exclusive of any other rights to which the indemnified party may be entitled; and that we
may purchase and maintain insurance on behalf of a director or officer against any liability
asserted against such officer or director and incurred by such officer or director in such
capacity, whether or not we would have the power to indemnify such director or officer against such
expense or liability the DGCL.
108
At present, there is no pending litigation or proceeding involving any director, officer,
employee or agent as to which indemnification will be required or permitted under the Certificate. We are not aware of any threatened litigation or proceeding that may
result in a claim for indemnification.
Insofar as indemnification by us for liabilities arising under the Securities Act, may be
permitted to our directors, officers and controlling persons pursuant to the provisions referenced
above, or otherwise, we have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Securities Act and is,
therefore, unenforceable. If a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by one of our directors, officers, or controlling
persons in the successful defense of any action, suit or proceeding) is asserted by a director,
officer or controlling person in connection with the securities being registered hereunder, we
will, unless in the opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act, and will be governed by the final
adjudication of such issue.
109
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion sets forth the material United States Federal income tax consequences
of the receipt of rights described in this offering (Rights) and of the exercise or expiration of
those Rights to United States Holders (as defined below) of our common stock that hold such stock
as a capital asset for Federal income tax purposes [and to United Sates Holders of our warrants
dated March 14, 2008 (2008 Investor Warrants) who elect to receive Rights as opposed to an
adjustment of the exercise price of such warrants]. This discussion is based upon the Code,
Treasury Regulations promulgated thereunder, judicial decisions, and the United States Internal
Revenue Services (IRS) current administrative rules, practices and interpretations of law, all
as in effect on the date of this document, and all of which are subject to change, possible with
retroactive effect. This discussion applies only to United States Holders who are shareholders of
the company and does not address all aspects of Federal income taxation that may be important to
particular holders in light of their individual investment circumstances or to holders who may be
subject to special tax rules, including, without limitation, holders of preferred stock,
partnerships (including any entity or arrangement treated as a partnership for Federal income tax
purposes), holders who are dealers in securities or foreign currency, foreign persons, insurance
companies, tax-exempt organizations, non-United States Holders, banks, financial institutions,
broker-dealers, holders who hold common stock as part of a hedge, straddle, conversion,
constructive sale or other integrated security transaction, or who acquired common stock pursuant
to the exercise of compensatory stock options or otherwise as compensation, all of whom may be
subject to tax rules that differ significantly from those summarized below.
We have not sought, and will not seek, a ruling from the IRS regarding the Federal income tax
consequences of this offering or the related share issuance. The following discussion does not
address the tax consequences of this offering or the related share issuance under foreign, state,
or local tax laws. Accordingly, each holder of common stock is urged to consult its tax advisor
with respect to the particular tax consequences of this offering or the related share issuance to
such holder.
For purposes of this description, a United States Holder is a holder that is for United
States federal income tax purposes:
|
|
|
|
a citizen or resident of the United States; |
|
|
|
|
|
|
a corporation or other entity taxable as a corporation that is
organized in or under the laws of the United States., any state
thereof or the District of Columbia; |
|
|
|
|
|
|
an estate, the income of which is subject to United States federal
income taxation, regardless of its source; or |
|
|
|
|
|
|
a trust, if a United States court is able to exercise primary
supervision over the administration of the trust and one or more
United States persons have the authority to control all substantial
decisions of the trust (or the trust was in existence on August 20,
1996, and validly elected to continue to be treated as a United States
trust). |
|
110
THIS SUMMARY IS ONLY A GENERAL DISCUSSION AND IS NOT INTENDED TO BE, AND SHOULD NOT BE
CONSTRUED TO BE, LEGAL, OR TAX ADVICE. THE UNITED STATES FEDERAL INCOME TAX TREATMENT OF THE RIGHTS
IS COMPLEX AND POTENTIALLY UNFAVORABLE TO UNITED STATES HOLDERS. ACCORDINGLY, EACH UNITED STATES
HOLDER WHO ACQUIRES RIGHTS IS STRONGLY URGED TO CONSULT HIS, HER OR ITS OWN TAX ADVISER WITH
RESPECT TO THE UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN INCOME, ESTATE AND OTHER TAX
CONSEQUENCES OF THE ACQUISITION OF THE RIGHTS, WITH SPECIFIC REFERENCE TO SUCH PERSONS PARTICULAR
FACTS AND CIRCUMSTANCES.
THE FEDERAL TAX DISCUSSION CONTAINED IN THIS PROSPECTUS IS NOT INTENDED OR WRITTEN TO BE USED,
AND CANNOT BE USED, BY ANY PERSON FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED BY
THE CODE. THE FEDERAL TAX DISCUSSION CONTAINED IN THIS PROSPECTUS WAS WRITTEN TO SUPPORT THE
PROMOTION OR MARKETING OF THE TRANSACTION DESCRIBED IN THIS PROSPECTUS. PROSPECTIVE INVESTORS
SHOULD SEEK ADVICE FROM THEIR OWN INDEPENDENT TAX ADVISORS CONCERNING THE FEDERAL, STATE AND LOCAL
TAX CONSEQUENCES OF AN INVESTMENT IN THE COMPANY BASED ON THEIR PARTICULAR CIRCUMSTANCES.
Receipt of the Rights
The distribution of the Rights should be a non-taxable distribution under Section 305(a) of
the Code. This position is not binding on the IRS, or the courts, however. If this position is
finally determined by the IRS or a court to be incorrect, the fair market value of the Rights would
be taxable to holders of our common stock as a dividend to the extent of the holders pro rata
share of our current and accumulated earnings and profits, if any, with any excess being treated as
a return of capital to the extent thereof and then as capital gain.
The remaining description assumes that holders of our common stock or [our 2008 Investor
Warrants who elect to receive the Rights] will not be subject to United States federal income tax
on the receipt of a Right.
Tax Basis and Holding Period of the Rights
If the aggregate fair market value of the Rights at the time they are distributed to United
States Holders of our common stock is less than 15% of the aggregate fair market value of our
common stock at such time, the tax basis of the Rights issued to you will be zero unless you elect
to allocate a portion of your tax basis of previously owned common stock to the Rights issued to
you in this offering. However, if the aggregate fair market value of the Rights at the time they
are distributed to United States Holders of our common stock is 15% or more of the aggregate
111
fair
market value of our common stock at such time, or if you elect to allocate a portion of your tax basis of previously owned common
stock to the Rights issued to you in this offering, then your tax basis in previously owned common
stock will be allocated between such common stock and the Rights based upon the relative fair
market value of such common stock and the Rights as of the date of the distribution of the Rights.
Thus, if such an allocation is made and the Rights are later exercised, the tax basis in the common
stock you originally owned will be reduced by an amount equal to the tax basis allocated to the
Rights and the stock basis in the new common stock will be increased by the tax basis allocated to
these common shares. This election is irrevocable if made and would apply to all of the Rights
received pursuant to the rights offering. The election must be made in a statement attached to your
Federal income tax return for the taxable year in which the Rights are distributed.
The holding period for the Rights received in the rights offering by a United States Holder of
our common stock will include the holding period for the common stock with respect to which the
Rights were received.
Expiration of the Rights
If the Rights expire without exercise while you continue to hold the shares of our common
stock with respect to which the Rights are received, you will recognize no loss and your tax basis
in the common stock with respect to which the Rights were received will equal its tax basis before
receipt of the Rights. If the Rights expire without exercise after you have disposed of the shares
of our common stock with respect to which the Rights are received, you should consult your own tax
advisor regarding your ability to recognize a loss (if any) on the expiration date.
Exercise of the Rights; Tax Basis and Holding Period of the Shares
The exercise of the Rights received in this offering will not result in any gain or loss to
you. Generally, the tax basis of the common stock acquired through exercise of the Rights will be
equal to the sum of the subscription price per share and the basis, if any, in the Rights that you
exercised, as described in Tax Basis of the Rights above. The holding period for a share of
common stock acquired upon exercise of a Right begins with the date of exercise. If you exercise
the Rights received in this offering after disposing of the shares of our common stock with respect
to which the Rights are received, you should consult your own tax advisor regarding the potential
application of the wash sale rules under Section 1091 of the Code.
Sale or Other Disposition of the Shares of Common Stock Underlying the Rights
If a United States Holder sells or otherwise disposes of the shares received as a result of
exercising a Right, such United States Holders gain or loss recognized upon that sale or other
disposition will be a capital gain or loss assuming the share is held as a capital asset at the
time of sale. This gain or loss will be long-term if the share has been held at the time of sale
for more than one year.
112
Information Reporting and Backup Withholding
Payments made to you of proceeds from the sale of shares of common stock underlying the Rights
may be subject to information reporting to the IRS and possible United States federal backup
withholding. Backup withholding will not apply if you furnish a correct taxpayer identification
number (certified on the IRS Form W-9) or otherwise establish that you are exempt from backup
withholding. Backup withholding is not an additional tax. Amounts withheld as backup withholding
may be credited against your United States federal income tax liability. You may obtain a refund of
any excess amounts withheld under the backup withholding rules by filing the appropriate claim for
refund with the IRS and furnishing any required information.
113
PLAN OF DISTRIBUTION
On October 6, 2009, we will distribute the Subscription Forms and copies of this prospectus to
the holders of our common stock on the record date. Rights holders who wish to exercise their
rights and purchase shares of our common stock must complete the Subscription Form and return it
with payment for the shares to the subscription agent, BNY Mellon Shareowner Services, as set forth
under the caption The Rights Offering Method of Exercising Rights. If you have any questions,
you should contact BNY Mellon Shareowner Services.
We plan to promote the offering by contacting shareholders, making presentations to them, and
engaging in discussions with them. CleanTech IR, Rolling Hills Estates, California, will assist us
in these efforts. CleanTech IR and one of its principals, Brion D. Tanous, have been consulting
with us for several months about our future direction and strategy in general and about this rights
offering in particular. CleanTech IR is an investor relations service company that focuses on helping
companies in the clean tech market, such as Energy Focus, convey their message to the investment
community.
The
subscription rights are transferable by shareholders during the
initial subscription period,
running from October 6, 2009 through October 30, 2009.
During the initial period, through
our management and employees, we may put shareholders who wish to transfer their subscription
rights in touch with shareholders and others who wish to acquire subscription rights. We may
approach nonshareholders about obtaining the names and contact information of others who may desire
to acquire rights and we may pay them for that information. We will make the contacts with others
and put them and interested shareholders in touch with each other. We will not charge any fee for
any of these activities.
All rights not exercised by shareholders by the expiration date of the initial subscription
period will return to us. During the second subscription period
running from November 2, 2009
through November 13, 2009 at 5:00 p.m., New York City time, we will have the right to issue rights
to both shareholders and non-shareholders in our sole discretion to purchase any or all shares
available in the offering but not purchased in the initial subscription period. From time to time
in the second subscription period, we may instruct the subscription agent to issue Subscription
Forms. The agent promptly will follow those instructions.
No broker, dealer, underwriter, or agent will make any contacts for us or be paid any sales
commissions by us. Other than as described above or elsewhere in this prospectus, we do not know
of any existing agreements between any shareholder, broker, dealer, underwriter, or agent relating
to the sale or distribution of the underlying common stock.
To the extent required, we will file, during any period in which offers or sales are being
made, a supplement to this prospectus which sets forth, with respect to a particular offering, the
specific number of shares of common stock to be sold, the name of the
114
holder, the sales price, the name of any participating broker, dealer, underwriter or agent,
any applicable commission or discount and any other material information with respect to the plan
of distribution not previously disclosed.
In order to comply with certain states securities laws, if applicable, the shares of common
stock will be sold in such jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain states, rights may not be distributed and shares of common stock may not be
sold unless the rights and shares have been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is satisfied.
LEGAL MATTERS
The validity of the shares of common stock being offered by this prospectus has been passed
upon for the Company by Cowden & Humphrey Co. LPA.
EXPERTS
The consolidated financial statements and schedule for the years ended December 31, 2008 and
2007, and for each of the three years in the period ended December 31, 2008 included in this
prospectus and elsewhere in the registration statement, have been audited by Grant Thornton, LLP,
independent registered public accountants, as indicated in their report with respect thereto (which
report expresses an unqualified opinion and contains an explanatory paragraph relating to
substantial doubt about the Companys ability to continue as a going concern), and is included
herein in reliance upon the authority of said firm as experts in accounting and auditing.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On April 3, 2009, the Company engaged Plante and Moran, PLLC as its new independent registered
public accounting firm replacing Grant Thornton LLP. The Company has had no disagreements with
either its current or prior public accounting firm regarding its accounting or financial disclosure
since their appointment. The change in public accounting firms was approved by the Companys Board
of Directors.
WHERE YOU CAN FIND MORE INFORMATION
We are a reporting company and file annual, quarterly, and current reports, proxy statements,
and other information with the SEC. You may read and copy any document we file with the SEC at the
Public Reference Room (Room 1580), 100 F Street, N.E., Washington, D.C. 20549. You may also obtain
information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC maintains a website (www.sec.gov) that contains the reports, proxy and information
statements, and other information that we file electronically with the SEC.
115
This prospectus is part of a registration statement that we filed with the SEC. The
registration statement contains more information than this prospectus regarding us and the
securities, including exhibits and schedules. You can obtain a copy of the registration statement
from the SEC at the above address or from the SECs Internet site.
Our internet address is www.efoi.com. We have not incorporated by reference into this
prospectus the information on our website and you should not consider it to be a part of this
document. Our web address is included in this document as an inactive textual reference only.
116
INDEX TO FINANCIAL STATEMENTS
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Page |
Audited Consolidated Financial Statements: |
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F-2 |
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F-3 |
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F-4 |
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F-5 |
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F-6 |
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F-7 |
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F-8 |
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Unaudited Consolidated Financial Statements: |
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F-29 |
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F-30 |
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F-31 |
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F-32 |
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F-33 |
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F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Energy Focus, Inc.
We have audited the accompanying consolidated balance sheets of Energy Focus, Inc. (a Delaware
corporation) and subsidiaries (collectively the Company) as of December 31, 2008 and 2007 and the
related consolidated statements of operations, comprehensive income (loss), shareholders equity,
and cash flows for each of the three years in the period ended December 31, 2008. Our audits of
the basic financial statements included the financial statement schedule listed in the index
appearing under Item 15 (a)(2). These financial statements and financial statement schedule are
the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Energy Focus, Inc. and subsidiaries as of December 31,
2008 and 2007, and the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2008 in conformity with accounting principles generally accepted
in the United States of America. Also in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements as a whole, presents fairly, in all
material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2, the Company incurred a net loss of
$14,448,000 during the year ended December 31, 2008, negative cash flows from operations of
$5,830,000 and, the Companys cash on-hand was $10,568,000 as of December 31, 2008. In addition as
discussed in Note 7, the Companys line of credit is due in 2009. These factors, among others, as
discussed in Note 2 to the financial statements raise substantial doubt about the Companys ability
to continue as a going concern. Managements plans in regard to these matters are also described
in Note 2. The consolidated financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/ GRANT THORNTON LLP
Cleveland, Ohio
March 30, 2009
F-2
ENERGY FOCUS, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
(amounts in thousands except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
10,568 |
|
|
$ |
8,412 |
|
Accounts receivable trade, net of allowances for doubtful accounts of $356 in 2008 and $698 in
2007 |
|
|
2,668 |
|
|
|
3,698 |
|
Inventories, net |
|
|
5,539 |
|
|
|
6,888 |
|
Prepaids and other current assets |
|
|
276 |
|
|
|
393 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
19,051 |
|
|
|
19,391 |
|
|
|
|
|
|
|
|
|
|
Fixed assets, net |
|
|
4,459 |
|
|
|
5,336 |
|
Goodwill, net |
|
|
|
|
|
|
4,359 |
|
Other assets |
|
|
142 |
|
|
|
39 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
23,652 |
|
|
$ |
29,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
2,767 |
|
|
$ |
2,277 |
|
Accruals and other current liabilities |
|
|
1,621 |
|
|
|
1,473 |
|
Deferred revenue |
|
|
191 |
|
|
|
244 |
|
Credit line borrowings |
|
|
1,904 |
|
|
|
1,159 |
|
Current portion of long-term bank borrowings |
|
|
54 |
|
|
|
1,726 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
6,537 |
|
|
|
6,879 |
|
Other deferred liabilities |
|
|
81 |
|
|
|
62 |
|
Deferred tax liabilities |
|
|
|
|
|
|
252 |
|
Long-term bank borrowings |
|
|
245 |
|
|
|
314 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
6,863 |
|
|
|
7,507 |
|
SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Preferred stock, par value $0.0001 per share: |
|
|
|
|
|
|
|
|
Authorized: 2,000,000 shares in 2008 and 2007 |
|
|
|
|
|
|
|
|
Issued and outstanding: no shares in 2008 and 2007 |
|
|
|
|
|
|
|
|
Common stock, par value $0.0001 per share: |
|
|
|
|
|
|
|
|
Authorized: 30,000,000 shares in 2008 and 2007 |
|
|
|
|
|
|
|
|
Issued and outstanding: 14,835,000 shares in 2008 and 11,623,000 shares in 2007 |
|
|
1 |
|
|
|
1 |
|
Additional paid-in capital |
|
|
65,865 |
|
|
|
55,682 |
|
Accumulated other comprehensive income |
|
|
251 |
|
|
|
815 |
|
Accumulated deficit |
|
|
(49,328 |
) |
|
|
(34,880 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
16,789 |
|
|
|
21,618 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
23,652 |
|
|
$ |
29,125 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-3
ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31,
(amounts in thousands except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net sales |
|
$ |
22,950 |
|
|
$ |
22,898 |
|
|
$ |
27,036 |
|
Cost of sales |
|
|
17,447 |
|
|
|
16,616 |
|
|
|
19,251 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
5,503 |
|
|
|
6,282 |
|
|
|
7,785 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Gross research and development |
|
|
3,083 |
|
|
|
3,424 |
|
|
|
3,556 |
|
Deduct credits from government contracts |
|
|
(895 |
) |
|
|
(517 |
) |
|
|
(1,215 |
) |
|
|
|
|
|
|
|
|
|
|
Net research and development expense |
|
|
2,188 |
|
|
|
2,907 |
|
|
|
2,341 |
|
Sales and marketing |
|
|
8,551 |
|
|
|
9,789 |
|
|
|
9,774 |
|
General and administrative |
|
|
5,080 |
|
|
|
4,651 |
|
|
|
4,956 |
|
Loss on impairment |
|
|
4,305 |
|
|
|
|
|
|
|
|
|
Restructuring expenses |
|
|
|
|
|
|
456 |
|
|
|
734 |
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
20,124 |
|
|
|
17,803 |
|
|
|
17,805 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(14,621 |
) |
|
|
(11,521 |
) |
|
|
(10,020 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
(87 |
) |
|
|
110 |
|
|
|
|
|
Interest income |
|
|
10 |
|
|
|
284 |
|
|
|
483 |
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes |
|
|
(14,698 |
) |
|
|
(11,127 |
) |
|
|
(9,537 |
) |
Benefit from (provision for) income taxes |
|
|
250 |
|
|
|
(190 |
) |
|
|
(113 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(14,448 |
) |
|
$ |
(11,317 |
) |
|
$ |
(9,650 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net loss per sharebasic and diluted |
|
$ |
(1.02 |
) |
|
$ |
(0.98 |
) |
|
$ |
(0.85 |
) |
|
|
|
|
|
|
|
|
|
|
|
Shares used in per share calculationbasic and diluted |
|
|
14,182 |
|
|
|
11,500 |
|
|
|
11,385 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-4
ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the years ended December 31,
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net loss |
|
$ |
(14,448 |
) |
|
$ |
(11,317 |
) |
|
$ |
(9,650 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
(564 |
) |
|
|
283 |
|
|
|
507 |
|
Net unrealized (loss) gain on securities |
|
|
|
|
|
|
(69 |
) |
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(15,012 |
) |
|
$ |
(11,103 |
) |
|
$ |
(9,090 |
) |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-5
ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the years ended December 31, 2008, 2007, and 2006
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes |
|
|
Accumulated |
|
|
Retained |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Unearned |
|
|
Receivable |
|
|
Other |
|
|
Earnings |
|
|
|
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Stock-Based |
|
|
from |
|
|
Comprehensive |
|
|
(Accumulated |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Compensation |
|
|
Shareholder |
|
|
Income |
|
|
Deficit) |
|
|
Total |
|
Balances, December
31, 2005 |
|
|
11,270 |
|
|
$ |
1 |
|
|
$ |
52,514 |
|
|
$ |
(397 |
) |
|
$ |
(62 |
) |
|
$ |
41 |
|
|
$ |
(13,913 |
) |
|
$ |
38,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of
unearned
stock-based
compensation upon
FAS-123r adoption |
|
|
|
|
|
|
|
|
|
|
(397 |
) |
|
|
397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional costs
from 2005 S-3
filing |
|
|
|
|
|
|
|
|
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common
stock warrants |
|
|
14 |
|
|
|
|
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common
stock options |
|
|
106 |
|
|
|
|
|
|
|
563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common
stock under
employee stock
option purchase
plan |
|
|
4 |
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note receivable
from shareholder |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
62 |
|
Stock-based
compensation |
|
|
|
|
|
|
|
|
|
|
1,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain
on securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 |
|
|
|
|
|
|
|
53 |
|
|
Foreign currency
translation
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
507 |
|
|
|
|
|
|
|
507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,650 |
) |
|
|
(9,650 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December
31, 2006 |
|
|
11,394 |
|
|
$ |
1 |
|
|
$ |
53,841 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
601 |
|
|
$ |
(23,563 |
) |
|
$ |
30,880 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common
stock warrants |
|
|
86 |
|
|
|
|
|
|
|
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common
stock options |
|
|
140 |
|
|
|
|
|
|
|
651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common
stock under
employee stock
option purchase
plan |
|
|
3 |
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18 |
|
Stock-based
compensation |
|
|
|
|
|
|
|
|
|
|
877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
877 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gain
on securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(69 |
) |
|
|
|
|
|
|
(69 |
) |
Foreign currency
translation
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
283 |
|
|
|
|
|
|
|
283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,317 |
) |
|
|
(11,317 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December
31, 2007 |
|
|
11,623 |
|
|
$ |
1 |
|
|
$ |
55,682 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
815 |
|
|
$ |
(34,880 |
) |
|
$ |
21,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private investment
public equity, net
of expenses of $255 |
|
|
3,184 |
|
|
|
|
|
|
|
9,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of common
stock options |
|
|
23 |
|
|
|
|
|
|
|
126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common
stock under
employee stock
option purchase
plan |
|
|
5 |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
Stock-based
compensation |
|
|
|
|
|
|
|
|
|
|
715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation
adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(564 |
) |
|
|
|
|
|
|
(564 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14,448 |
) |
|
|
(14,448 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December
31, 2008 |
|
|
14,835 |
|
|
$ |
1 |
|
|
$ |
65,865 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
251 |
|
|
$ |
(49,328 |
) |
|
$ |
16,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-6
ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(14,448 |
) |
|
$ |
(11,317 |
) |
|
$ |
(9,650 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss on impairment of goodwill |
|
|
4,305 |
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
1,233 |
|
|
|
1,236 |
|
|
|
1,197 |
|
Stock-based compensation |
|
|
715 |
|
|
|
877 |
|
|
|
1,118 |
|
Unrealized loss (gain) from marketable securities |
|
|
|
|
|
|
69 |
|
|
|
(53 |
) |
Gain (loss) on sale of fixed asset |
|
|
1 |
|
|
|
(1 |
) |
|
|
|
|
Deferred taxes |
|
|
(255 |
) |
|
|
177 |
|
|
|
63 |
|
Deferred revenue |
|
|
(53 |
) |
|
|
244 |
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, trade |
|
|
825 |
|
|
|
2,554 |
|
|
|
278 |
|
Inventories |
|
|
1,037 |
|
|
|
947 |
|
|
|
351 |
|
Prepaid and other current assets |
|
|
108 |
|
|
|
(54 |
) |
|
|
558 |
|
Other assets |
|
|
(112 |
) |
|
|
131 |
|
|
|
(99 |
) |
Accounts payable |
|
|
553 |
|
|
|
(1,942 |
) |
|
|
1,510 |
|
Accruals and other current liabilities |
|
|
261 |
|
|
|
(423 |
) |
|
|
(2,457 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
8,618 |
|
|
|
3,815 |
|
|
|
2,466 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(5,830 |
) |
|
|
(7,502 |
) |
|
|
(7,184 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Sale of short-term investments |
|
|
|
|
|
|
49,441 |
|
|
|
114,595 |
|
Purchase of short-term investments |
|
|
|
|
|
|
(37,090 |
) |
|
|
(108,834 |
) |
Proceeds from sale of fixed assets |
|
|
|
|
|
|
33 |
|
|
|
|
|
Acquisition of fixed assets |
|
|
(395 |
) |
|
|
(542 |
) |
|
|
(3,703 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(395 |
) |
|
|
11,842 |
|
|
|
2,058 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuances of common stock |
|
|
9,335 |
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
133 |
|
|
|
964 |
|
|
|
651 |
|
Repayment of loan made to shareholder |
|
|
|
|
|
|
|
|
|
|
62 |
|
Proceeds from credit line borrowings |
|
|
5,633 |
|
|
|
129 |
|
|
|
1,077 |
|
Proceeds from long-term borrowings |
|
|
|
|
|
|
160 |
|
|
|
1,609 |
|
Payments of credit line borrowings |
|
|
(4,882 |
) |
|
|
(107 |
) |
|
|
|
|
Payments of long-term borrowings |
|
|
(1,726 |
) |
|
|
(801 |
) |
|
|
(491 |
) |
Other liabilities |
|
|
|
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
8,493 |
|
|
|
407 |
|
|
|
2,908 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(112 |
) |
|
|
(40 |
) |
|
|
369 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
2,156 |
|
|
|
4,707 |
|
|
|
(1,849 |
) |
Cash and cash equivalents, beginning of year |
|
|
8,412 |
|
|
|
3,705 |
|
|
|
5,554 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
10,568 |
|
|
$ |
8,412 |
|
|
$ |
3,705 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Information |
|
|
|
|
|
|
|
|
|
|
|
|
Interest Paid |
|
$ |
198 |
|
|
$ |
334 |
|
|
$ |
248 |
|
Non-cash investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Fully depreciated assets disposed of |
|
$ |
35 |
|
|
$ |
205 |
|
|
$ |
79 |
|
The accompanying notes are an integral part of these financial statements.
F-7
ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2008, 2007, and 2006
Energy Focus Inc. and subsidiaries (the company) design, develop, manufacture, market, and
install lighting systems and customer specific energy efficient lighting solutions for a wide-range
use in both the general commercial market and the pool market. The companys lighting technology
offers significant energy savings, heat dissipation and maintenance cost benefits over conventional
lighting for multiple applications. The companys solutions include fiber optic (EFO),
light-emitting diode (LED), ceramic metal halide (CMH), high-intensity discharge (HID), and
other highly energy efficient lighting technologies. The companys strategy also incorporated
continued investment in research into new and emerging energy sources including, but not limited
to, solar energy. Typical savings of current technology averages 80% in electricity costs, while
providing full-spectrum light closely simulating daylight colors.
|
2. |
|
Summary of Significant Accounting Policies |
The significant accounting policies of Energy Focus, which are summarized below, are consistent
with generally accepted accounting principles and reflect practices appropriate to the business in
which it operates.
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 and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting
period. Estimates include, but are not limited to, the establishment of reserves for accounts
receivable, sales returns, inventory obsolescence, and warranty claims; the useful lives for
property, equipment, and intangible assets; and stock-based compensation. Actual results could
differ from those estimates.
Certain prior year amounts have been reclassified to be consistent with the current year
presentation.
The consolidated financial statements (financial statements) include the accounts of the company
and its subsidiaries, Crescent Lighting Limited located in the United Kingdom and LBM
Lichtleit-Fasertechnik (LBM) located in Germany. All significant inter-company balances and
transactions have been eliminated.
The accompanying financial statements have been prepared assuming that the company will continue as
a going concern. The company has incurred losses over the last several years which have been
attributable to operational performance, restructuring, and other charges such as the
F-8
impairment of
goodwill, which has led to negative cash flows and violations of bank debt compliance. Further,
the company has not historically met management budgetary forecasts. The company has managed its
liquidity during this time through a series of cost reduction initiatives, bank lines of credit
borrowings, and capital market transactions. However, the global credit market crisis has had a
dramatic effect on its industry and customer base. The recession in the United States and Western
Europe and the slowdown of economic growth in the rest of the world has created a business
environment where it is substantially more difficult to obtain equity funding and additional
non-equity financing. Furthermore, this environment has resulted in an increased risk of customer
payment defaults. The companys liquidity position, as well as its operating performance, was
negatively affected by these economic and industry conditions and by other financial and business
factors, many of which were beyond its control.
Management acknowledges that sustaining our historical level of cash utilization is not conducive
to remaining a viable entity in this environment, and is in the process of aggressively
transforming our business into a turnkey, comprehensive energy-efficient lighting solutions
provider. In addition, management continues to aggressively reduce costs, as evidenced in the
$1,984,000 decrease in operating expenses, excluding loss on impairment in 2008, from 2007
levels. These cost reductions have been achieved while simultaneously realigning and expanding our
sales and marketing organization. In this regard, we have been very successful in hiring highly
experienced salespeople from leading Fortune 500 firms including our new Vice President of
Sales. Further, we have aligned our entire engineering and research and development organization
around sales and marketing to expedite new product introductions into our served available
markets. This realignment is readily evidenced by the 2008 introduction of multiple new products
including;
|
|
|
MR-16 halogen replacement bulbs, |
|
|
|
|
LED Cold Storage Globe lamps, |
|
|
|
|
LED Lamps and Fixtures (PAL), |
|
|
|
|
LED Light Rails, |
|
|
|
|
LED Docklights, |
|
|
|
|
HID High Bay Fixtures, |
|
|
|
|
Fluorescent fixtures, and |
|
|
|
|
Compact Fluorescent Light Bulbs |
Lastly, we expect to continue our on-going leadership role in the United States governments Very
High Efficiency Solar Cell (VHESC) Consortium sponsored by the Defense Advanced Research Projects
Agency (DARPA) where we expect to be able to commercialize a solar cell technology that will
significantly surpass current solar efficiencies ranging from 6% 20%. Our proven optics
technology has already shown the ability to achieve approximately 40% efficiency in a laboratory
environment and we believe that this efficiency, or greater, can be achieved on a cost-effective,
commercially-viable scale.
Although we are optimistic about obtaining the funding necessary for us to continue as a going
concern through internal means, there can be no assurances that this objective will be
successful. Therefore, in the event that our cash reserves and bank lines of credit are deemed by
management to not be sufficient to continue to fund operations throughout 2009, we will
aggressively pursue one or more of the following external funding sources:
F-9
|
|
|
obtain loans and/or grants available through federal, state, and/or local governmental agencies, |
|
|
|
|
obtain loans and/or grants from various financial institutions, |
|
|
|
|
obtain loans from non-traditional investment capital organizations, |
|
|
|
|
sale and/or disposition of one or more operating units, and |
|
|
|
|
obtain funding from the sale of our common stock or other equity instruments. |
Obtaining financing through the above mentioned mechanisms contain risks, including:
|
|
|
government stimulus and/or grant money is not allocated to us
despite our focus on the design, development, and manufacturing of
energy efficient lighting systems, |
|
|
|
|
loans or other debt instruments may have terms and/or conditions,
such as interest rate, restrictive covenants, and control or
revocation provisions, which are not acceptable to management or
our Board of Directors, |
|
|
|
|
the current global economic crisis combined with our current
financial condition may prevent us from being able to obtain any
debt financing, |
|
|
|
|
financing may not be available for parties interested in pursuing
the acquisition of one or more of our operating units, and |
|
|
|
|
additional equity financing may not be available to us in the
current economic environment and could lead to further dilution of
shareholder value for current shareholders of record. |
Revenue is recognized when it is realized or realizable, has been earned, and when all of the
following has occurred:
|
|
|
persuasive evidence or an arrangement exists, e.g., a sales order, a purchase order, or a sales agreement |
|
|
|
|
shipment has occurred (the standard shipping term is F.O.B. ship point) or services provided on a
proportional performance basis or installation has been completed, |
|
|
|
|
price to the buyer is fixed or determinable, and |
|
|
|
|
collectability is reasonably assured. |
Revenue from product sale generally is recognized upon shipping because of the following:
|
|
|
all sales made by the company to its customer base are
non-contingent, meaning that they are not tied to that customers
resale of products, |
|
|
|
|
standard terms of sale contain shipping terms of F.O.B. ship
point, meaning that the title is transferred when shipping occurs
and |
|
|
|
|
there is no automatic return provision that allows the customer to
return the product in the event the product does not sell within a
defined timeframe. |
Revenue from installation services, including design and integration services and other services
(where product sales are not incorporated into the contract), is recognized upon the following:
|
|
|
proportional performance method using the ratio of labor cost
incurred to the total final estimated labor cost. Under this
method, revenue recognized reflects the portion of anticipated
revenue that has been earned.
|
F-10
Revenue from product sales that incorporate specifically defined installation services is
recognized as follows:
|
|
|
product sale at completion of installation and |
|
|
|
|
installation service at completion of installation |
The company warrants its products against defects or workmanship issues. We set up allowances for
estimated returns, discounts, and warranties upon recognition of revenue, and these allowances are
adjusted periodically to reflect actual and anticipated returns, discounts, and warranty
expenses. These allowances are based on past history and historical trends, current economic
conditions, and contractual terms.
The company considers all highly liquid investments purchased with original maturity of three
months or fewer to be cash equivalent. The company has $9,964,000 in cash on deposit with Silicon
Valley Bank in the United States as of December 31, 2008. The remaining cash of the company is on
deposit with European based banks in the United Kingdom and Germany.
At December 31, 2008 and December 31, 2007, we had no short-term investments. All monies were
invested in money market funds and therefore classified as cash and cash equivalents.
The company states inventories at the lower of standard cost (which approximates actual cost
determined using the first-in-first-out method) or market. The company establishes provisions for
excess and obsolete inventories after evaluation of historical sales, current economic trends,
forecasted sales, product lifecycles, and current inventory levels. Charges to cost of sales for
excess and obsolete inventories amounted to $1,503,000, $677,000, and $868,000 in 2008, 2007, and
2006, respectively.
The companys customers currently are concentrated in the United States and Europe. In the normal
course of business, the company extends unsecured credit to its customers related to the sale of
its products. Typical credit terms require payment within thirty days from the date of delivery or
service. The company evaluates and monitors the creditworthiness of each customer on a
case-by-case basis. The company provides allowances for sales returns and doubtful accounts based
on its continuing evaluation of its customers ongoing requirements and credit risk. The company
writes-off accounts receivable when management deems that they have become uncollectible, and
payments subsequently received on such receivables are credited to the allowance for doubtful
accounts. The company does not generally require collateral from its customers.
F-11
As part of the process of preparing its consolidated financial statements, the company estimates
its income tax liability in each of the jurisdictions in which it does business. This process
involves estimating the companys actual current tax expense together with assessing temporary
differences resulting from differing treatment of items, such as deferred revenues, for tax and
accounting purposes. These differences result in deferred tax assets and liabilities, which are
included in the consolidated balance sheet. The company then assesses the likelihood that these
deferred tax assets will be recovered from future taxable income and, to the extent to which the
company believes that recovery is more likely than not, or is unknown, the company establishes a
valuation allowance.
Significant management judgment is required in determining the provision for income taxes, deferred
tax assets and liabilities, and any valuation allowance recorded against such deferred tax
assets. At December 31, 2008, the company recorded a full valuation allowance against deferred tax
assets in the United States and Germany due to uncertainties related to its ability to utilize
those deferred tax assets. The valuation allowance is based on estimates of taxable income by
jurisdiction and the periods over which its deferred tax assets could be recoverable.
Fixed assets are stated at cost and include expenditures for additions and major
improvements. Expenditures for repairs and maintenance are charged to operations as incurred. The
company uses the straight-line method of depreciation over their estimated useful lives of the
related assets (generally two to fifteen years) for financial reporting purposes. Accelerated
methods of depreciation are used for federal income tax purposes. When assets are sold or
otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any
gain or loss is reflected in the consolidated statement of operations.
Long-lived assets are reviewed for impairment whenever events or circumstances indicate the
carrying amount may not be recoverable. Events or circumstances that would result in an impairment
review primarily include operations reporting losses, a significant change in the use of an asset,
or the planned disposal or sale of the asset. The asset would be considered impaired when the
future net undiscounted cash flows generated by the asset are less than its carrying value. An
impairment loss would be recognized based on the amount by which the carrying value of the asset
exceeds its fair value, as determined by quoted market price (if available) or the present value of
expected future cash flows.
The company performed its annual goodwill impairment test at December 31, 2008. The impairment
test first utilized a market capitalization methodology to calculate the fair value of its goodwill
as of the test date, which was less than its respective carrying value, indicating impairment. As
a result, the company performed Step two of its impairment analysis. Based on the results of the
impairment test, the company recorded a non-cash impairment charge for goodwill of $4,305,000 in
the fourth quarter of 2008, which represents the entire carrying balance of goodwill, net of
foreign currency translation.
|
|
|
Fair Value of Financial Instruments |
Carrying amounts of certain financial instruments including cash and cash equivalents, accounts
receivable, and accounts payable approximate fair value due to their short maturities. Based on
borrowing rates currently available to the company for loans with similar terms, the carrying value
of long-term debt obligations also approximates fair value.
F-12
|
|
|
Certain Risks and Concentrations |
The company invests its excess cash in deposits and high-grade short-term securities with a major
financial institution that is insured by the Federal Deposit Insurance Corporation (FDIC) up to
$250,000 and the Securities Investor Protection Corporation (SIPC) up to $500,000 of primary net
equity protection including $100,000 for claims for cash. At times, the companys cash balances
exceed the amounts insured by the FDIC. As of December 31, 2008, the company does not have any
short-term securities investments. The company has not experienced any losses in such accounts and
believes that it is not exposed to significant risk of loss.
The company sells its products and solutions services through a combination of direct sales
employees, independent sales representatives, and various distributors in different geographic
markets throughout the world. The company performs ongoing credit evaluations of its customers and
generally does not require collateral. Although the company maintains allowances for potential
credit losses that it believes to be adequate, a payment default on a significant sale could
materially and adversely affect its operating results and financial condition.
At December 31, 2008, one customer accounted for 12.8% of the net accounts receivable, and no
single customer accounted for more than 10% of net accounts receivable at December 31, 2007. For
the year ended December 31, 2008 and 2007, no single customer accounted for more than 10% of net
sales. For the year ended December 31, 2006, one customer accounted for 11% of net sales.
The company currently purchases its small-diameter stranded fiber from multiple vendors. There are
a limited number of fiber suppliers, and even if an alternative supplier were obtained, a change in
suppliers could cause delays in manufacturing and a possible loss of sales, which would adversely
affect operating results.
The company requires substantial amounts of purchased materials from selected vendors. With
specific materials, the company purchases 100% of its requirement from a single vendor. Included
in purchased materials are small diameter stranded fiber, plastic fixtures, lamps, reflectors, and
power supplies. Substantially all of the materials the company requires are in adequate
supply. However, the availability and costs of materials may be subject to change due to, among
other things, new laws or regulations, suppliers allocation to other purchasers, interruptions in
production by suppliers, and changes in exchange rates and worldwide price and demand levels. The
companys inability to obtain adequate supplies of materials for its products at favorable prices
could have a material adverse effect on its business, financial position, or results of operations
by decreasing our profit margins and by hindering its ability to deliver products to its customers
on a timely basis.
Research and development expenses include salaries, contractor and consulting fees, supplies and
materials, as well as costs related to other overhead such as depreciation and facilities
costs. Research and development costs are expensed as they are incurred. The companys research
and development expenses are reduced on a proportional performance basis under Defense Advanced
Research Projects Agency (DARPA) Small Business Innovation Research (SBIR) development
contracts. These contracts were signed in 2007, for a total of $1,500,000 to be reimbursed over the
two-year life of the contracts.
F-13
Credits received from government contracts for research for which the company is the beneficiary
during the fiscal year are recorded as a reduction to research and development expense.
When the government contract is for the delivery of a product or service, the company recognizes
revenue from those government projects according to proportional performance method or actual
deliveries made. Costs related to the completion of the sale are charged to cost of sales in the
same period in which the revenue is recognized.
|
|
|
Earnings (Loss) Per Share |
Basic loss per share is computed by dividing net loss available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted loss per share is
computed giving effect to all dilutive potential common shares that were outstanding during the
period. Dilutive potential common shares consist of incremental shares upon exercise of stock
options and warrants, unless the effect would be anti-dilutive.
A reconciliation of the numerator and denominator of basic and diluted loss per share is provided
as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
NumeratorBasic and Diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(14,448 |
) |
|
$ |
(11,317 |
) |
|
$ |
(9,650 |
) |
DenominatorBasic and Diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
14,182 |
|
|
|
11,500 |
|
|
|
11,385 |
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share |
|
$ |
(1.02 |
) |
|
$ |
(0.98 |
) |
|
$ |
(0.85 |
) |
|
|
|
|
|
|
|
|
|
|
Options and warrants to purchase approximately 5,329,000 shares, 1,547,000 shares, and 1,690,000
shares of common stock were outstanding at December 31, 2008, 2007, and 2006, respectively, but
were not included in the calculation of diluted loss per share because their inclusion would have
been anti-dilutive.
The company accounts for stock-based compensation following FAS No. 123(R), Share-Based Payment
(FAS No. 123(R)). FAS No. 123(R) focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment transactions. The statement requires
entities to recognize compensation expense for awards of equity instruments to employees based on
grant-date fair value of those awards (with limited exceptions). FAS No. 123(R) also requires the
benefits of tax deductions in excess of recognized compensation expense to be reported as a
financing cash flow rather than as an operating cash flow as prescribed under the prior accounting
rules. For the years ended December 31, 2008, 2007, and 2006, the company recorded compensation
expense of $715,000, $877,000, and $1,118,000, respectively. At December 31, 2005, the company had
unamortized compensation expense of $397,000. This amount is now part of total unearned
compensation of $1,293,000 remaining at December 31, 2008. The remaining weighted average life is
approximately 1.8 years as of December 31, 2008. These costs will be charged to expense,
amortized on a straight-line method, in future periods in accordance with FAS No. 123(R)
accounting. At December 31, 2008, the intrinsic value of total options outstanding was zero, as
the market price per common share of stock was $1.15, which was below the exercise price of all
stock option grants.
F-14
The expenses for 2008, 2007, and 2006 include both the costs of awards granted in those years and
those unvested at the beginning of 2006. Both the expense and future unearned compensation have
been estimated using the Black-Scholes option pricing model. Estimates utilized in the calculation
include the expected life of the option, risk-free interest rate, and volatility and are further
comparatively detailed below. The estimated expected life of the option is calculated based on
contractual life of the option, the vesting life of the option, and historical exercise patterns of
vested options. The volatility estimates are calculated using historical pricing experience.
As of December 31, 2008, the company has two stock-based employee compensation plans, which are
described more fully in Note 9. The company accounts for equity instruments issued to
non-employees in accordance with the provisions of FAS No. 123(R) and related interpretations.
Under these principles, the equity instruments are valued at the fair value, which is computed
based on stock price on the date of grant or other measurement date, exercise price, estimated
life, stock volatility, and the risk-free rate of interest.
The fair value of each option grant and stock purchase plan grant combined is estimated on the date
of grant using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2008, 2007, and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
2006 |
Fair value of options issued |
|
$ |
1.04 |
|
|
$ |
3.01 |
|
|
$ |
3.50 |
|
Exercise price |
|
$ |
1.91 |
|
|
$ |
6.30 |
|
|
$ |
7.09 |
|
Expected life of option |
|
4.0 years |
|
|
4.0 years |
|
|
4.0 years |
|
Risk-free interest rate |
|
|
2.36 |
% |
|
|
4.35 |
% |
|
|
4.86 |
% |
Expected volatility |
|
|
72.53. |
% |
|
|
56.29 |
% |
|
|
58.53 |
% |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
|
Foreign Currency Translation |
The companys international subsidiaries use their local currencies as their functional
currencies. For those subsidiaries, assets and liabilities are translated at exchange rates in
effect at the balance sheet date and income and expense accounts at average exchange rates during
the year. Resulting translation adjustments are recorded directly to accumulated comprehensive
income within the statement of shareholders equity. Foreign currency transaction gains and losses
are included as a component of interest income and other. Gains and losses from foreign currency
translation are included as a separate component of comprehensive income (expense) within the
consolidated statement of comprehensive income (loss).
The company expenses the costs of advertising, which consists of costs for the placement of
advertisements in various media. Advertising expenses were $601,000, $464,000, and $415,000 for the
years ended December 31, 2008, 2007, and 2006, respectively.
F-15
The company warrants finished goods against defects in material and workmanship under normal use
and service for periods of one to three years for illuminators and fiber. Settlement costs
consist of actual amounts expensed for warranty services which are largely a result of third party
service calls, and the costs of replacement products. A liability for the estimated future costs
under product warranties is maintained for products outstanding under warranty and is included in
accruals and other liabilities in the Consolidated Balance Sheet. The warranty activity for the
respective years is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Balance at the beginning of the year |
|
$ |
212 |
|
|
$ |
230 |
|
Accruals for warranties issued |
|
|
342 |
|
|
|
381 |
|
Settlements made during the year (in cash or in kind) |
|
|
(262 |
) |
|
|
(399 |
) |
|
|
|
|
|
|
|
Balance at the end of the year |
|
$ |
292 |
|
|
$ |
212 |
|
|
|
|
|
|
|
|
|
|
|
Accounting Pronouncements Pending Adoption at December 31, 2008 |
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements (FAS 157), which defines
fair value, establishes a framework for measuring fair value, and expands disclosures about fair
value measurements. This guidance applies only when other guidance requires or permits assets or
liabilities to be measured at fair value; it does not expand the use of fair value in any new
circumstances. FAS 157 was effective for fiscal years beginning after November 15, 2007 (effective
January 1, 2008, for the company). In February 2008, the FASB issued Staff Position FAS 157-1,
which provides that FAS 157 does not apply under FAS 13, Accounting for Leases, and other
accounting pronouncements that address fair value measurements for leases. The company adopted the
financial assets and liabilities portion of this FASB and it had no effect. In February 2008, the
FASB also issued Staff Position FAS 157-2, which delays the effective date of FAS 157 for all
nonfinancial assets and liabilities, except those recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually). For items within the scope of Staff
Position FAS 157-2, the effective date will be for fiscal years beginning after November 15, 2008
(January 1, 2009, for the company). Early adoption of FAS 157 for nonfinancial assets and
liabilities within the scope of the new guidance is permitted. Management is evaluating the effect
that this guidance may have on the companys overall financial position or results of operations
and the company does not anticipate that it will have a significant impact.
In December 2007, the FASB issued FAS No. 141(R), Business Combinations (FAS 141(R)).The new
pronouncement requires the acquiring entity in a business combination to recognize only the assets
acquired and liabilities assumed in a transaction (e.g., acquisition costs must be expensed when
incurred), establishes the fair value at the date of acquisition as the initial measurement for all
assets acquired and liabilities assumed, and requires expanded disclosures. FAS 141(R) will be
effective for fiscal years beginning after December 15, 2008 (January 1, 2009, for the company).
Early adoption is prohibited. Management is evaluating the effect that this guidance may have on
the companys overall financial position or results of operations and we do not anticipate that it
will have a significant impact.
F-16
In December 2007, the FASB issued FAS No. 160, Non-controlling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 51 (FAS 160). The new pronouncement requires all entities to
report non-controlling (minority) interests in subsidiaries as a component of shareholders equity.
FAS No. 160 will be effective for fiscal years beginning after December 15, 2008 (January 1, 2009,
for the company). Early adoption is prohibited. Management is evaluating the effect that this
guidance may have on the companys overall financial position or results of operations and we do
not anticipate that it will have a significant impact.
|
|
|
Accounting Pronouncements Adopted in 2008 |
In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities (FAS 159). This guidance provides an option to selectively report financial
assets and liabilities at fair value and establishes presentation and disclosure requirements
designed to facilitate comparisons between entities that choose different measurement attributes
for similar types of assets and liabilities. FAS No. 159 was effective for fiscal years beginning
after November 15, 2007 (effective January 1, 2008, for the company). The company has elected to
not apply this fair value option to any of its existing assets or liabilities. However, the company
may adopt this guidance for assets or liabilities in the future as permitted under FAS No. 159.
|
3. |
|
Inventories (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Raw materials |
|
$ |
4,738 |
|
|
$ |
5,965 |
|
Inventory reserve |
|
|
(1,795 |
) |
|
|
(713 |
) |
Finished goods |
|
|
2,596 |
|
|
|
1,636 |
|
|
|
|
|
|
|
|
|
|
$ |
5,539 |
|
|
$ |
6,888 |
|
|
|
|
|
|
|
|
|
4. |
|
Fixed Assets (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Equipment (useful life 3 - 15 years) |
|
$ |
8,632 |
|
|
$ |
8,654 |
|
Tooling (useful life 2 - 5 years) |
|
|
2,752 |
|
|
|
2,751 |
|
Furniture and fixtures (useful life 5 years) |
|
|
200 |
|
|
|
225 |
|
Computer software (useful life 3 years) |
|
|
483 |
|
|
|
417 |
|
Leasehold improvements (the shorter of useful life or lease life) |
|
|
1,639 |
|
|
|
1,576 |
|
Construction in progress |
|
|
60 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
13,766 |
|
|
|
13,643 |
|
Less accumulated depreciation and amortization |
|
|
(9,307 |
) |
|
|
(8,307 |
) |
|
|
|
|
|
|
|
|
|
$ |
4,459 |
|
|
$ |
5,336 |
|
|
|
|
|
|
|
|
The company performed its annual goodwill impairment test at December 31, 2008. The impairment
test first utilized a market capitalization methodology to calculate the fair value of its goodwill
as of the test date, which was less than its respective carrying value, indicating impairment. As
a result, the company performed Step two of its impairment analysis. Based on the results of the
impairment test, the company recorded a non-cash impairment charge for goodwill of $4,305,000 in
the fourth quarter of 2008, which represents the entire carrying balance of goodwill, net of
foreign currency translation.
F-17
The changes in the carrying amounts of goodwill for the years ended December 31, 2008 and 2007 were
as follows (in thousands):
|
|
|
|
|
|
|
Goodwill |
|
|
|
Net |
|
|
|
Carrying |
|
|
|
Amount |
|
Balance as of December 31, 2006 |
|
$ |
4,247 |
|
Foreign currency translation |
|
|
112 |
|
|
|
|
|
Balance as of December 31, 2007 |
|
$ |
4,359 |
|
Impairment |
|
|
(4,305 |
) |
Foreign currency translation |
|
|
(54 |
) |
|
|
|
|
Balance as of December 31, 2008 |
|
$ |
|
|
|
|
|
|
|
6. |
|
Accruals and Other Current Liabilities (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Accrued sales commissions and incentives |
|
$ |
325 |
|
|
$ |
445 |
|
Accrued warranty expense |
|
|
292 |
|
|
|
212 |
|
Accrued professional fees |
|
|
218 |
|
|
|
302 |
|
Accrued employee benefits |
|
|
387 |
|
|
|
260 |
|
Accrued rent |
|
|
26 |
|
|
|
19 |
|
Accrued taxes |
|
|
201 |
|
|
|
116 |
|
Accrued other expenses |
|
|
172 |
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
$ |
1,621 |
|
|
$ |
1,473 |
|
|
|
|
|
|
|
|
Effective October 15, 2008, the company entered into a one year credit agreement with Silicon
Valley Bank (SVB) incorporating a $4,000,000 revolving line of credit which replaced all
existing facilities including the United States term loans. This new line of credit includes a
$1,500,000 sub-limit for cash management products, letters of credit, and foreign exchange. Under
this new agreement, all domestic existing term loans and revolving credit lines were repaid and
funded by this new borrowing arrangement. The amount of borrowing available to the company is the
lesser of $4,000,000 or the sum of the following:
|
|
|
up to a 75% advance rate against eligible accounts receivable, as defined by the agreement, |
|
|
|
|
up to 50% of our cash balance in deposit at SVB, capped at $1,500,000, and |
|
|
|
|
up to a 75% advance rate against eligible Early Buy accounts receivable, as defined by the
agreement, capped at $500,000. |
Borrowings under this agreement are collateralized by its assets, including intellectual property
and bears interest at the SVB Prime Rate plus 1.00%. If the company terminates the facility prior
to maturity, it will be required to pay a 1.00% termination fee. The company is required to
maintain 85% of its cash and cash equivalents in operating and investment accounts with SVB and its
affiliates. The company is required to comply with certain covenant requirements, including a
tangible net worth covenant. As of December 31, 2008, the company was not in compliance with the
tangible net worth covenant requirement. At December 31, 2008, the interest rate was 5.00%,
and the company had borrowings under the line of credit of $1,776,000, and available borrowings of
$263,000.
F-18
Effective January 31, 2009, the company entered into a First Loan Modification and Forbearance
Agreement with SVB which modified the one year credit agreement entered into on October 15,
2008. This modification to the terms of the 2008 credit agreement states that borrowings are
collateralized by our assets, including intellectual property and bears interest at the SVB Prime
Rate plus 1.50%. SVB also agreed to forebear from exercising its rights and remedies against the
company as a result of violating its tangible net worth covenant as of December 31, 2008. We are
currently working with SVB to revise our tangible net worth covenant.
For 2007, the companys bank line of credit in the United States was based on an agreement with SVB
dated August 15, 2005. It was amended on July 25, 2008, and on September 15, 2008. The most
recent amendment extended the credit agreement through October 15, 2008. The total credit facility
was for $5,000,000 and incorporated both a revolving line of credit and term loan. The interest
rate was 7.75% at December 31, 2007. The rate was the same for both the term loan and line of
credit. Borrowings under the SVB Agreement were collateralized by the companys assets and
intellectual property. Specific borrowings under the revolver were tied to accounts receivable,
and the company was required to comply with certain covenants with respect to effective net worth
and financial ratios. The company had borrowings under the revolving line of credit of $973,000 at
December 31, 2007, which was classified as a current liability. The company had total borrowings
of $1,672,000 under the term loan portion of the agreement as of December 31, 2007, which has been
classified as a current liability. The company paid an unused line fee of 0.25% against any unused
daily balance during the year.
Through the companys United Kingdom subsidiary, the company maintains a bank overdraft facility of
$365,000 (in British pounds sterling, based on the exchange rate at December 31, 2008) under an
agreement with Lloyds Bank Plc. There were no borrowings against this facility as of December 31,
2008 or December 31, 2007. The facility is renewed annually on
January 1. The interest rate on the facility was 7.25% at December 31, 2008, and 7.75% at December 31, 2007.
Through the companys German subsidiary, it maintains a credit facility under an agreement with
Sparkasse Neumarkt Bank. This credit facility was put in place to finance the building of offices
in Berching, Germany, which are owned and occupied by the companys German subsidiary. In
November, 2008, the company began discussions with Sparkasse Neumarkt Bank related to the
restructuring of the current credit facility. It was agreed that additional investment in its
German subsidiary would be made in 2009 as a precondition to maintaining the current facility
structure. As of December 31, 2008, the company had borrowings of $299,000 (in Euros, based on the
exchange rate at December 31, 2008) and $368,000 as of December 31, 2007 (in Euros, based on the
exchange rate at December 31, 2007) against this credit facility, due December, 2013. The interest
rate was 5.49% at December 31, 2008 and December 31, 2007. In addition, the companys German
subsidiary has a revolving line of credit for $209,000 (in Euros, based on the exchange rate at
December 31, 2008) with Sparkasse Neumarkt Bank. As of December 31, 2008, there were borrowings
against this facility of $128,000 (in Euros, based on the exchange rate at December 31, 2008),
compared to $186,000 at December 31, 2007 (in Euros, based on the exchange rate at December 31,
2007). The revolving facility is renewed annually on January 1. Interest rates on this line of
credit were 11.00% at December 31, 2008 and 10.75% at December 31, 2007. The $128,000 revolving
line of credit is a current liability.
F-19
Future maturities of remaining borrowings are (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United |
|
|
|
|
|
|
|
Year Ending December 31, |
|
States |
|
|
Germany |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
1,776 |
|
|
$ |
182 |
|
|
$ |
1,958 |
|
2010 |
|
|
|
|
|
|
57 |
|
|
|
57 |
|
2011 |
|
|
|
|
|
|
61 |
|
|
|
61 |
|
2012 |
|
|
|
|
|
|
64 |
|
|
|
64 |
|
2013 |
|
|
|
|
|
|
63 |
|
|
|
63 |
|
|
|
|
|
|
|
|
|
|
|
Total Commitment |
|
$ |
1,776 |
|
|
$ |
427 |
|
|
$ |
2,203 |
|
|
|
|
|
|
|
|
|
|
|
|
8. |
|
Commitments and Contingencies |
The company occupies manufacturing and office facilities under non-cancelable operating leases
expiring through 2017 under which it is responsible for related maintenance, taxes, and insurance.
Minimum lease commitments under the leases are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Lease |
|
|
Sublease |
|
|
Minimum Lease |
|
Ending December 31, |
|
Commitments |
|
|
Payments |
|
|
Commitments |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
838 |
|
|
$ |
(71 |
) |
|
$ |
767 |
|
2010 |
|
|
795 |
|
|
|
(36 |
) |
|
|
759 |
|
2011 |
|
|
272 |
|
|
|
|
|
|
|
272 |
|
2012 |
|
|
49 |
|
|
|
|
|
|
|
49 |
|
2013 2017 |
|
|
190 |
|
|
|
|
|
|
|
190 |
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments |
|
$ |
2,144 |
|
|
$ |
(107 |
) |
|
$ |
2,037 |
|
|
|
|
|
|
|
|
|
|
|
These leases included certain escalation clauses; thus, rent expense was recorded on a
straight-line basis. Consolidated net rent expense was $933,000, $998,000, and $828,000 for the
years ended December 31, 2008, 2007, and 2006, respectively. Beginning in 2006, a portion of our
Solon facility has been subleased. For 2008, 2007, and 2006, the gross rent was reduced by
$71,000, $75,000 and $67,000 of sublease rentals, respectively.
At December 31, 2008, a letter of credit in the amount of $306,000 was held by the company on
behalf of Sparkasse Neumarkt Bank. The letter of credit would be drawn against the companys line
of credit facility with Silicon Valley Bank in the event of a default by the companys German
subsidiary on its outstanding loan with Sparkasse Neumarkt Bank.
Common Stock
The company did not have any notes receivable from shareholders in 2008 or 2007. During 2006, the
company had a shareholder note receivable of $62,000 for warrants exercised in 2005 and paid for in
2006.
The company issued 3,566,440 warrants on March 14, 2008 as part of a private placement equity
financing. Those warrants are fully exercisable and will expire on March 14, 2013. There were no
warrants issued by the company in 2007 and 2006. Warrants were issued in 2000
F-20
as part of acquisitions, and in 2002 and 2003 as part of stock-based financings. There have been no warrants
issued to employees, directors, or consultants for compensation purposes. All warrants are fully
vested and exercisable. The activity relating to previously issued warrants is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants |
|
|
Warrants |
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Outstanding |
|
|
Warrants |
|
|
|
|
|
|
Shares |
|
|
Exercise Price |
|
|
Exercisable |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Balance, December 31, 2005 |
|
|
410,751 |
|
|
$ |
4.30 4.50 |
|
|
|
410,751 |
|
|
$ |
1,837 |
|
Warrants exercised |
|
|
(13,800 |
) |
|
$ |
4.50 |
|
|
|
(13,800 |
) |
|
|
(62 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
|
396,951 |
|
|
$ |
4.30 4.50 |
|
|
|
396,951 |
|
|
$ |
1,775 |
|
Warrants exercised |
|
|
(85,478 |
) |
|
$ |
0.01 5.563 |
|
|
|
(85,478 |
) |
|
|
(295 |
) |
Warrants cancelled |
|
|
(40,274 |
) |
|
$ |
0.01 5.563 |
|
|
|
(40,274 |
) |
|
|
(260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
271,199 |
|
|
$ |
4.30 4.50 |
|
|
|
271,199 |
|
|
$ |
1,220 |
|
Warrants issued |
|
|
3,566,440 |
|
|
$ |
3.08 |
|
|
|
3,566,440 |
|
|
|
10,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
3,837,639 |
|
|
$ |
3.08 4.50 |
|
|
|
3,837,639 |
|
|
$ |
12,205 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1988 Stock Option Plan
Upon adoption of the 1994 Stock Option Plan (see below), the companys Board of Directors
determined to make no further grants under the 1988 Stock Option Plan (the 1988 Plan). Upon
cancellation or expiration of any options granted under the 1988 Plan, the related reserved shares
of common stock became available instead for options granted under the 1994 Stock Option Plan, and,
after May 19, 2004, under our 2004 Stock Incentive Plan.
1994 Directors Stock Option Plan
At December 31, 2004, a total of 400,000 shares of common stock had been reserved for issuance
under the 1994 Directors Stock Option Plan. The plan provided for the granting of non-statutory
stock options to non-employee directors of the company. This plan was terminated on May 19, 2004.
1994 Stock Option Plan
At December 31, 2004, an aggregate of 1,550,000 shares of the companys common stock had been
reserved for issuance and were outstanding under the 1994 Stock Option Plan to employees, officers,
and consultants at prices not lower than the fair market value of the common stock of the company
on the date of grant in the case of incentive stock options and not lower than 85% of the fair
market value on the date of grant in the case of non-statutory stock options. Options granted
could have been either incentive stock options or non-statutory stock options. The plan
administrator (the Board of Directors or a committee of the Board) determined the terms of options
granted under the plan, including the number of shares subject to the option, exercise price, term,
and exercisability. This plan was terminated on May 19, 2004.
2004 Stock Incentive Plan
On May 19, 2004, the shareholders approved the 2004 Stock Incentive Plan (the 2004 Plan). The
stated purpose of the 2004 Plan is to promote the long-term success of the Company and the
creation of stockholder value by (a) encouraging employees, outside directors, and consultants to focus on critical long-range objectives;
(b) encouraging the attraction and retention of employees, outside directors, and consultants with exceptional qualifications; and (c) linking employees,
F-21
outside directors, and consultants directly to stockholder interests through increased stock
ownership. The 2004 Plan seeks to achieve this purpose by providing for awards in the form of
restricted shares, stock units, options (which may constitute incentive stock options or
non-statutory stock options), or stock appreciation rights. An aggregate of 500,000 shares of the
companys common stock was reserved for issuance under the 2004 Plan on May 19, 2004. On June 15,
2006, the shareholders reserved an additional 500,000 shares of the companys common stock for
issuance under the 2004 Plan.
On May 6, 2008, an individual was granted an incentive stock option under the 2004 Plan to purchase
100,000 shares of our common stock at an exercise price of $2.00 per share. At that time, only
59,000 shares were available for grant under the plan. In order to provide enough shares to cover
the grants, the individual was asked to surrender 141,000 shares under an option granted to him on
June 28, 2005 at an exercise price of $9.60 per share. This modification of options required the
company to recognize additional stock-based compensation of $88,000 over the remaining vesting
period of the June 28, 2005 option.
2008 Stock Incentive Plan
On September 30, 2008, the companys shareholders approved its 2008 Incentive Stock Plan. Under
the Plan, the maximum aggregate number of stock options awarded shall not exceed 1,000,000 shares,
plus any shares remaining available for grant under existing plans. Under existing plans, only a
limited number of shares remain available for grant.
Options outstanding under all plans have a contractual life between five and ten years, and vesting
periods between one and four years.
Option activity under all plans comprised (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
Number of |
|
|
Weighted |
|
|
|
Available |
|
|
Shares |
|
|
Average Exercise |
|
|
|
for Grant |
|
|
Outstanding |
|
|
Price Per Share |
|
Balance, December 31, 2005 |
|
|
14 |
|
|
|
1,075 |
|
|
$ |
6.48 |
|
Granted |
|
|
(330 |
) |
|
|
330 |
|
|
$ |
7.12 |
|
Cancelled |
|
|
6 |
|
|
|
(6 |
) |
|
$ |
5.52 |
|
Exercised |
|
|
|
|
|
|
(106 |
) |
|
$ |
5.36 |
|
Additional shares reserved |
|
|
500 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006 |
|
|
190 |
|
|
|
1,293 |
|
|
$ |
7.00 |
|
Granted |
|
|
(259 |
) |
|
|
259 |
|
|
$ |
6.30 |
|
Cancelled |
|
|
136 |
|
|
|
(136 |
) |
|
$ |
6.96 |
|
Exercised |
|
|
|
|
|
|
(140 |
) |
|
$ |
4.66 |
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007 |
|
|
67 |
|
|
|
1,276 |
|
|
$ |
7.07 |
|
Granted |
|
|
(477 |
) |
|
|
477 |
|
|
$ |
1.91 |
|
Cancelled |
|
|
238 |
|
|
|
(238 |
) |
|
$ |
8.22 |
|
Exercised |
|
|
|
|
|
|
(23 |
) |
|
$ |
3.27 |
|
Additional shares reserved |
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008 |
|
|
828 |
|
|
|
1,492 |
|
|
$ |
5.29 |
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008, options to purchase 771,000 shares of common stock were exercisable at a
weighted-average fair value of $2.95. At December 31, 2008, options to purchase 1,492,000 shares
were outstanding, with a weighted-average fair value of $2.40. All options exercised during 2008
had no intrinsic value as the market price per share of common stock at the date of exercise was
below the per share exercise price. All outstanding options, both exercisable and non-exercisable,
have no intrinsic value as the market price per share of common stock of $1.15 at December 31, 2008
was below the per share exercise price of all grants to date.
F-22
At December 31, 2007, options to purchase 801,000 shares of common stock were exercisable at a
weighted-average fair value of $3.41, and a total intrinsic value of $764,000. At December 31,
2007, total outstanding shares were 1,276,000, with a weighted-average fair value of $3.36, and a
total intrinsic value of $1,172,000.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPTIONS CURRENTLY |
OPTIONS OUTSTANDING |
|
EXERCISABLE |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Average |
|
Weighted- |
|
|
Number |
|
Remaining |
|
Weighted |
|
|
|
|
|
Remaining |
|
Average |
Range of |
|
of Shares |
|
Contractual |
|
Average |
|
Number |
|
Contractual |
|
Exercise |
Exercise Prices |
|
Outstanding |
|
Life |
|
Exercise Price |
|
Exercisable |
|
Life |
|
Price |
|
|
(in thousands) |
|
(in years) |
|
|
|
|
|
(in thousands) |
|
(in years) |
|
|
|
|
$1.37 $4.80 |
|
|
666 |
|
|
7.9 |
|
|
$ |
2.45 |
|
|
|
191 |
|
|
3.8 |
|
|
$ |
3.74 |
|
$5.38 $7.19 |
|
|
464 |
|
|
7.7 |
|
|
$ |
6.57 |
|
|
|
258 |
|
|
7.1 |
|
|
$ |
6.72 |
|
$7.23 $9.50 |
|
|
227 |
|
|
6.6 |
|
|
$ |
7.87 |
|
|
|
198 |
|
|
6.4 |
|
|
$ |
7.94 |
|
$9.60 12.00 |
|
|
135 |
|
|
7.7 |
|
|
$ |
10.60 |
|
|
|
124 |
|
|
7.8 |
|
|
$ |
10.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,492 |
|
|
|
|
|
|
|
|
|
|
771 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1994 Employee Stock Purchase Plan
A total of 150,000 shares of common stock had been reserved for issuance under the 1994 Employee
Stock Purchase Plan. The plan permits eligible employees to purchase common stock through payroll
deductions at a price equal to the lower of 85% of the fair market value of the companys common
stock at the beginning or end of the offering period. Employees may end their participation at any
time during the offering period, and participation ends automatically on termination of employment
with the company. On June 15, 2006, the shareholders reserved an additional 50,000 shares of the
companys common stock for issuance under the 1994 Employee Stock Purchase Plan. At December 31,
2008, 2007, and 2006, 103,000 shares, 98,000 shares, and 95,000 shares had been issued under this
plan since inception, respectively.
Shareholder Rights Plan
On September 12, 2001, the Board of Directors declared a dividend distribution of one Right for
each outstanding share of common stock of the company to shareholders of record at the close of
business on September 26, 2002. One Right also will attach to each share of common stock issued by
the company subsequent to such date and prior to the distribution date defined below. With certain
exceptions, each Right, when exercisable, entitles the registered holder to purchase
from the company one one-thousandth of a share of a new series of preferred stock, designated as
Series A Participating Preferred Stock, at a price of $30.00 per one one-thousandth of a share,
subject to adjustment. The Rights were distributed as a non-taxable dividend and expire ten years
from the date of the Rights Plan. In general, the Rights will become exercisable and trade
independently from the common stock on a distribution date that will occur on the earlier of (i)
the public announcement of the acquisition by a person or group of 15% or more of the common stock
or (ii) 10 days after commencement of a tender or exchange offer for the common stock that would
result in the acquisition of 15% or more of the common stock. Upon the occurrence of certain other
events related to changes in ownership of the common stock, each holder of a Right would be
entitled to purchase shares of common stock, or an acquiring corporations common stock, having a
market value of twice the exercise price. Under certain conditions, the Rights may be redeemed at
$0.001 per Right by the Board of Directors.
F-23
The description and terms of the Rights are set forth in a Rights Agreement dated as of September
20, 2002, between the company and Mellon Investor Services LLC, as rights agent. On March 12, 2008,
as part of a private placement of shares of common stock and warrants to a number of existing
shareholders, with the largest portion being purchased by The Quercus Trust of Costa Mesa,
California, the company and Mellon Investor Services LLC amended the agreement to increase the 15%
ceiling noted above to 20% for the Trust and persons who are beneficial owners through the Trust,
without triggering the rights under the agreement.
10. Income Taxes
The company adopted the provisions of FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes an Interpretation of FASB Statement No. 109, on January 1, 2007. FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. Guidance also is
provided on derecognition, classification, interest and penalties, accounting in interim periods,
and disclosure and transition. Based on the companys evaluation, there are no significant
uncertain tax positions requiring recognition in the companys financial statements. There was no
effect on financial condition or results of operations as a result of implementing FIN 48 to all
tax positions for which the statute of limitations remained open, and the company did not have any
unrecognized tax benefits. At December 31, 2008, there have been no changes to the liability for
uncertain tax positions, and there are no unrecognized tax benefits.
The company files income tax returns in the United States federal jurisdiction, as well as in
various states and foreign jurisdictions. With few exceptions, the company is no longer subject to
United States federal, state, and local, or non-United States income tax examinations by tax
authorities for years before 2004.
The companys policy is to reflect interest expense related to uncertain income tax positions as
part of income tax expense, when and if they become applicable.
The components of the benefit from (provision for) income taxes are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Foreign |
|
|
|
|
|
|
(13 |
) |
|
|
(50 |
) |
State |
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6 |
) |
|
|
(13 |
) |
|
|
(50 |
) |
Deferred
Federal |
|
|
238 |
|
|
|
(162 |
) |
|
|
(74 |
) |
Foreign |
|
|
4 |
|
|
|
|
|
|
|
12 |
|
State |
|
|
14 |
|
|
|
(15 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
256 |
|
|
|
(177 |
) |
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
Benefit from (provision for) income taxes |
|
$ |
250 |
|
|
$ |
(190 |
) |
|
$ |
(113 |
) |
|
|
|
|
|
|
|
|
|
|
F-24
The following table shows the geographic components of pretax income (loss) between United States
and foreign subsidiaries (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
United States |
|
$ |
(12,907 |
) |
|
$ |
(10,593 |
) |
|
$ |
(9,510 |
) |
Foreign subsidiaries |
|
|
(1,791 |
) |
|
|
(534 |
) |
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(14,698 |
) |
|
$ |
(11,127 |
) |
|
$ |
(9,537 |
) |
|
|
|
|
|
|
|
|
|
|
The principal items accounting for the difference between income taxes computed at the United
States statutory rate and the benefit from (provision for) income taxes reflected in the statements
of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2008 |
|
2007 |
|
2006 |
United States statutory rate |
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
% |
State Taxes (net of federal tax benefit) |
|
|
|
% |
|
|
1.9 |
% |
|
|
2.0 |
% |
Valuation allowance |
|
|
(31.1 |
)% |
|
|
(38.2 |
)% |
|
|
(39.0 |
)% |
Other |
|
|
(1.2 |
)% |
|
|
0.6 |
% |
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.7 |
% |
|
|
(1.7 |
)% |
|
|
(1.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax
assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Allowance for doubtful accounts |
|
$ |
92 |
|
|
$ |
218 |
|
|
$ |
113 |
|
Accrued expenses and other reserves |
|
|
1,905 |
|
|
|
1,233 |
|
|
|
1,097 |
|
Tax credits, Deferred R&D, and other |
|
|
833 |
|
|
|
202 |
|
|
|
154 |
|
Net operating loss |
|
|
15,807 |
|
|
|
12,413 |
|
|
|
8,328 |
|
Valuation allowance |
|
|
(18,622 |
) |
|
|
(14,054 |
) |
|
|
(9,680 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset |
|
|
15 |
|
|
|
12 |
|
|
|
12 |
|
Deferred tax liabilities associated
with indefinite-lived intangibles |
|
|
|
|
|
|
(252 |
) |
|
|
(75 |
) |
|
|
|
|
|
|
|
|
|
|
Net total deferred taxes |
|
$ |
15 |
|
|
$ |
(240 |
) |
|
$ |
(63 |
) |
|
|
|
|
|
|
|
|
|
|
The company has a full valuation allowance against its United States and German deferred tax
assets. The net deferred tax assets for 2008 amounted to $15,000 and were for the companys United
Kingdom subsidiary, which reported income in 2008 and has been profitable prior to 2007. The net
deferred liabilities were $0 at December 31, 2008, compared to $252,000 at December 31, 2007. The
income tax benefit from the United States operations in 2008 relates to the reversal of the 2007
deferred tax liability of $252,000 for intangibles as a result of the book impairment. There were
no Federal tax expenses for the United States operations in 2008, as any expected benefits were
offset by an increase in the valuation allowance. No tax benefits were recorded for the 2008
German operations loss.
As of December 31, 2008, the company has a net operating loss carry-forward of approximately
$42,800,000 for federal, state and local income tax purposes. If not utilized, these carry-forwards
will begin to expire in 2020 for federal and has begun to expire for state and local purposes.
F-25
Under the Internal Revenue Code Section 382, the amounts of and benefits from net operating losses
carry-forwards may be impaired in certain circumstances. Events that cause limitations in
the
amount of net operating losses that the company may utilize in any one year include, but are not
limited to, a cumulative ownership change of more than 50%, as defined, over a three-year period. A
valuation allowance is recognized if, based on the weight of available evidence, it is more likely
than not that some portion or all of the deferred tax asset will not be realized. A valuation
allowance has been provided because it is more likely than not that the deferred tax assets
relating to certain of the federal and state loss carry-forwards will not be realized.
11. Segments and Geographic Information
The company has two primary product lines: the pool lighting product line and the commercial
lighting product line, each of which markets and sells fiber optic lighting products. The company
markets its products for worldwide distribution primarily through independent sales
representatives, distributors and contractors in North America, Europe and the Far East.
A summary of geographic sales is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
United States Domestic |
|
$ |
12,902 |
|
|
$ |
14,949 |
|
|
$ |
18,776 |
|
Other Countries |
|
|
10,048 |
|
|
|
7,949 |
|
|
|
8,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,950 |
|
|
$ |
22,898 |
|
|
$ |
27,036 |
|
|
|
|
|
|
|
|
|
|
|
A summary of sales by product line is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Pool Lighting |
|
$ |
7,204 |
|
|
$ |
11,002 |
|
|
$ |
13,364 |
|
Commercial Lighting |
|
|
15,746 |
|
|
|
11,896 |
|
|
|
13,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
22,950 |
|
|
$ |
22,898 |
|
|
$ |
27,036 |
|
|
|
|
|
|
|
|
|
|
|
A summary of geographic long-lived assets (fixed assets) is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
United States Domestic |
|
$ |
3,726 |
|
|
$ |
7,791 |
|
Germany |
|
|
540 |
|
|
|
1,773 |
|
Other Countries |
|
|
193 |
|
|
|
111 |
|
|
|
|
|
|
|
|
|
|
$ |
4,459 |
|
|
$ |
9,675 |
|
|
|
|
|
|
|
|
12. Employee Retirement Plan
The company maintains a 401(k) profit-sharing plan for its employees who meet certain
qualifications. The Plan allows eligible employees to defer up to 15% of their earnings, not to
exceed the statutory amount per year on a pretax basis, through contributions to the Plan. The Plan
provides for employer contributions at the discretion of the Board of Directors; however, no such
contributions were made in 2008, 2007, or 2006.
F-26
13. Reorganization and Restructuring
On May 8, 2007, Energy Focus, Inc., a wholly owned subsidiary of Fiberstars, Inc., was merged into
Fiberstars, Inc. As a result of this merger, the name of Fiberstars,
Inc. was changed to Energy
Focus, Inc. Existing certificates for shares of the company, bearing the name Fiberstars, Inc.,
will continue to be valid certificates for Energy Focus, Inc., and no action is required by the
shareholders as a result of the name change.
During 2007, the company moved the fiber production operation from Mexico to Solon, Ohio. The cost
associated with this move was $456,000.
During 2006, the company charged to operations $734,000 for costs associated with moving its
operations from Fremont, California to Solon, Ohio.
14. Related Party Transactions
The company entered into a consulting agreement with Jeffrey H. Brite, a member of its Board of
Directors, on November 1, 2004. This agreement ended on March 7, 2007, upon Jeffrey H. Brites
resignation as a member of the Board of Directors. As a consultant under this agreement, Mr. Brite
assisted the company in various capacities. In return, the company compensated Mr. Brite with the
award of an option for the acquisition of up to 40,000 shares of its common stock at a per-share
exercise price of $7.23, which was expensed during 2004, and with annual aggregate cash payments of
$50,000 paid in quarterly installments during each of the years 2005, 2006, and part of 2007. No
expenses were recorded during the twelve months ending December 31, 2008, nor were any payments
made to Mr. Brite. Payments for the twelve months ending December 31, 2007, were $13,690, compared
to $50,000 in 2006.
Gensler Architecture, Design, and Planning, P.C., a New York professional corporation (Gensler),
provided contract services to the company in the areas of fixture design and marketing, targeted at
expanding the market for the companys EFOTM products. Mr. Jeffrey Brite, an employee
of Gensler, was a member of the companys Board of Directors through March 7, 2007. The company had
entered into a three-year consulting agreement with Gensler, effective December 15, 2004. Gensler
agreed to assist the companys marketing group with matters of structure, procedure and practices
as they relate to the design, real estate, and procurement communities, and advise the company on
strategies to enhance its visibility and image within the design and construction community as a
manufacturer of preferred technology. In return, the company compensated Gensler with a one-time cash payment in 2005 of $60,750 and a
$50,000 annual cash payment paid in quarterly installments of $12,500 in arrears for each of the
calendar years 2005, 2006, and part of 2007. Also, there was a one-time option award for acquiring
up to 75,000 shares of the companys common stock at a per-share exercise price of $6.57, which was
expensed in 2006 under FAS 123(R). No payments were made in the fourth quarter of 2007 to Gensler,
but the company accrued expenses of $12,500, which were paid during the first quarter of 2008.
Payments total $37,500 for the twelve months ending December 31, 2007, compared to $50,000 in 2006.
On February 3, 2006, the company had entered into a consulting agreement with David Ruckert, a
member of its Board of Directors. Mr. Ruckert was paid $76,000 during the year ending December 31,
2007 and $110,000 during the year ending December 31, 2006 under this agreement. This agreement
was terminated on June 30, 2007. No payments were made to Mr. Ruckert during the twelve months
ending December 31, 2008. Additionally, Mr. Ruckert was granted options to purchase 32,000 shares
of the companys common stock. Stock expense incurred under FAS 123(R) related to these options
was $30,000 during the year ending December 31, 2008, compared to $30,000 during 2007, and $15,000
during 2006.
F-27
On October 19, 2007, the company entered into a management agreement with Barry Greenwald, former
General Manager of its Pool Lighting Division. Under this agreement, the company was to pay Mr.
Greenwald nonrefundable amounts totaling $309,000 of additional compensation, of which $77,000 was
paid on November 1, 2007, and $77,000 was paid on March 14, 2008. Upon Mr. Greenwalds termination
on January 17, 2008, the balance of $155,000 would have been paid in 36 monthly installments
commencing on January 1, 2009, subject to certain conditions being met by Mr. Greenwald. Mr.
Greenwald failed to meet these certain conditions, so the accrued liability of $155,000 was
reversed during the twelve months ending December 31, 2008.
On March 14, 2008, the company received an additional $9,335,000 in equity financing, net of
expenses. The investment was made by several current Energy Focus shareholders, including four
members of the Board of Directors. These investors agreed to an at-market purchase of approximately
3.1 million units for $3.205 per unit, based on the closing bid price of Energy Focus common shares
on March 13, 2008 of $3.08. Each unit comprises one share of the Companys common stock, par value
$0.0001 per share, and one warrant to purchase one share of the Companys common stock at an
exercise price of $3.08 per share. The warrants were immediately separable from the units and
immediately exercisable, and will expire five years after the date of their issuance. This
additional financing is being used to fund working capital, pay debt and perform additional
research and development. The company received 100% of the funds from escrow on March 17, 2008.
Among the investors were Ronald A. Casentini, John M. Davenport, John B. Stuppin, and Philip
Wolfson, all of whom were members of our Board of Directors, at the time of the transaction, and
who invested approximately $100,000 in the aggregate.
Supplementary Financial Information to Item 8
The following table sets forth our selected unaudited financial information for the eight quarters
in the period ended December 31, 2008. This information has been prepared on the same basis as the
audited financial statements and, in the opinion of management, contains all adjustments necessary
for a fair presentation thereof.
Any variations from year to date amounts reported in this report are a result of rounding.
QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 QUARTERS ENDED |
|
DEC. 31 |
|
|
SEP. 30 |
|
|
JUN. 30 |
|
|
MAR. 31 |
|
Net sales |
|
$ |
4,140 |
|
|
$ |
6,357 |
|
|
$ |
7,616 |
|
|
$ |
4,837 |
|
Gross profit |
|
|
(494 |
) |
|
|
2,310 |
|
|
|
2,443 |
|
|
|
1,244 |
|
As a percent of net sales |
|
|
(11.9 |
)% |
|
|
36.3 |
% |
|
|
32.1 |
% |
|
|
25.7 |
% |
Net loss |
|
|
(7,776 |
) |
|
|
(1,584 |
) |
|
|
(1,639 |
) |
|
|
(3,449 |
) |
As a percent of net sales |
|
|
(187.8 |
)% |
|
|
(24.9 |
)% |
|
|
(21.5 |
)% |
|
|
(71.3 |
)% |
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.52 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.28 |
) |
Diluted |
|
$ |
(0.52 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.28 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 QUARTERS ENDED |
|
DEC. 31 |
|
|
SEP. 30 |
|
|
JUN. 30 |
|
|
MAR. 31 |
|
Net sales |
|
$ |
5,440 |
|
|
$ |
5,745 |
|
|
$ |
6,704 |
|
|
$ |
5,009 |
|
Gross profit |
|
|
544 |
|
|
|
1,988 |
|
|
|
2,280 |
|
|
|
1,470 |
|
As a percent of net sales |
|
|
10.0 |
% |
|
|
34.6 |
% |
|
|
34.0 |
% |
|
|
29.4 |
% |
Net loss |
|
|
(3,666 |
) |
|
|
(3,175 |
) |
|
|
(1,870 |
) |
|
|
(2,606 |
) |
As a percent of net sales |
|
|
(67.4 |
)% |
|
|
(55.3 |
)% |
|
|
(27.9 |
)% |
|
|
(52.0 |
)% |
Net loss per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(0.31 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.23 |
) |
Diluted |
|
$ |
(0.31 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.23 |
) |
F-28
ENERGY FOCUS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,613 |
|
|
$ |
10,568 |
|
Accounts receivable trade, net |
|
|
1,903 |
|
|
|
2,668 |
|
Inventories, net |
|
|
4,928 |
|
|
|
5,539 |
|
Prepaid and other current assets |
|
|
300 |
|
|
|
276 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
12,744 |
|
|
|
19,051 |
|
Fixed assets net |
|
|
3,582 |
|
|
|
4,459 |
|
Other assets |
|
|
102 |
|
|
|
142 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
16,428 |
|
|
$ |
23,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,222 |
|
|
$ |
2,767 |
|
Accrued liabilities |
|
|
1,186 |
|
|
|
1,621 |
|
Deferred revenue |
|
|
216 |
|
|
|
191 |
|
Credit line borrowings |
|
|
1,776 |
|
|
|
1,904 |
|
Current portion of long-term bank borrowings |
|
|
|
|
|
|
54 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
4,400 |
|
|
|
6,537 |
|
|
|
|
|
|
|
|
|
|
Other deferred liabilities |
|
|
67 |
|
|
|
81 |
|
Long-term bank borrowings |
|
|
71 |
|
|
|
245 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
4,538 |
|
|
|
6,863 |
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Preferred stock, par value $0.0001 per share: |
|
|
|
|
|
|
|
|
Authorized: 2,000,000 shares in 2009 and 2008 |
|
|
|
|
|
|
|
|
Issued and outstanding: no shares in 2009 and 2008 |
|
|
|
|
|
|
|
|
Common stock, par value $0.0001 per share: |
|
|
|
|
|
|
|
|
Authorized: 30,000,000 shares in 2009 and 2008 |
|
|
|
|
|
|
|
|
Issued and outstanding: 15,079,000 in 2009 and 14,835,000 in 2008 |
|
|
1 |
|
|
|
1 |
|
Additional paid-in capital |
|
|
66,238 |
|
|
|
65,865 |
|
Accumulated other comprehensive income |
|
|
369 |
|
|
|
251 |
|
Accumulated deficit |
|
|
(54,718 |
) |
|
|
(49,328 |
) |
Total shareholders equity |
|
|
11,890 |
|
|
|
16,789 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
16,428 |
|
|
$ |
23,652 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-29
ENERGY FOCUS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net sales |
|
$ |
3,815 |
|
|
$ |
7,616 |
|
|
$ |
6,620 |
|
|
$ |
12,453 |
|
Cost of sales |
|
|
3,016 |
|
|
|
5,173 |
|
|
|
5,503 |
|
|
|
8,766 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
799 |
|
|
|
2,443 |
|
|
|
1,117 |
|
|
|
3,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
253 |
|
|
|
192 |
|
|
|
483 |
|
|
|
593 |
|
Sales and marketing |
|
|
1,650 |
|
|
|
2,712 |
|
|
|
3,530 |
|
|
|
5,590 |
|
General and administrative |
|
|
1,202 |
|
|
|
1,182 |
|
|
|
2,426 |
|
|
|
2,552 |
|
Loss on impairment of assets |
|
|
165 |
|
|
|
|
|
|
|
165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
3,270 |
|
|
|
4,086 |
|
|
|
6,604 |
|
|
|
8,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(2,471 |
) |
|
|
(1,643 |
) |
|
|
(5,487 |
) |
|
|
(5,048 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
|
|
146 |
|
|
|
30 |
|
|
|
147 |
|
|
|
32 |
|
Interest expense |
|
|
(24 |
) |
|
|
14 |
|
|
|
(50 |
) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(2,349 |
) |
|
|
(1,599 |
) |
|
|
(5,390 |
) |
|
|
(5,008 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
|
|
|
|
(40 |
) |
|
|
|
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,349 |
) |
|
$ |
(1,639 |
) |
|
$ |
(5,390 |
) |
|
$ |
(5,088 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted |
|
$ |
(0.16 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.36 |
) |
|
$ |
(0.38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing net loss per
share basic and diluted |
|
|
14,915 |
|
|
|
14,830 |
|
|
|
14,877 |
|
|
|
13,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-30
ENERGY FOCUS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net loss |
|
$ |
(2,349 |
) |
|
$ |
(1,639 |
) |
|
$ |
(5,390 |
) |
|
$ |
(5,088 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
162 |
|
|
|
7 |
|
|
|
118 |
|
|
|
166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(2,187 |
) |
|
$ |
(1,632 |
) |
|
$ |
(5,272 |
) |
|
$ |
(4,922 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-31
ENERGY FOCUS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,390 |
) |
|
$ |
(5,088 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Loss on impairment of assets |
|
|
165 |
|
|
|
|
|
Depreciation |
|
|
540 |
|
|
|
621 |
|
Stock-based compensation |
|
|
364 |
|
|
|
433 |
|
Provision for doubtful accounts receivable |
|
|
(98 |
) |
|
|
(266 |
) |
Deferred taxes |
|
|
|
|
|
|
80 |
|
Deferred revenue |
|
|
25 |
|
|
|
(41 |
) |
Loss on disposal of fixed assets |
|
|
14 |
|
|
|
1 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
931 |
|
|
|
(583 |
) |
Inventories |
|
|
755 |
|
|
|
466 |
|
Prepaid and other current assets |
|
|
(19 |
) |
|
|
(13 |
) |
Other assets |
|
|
39 |
|
|
|
(58 |
) |
Accounts payable |
|
|
(1,563 |
) |
|
|
177 |
|
Accrued liabilities |
|
|
(465 |
) |
|
|
213 |
|
|
|
|
|
|
|
|
Total adjustments |
|
|
688 |
|
|
|
1,030 |
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(4,702 |
) |
|
|
(4,058 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from disposal of fixed assets |
|
|
346 |
|
|
|
|
|
Acquisition of fixed assets |
|
|
(177 |
) |
|
|
(298 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
169 |
|
|
|
(298 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Cash proceeds from issuances of common stock, net |
|
|
10 |
|
|
|
9,335 |
|
Cash proceeds from exercise of stock options |
|
|
|
|
|
|
130 |
|
Proceeds from credit line borrowings |
|
|
1,904 |
|
|
|
1,968 |
|
Payments of credit line borrowings |
|
|
(2,027 |
) |
|
|
(2,813 |
) |
Proceeds from long-term bank borrowings |
|
|
70 |
|
|
|
|
|
Payments of short and long-term bank borrowings |
|
|
(288 |
) |
|
|
(358 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(331 |
) |
|
|
8,262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(91 |
) |
|
|
(69 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(4,955 |
) |
|
|
3,837 |
|
Cash and cash equivalents, beginning of period |
|
|
10,568 |
|
|
|
8,412 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
5,613 |
|
|
$ |
12,249 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
F-32
ENERGY FOCUS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2009
(Unaudited)
1. Nature of Operations
Energy Focus, Inc. and subsidiaries (the company) design, develop, manufacture, and market
lighting systems and customer specific energy efficient lighting solutions for a wide-range of use
in both the general commercial market and the pool market. The companys lighting technology offers
significant energy savings, heat dissipation, and maintenance cost benefits over conventional
lighting for multiple applications. The companys solutions include fiber optic (EFO),
light-emitting diode (LED), ceramic metal halide (CMH), high-intensity discharge (HID), and
other highly energy efficient lighting technologies. The companys strategy also incorporates
continued investment into researching new and emerging energy sources including, but not limited
to, solar energy for both the public and private sectors. Typical savings of current technology
average 80% in electricity costs, while providing full-spectrum light closely simulating daylight
colors.
2. Summary of Significant Accounting Policies
The significant accounting policies of the company, which are summarized below, are consistent with
generally accepted accounting principles and reflect practices appropriate to the business in which
it operates.
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 and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Estimates
include, but are not limited to, the establishment of reserves for accounts receivable, sales
returns, inventory obsolescence, and warranty claims; the useful lives for property, equipment, and
intangible assets; and stock-based compensation. Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to be consistent with the current year
presentation.
Basis of Presentation
The consolidated financial statements (financial statements) include the accounts of the company
and its subsidiaries, Crescent Lighting Limited (CLL) located in the United Kingdom and LBM
Lichtleit-Fasertechnik (LBM) located in Germany. All significant inter-company balances and
transactions have been eliminated.
Interim Financial Statements (unaudited)
Although unaudited, the interim financial statements in this report reflect all adjustments,
consisting only of all normal recurring adjustments, which are, in the opinion of management,
necessary for a fair statement of financial position, results of operations and cash flows for the
interim periods covered and of the
financial condition of the company at the interim balance sheet date. The results of operations for
the interim periods presented are not necessarily indicative of the results expected for the entire
year.
F-33
Year-end Balance Sheet
The year-end balance sheet information was derived from audited financial statements but does not
include all disclosures required by generally accepted accounting principles. These financial
statements should be read in conjunction with the companys audited financial statements and notes
thereto for the year ended December 31, 2008, which are contained in the companys 2008 Annual
Report on Form 10-K.
Foreign Currency Translation
The companys international subsidiaries use their local currencies as their functional currencies.
For those subsidiaries, assets and liabilities are translated at exchange rates in effect at the
balance sheet date and income and expense accounts are translated at average exchange rates during
the year. Resulting translation adjustments are recorded directly to accumulated comprehensive
income as a component of shareholders equity. Foreign currency transaction gains and losses are
included as a component of other income and expense. Gains and losses from foreign currency
translation are included as a separate component of comprehensive income (expense) within the
consolidated statement of comprehensive income (loss).
Liquidity
The company has continued to incur losses which have been attributable to operational performance,
restructuring, and miscellaneous non-cash charges. This trend has, in turn, led to negative cash
flows and ongoing bank debt compliance violations. The company has managed its liquidity during
this period through a series of previously announced cost reduction initiatives, bank debt
restructuring, and certain asset disposals. However, the ongoing global financial crisis has
continued to have a dramatic effect on the companys industry and customer base. Further, the
ongoing recession in the United States and Western Europe, combined with the slowdown of economic
growth in the rest of the world, continues to foster a business environment where it is extremely
difficult and costly to obtain either equity or non-equity financing. This environment has also
increased the potential for customer payment defaults. The companys liquidity position, as well as
its operating performance, has been negatively affected by these economic and industry conditions
and by other financial and business factors, many of which are beyond its control.
Management acknowledges that the level of negative cash utilization experienced during the six
months ended June 30, 2009, if sustained, could result in the insolvency of the company in 2009
without the infusion of additional equity or non-equity financing. Therefore, the company is
aggressively pursuing all of the following sources for working capital funding:
|
|
|
obtain loans from various financial institutions, |
|
|
|
|
obtain loans from one or more non-traditional investment capital organizations, |
|
|
|
|
sale and/or disposition of one or more operating units, and |
|
|
|
|
obtain funding from the sale of the companys common stock or other equity instruments. |
Obtaining financing through the above mentioned mechanisms contain risks, including:
|
|
|
loans or other debt instruments may have terms and/or conditions, such
as interest rate, restrictive covenants, and control or revocation
provisions, which are not acceptable to management or our Board of
Directors, |
|
|
|
|
the current global economic crisis combined with our current financial
condition may prevent us from being able to obtain any debt financing, |
|
|
|
|
financing may not be available for parties interested in pursuing the
acquisition of one or more of our operating units, and |
|
|
|
|
additional equity financing may not be available to us in the current
economic environment and could lead to further dilution of shareholder
value for current shareholders of record. |
F-34
The company continues to aggressively reduce costs, as evidenced in the $2,296,000 decrease in
operating expenses, net of a non-cash loss on impairment of fixed assets of $165,000, for the six
months ended June 30, 2009, as compared to the six months ended June 30, 2008. The companys cash
utilization was $1,187,000 for the three months ended June 30, 2009; a 54.2% decrease compared to
the cash utilization for the three months ended June 30, 2008 of $2,589,000. Management continues
to execute further cost reductions and organizational realignments in an effort to sustain the
companys ongoing viability throughout the remainder of 2009.
Earnings (Loss) per Share
Basic loss per share is computed by dividing net loss available to common shareholders by the
weighted average of common shares outstanding for the period. Diluted loss per share is computed
giving effect to all dilutive potential common shares outstanding during the period. Dilutive
potential common shares consist of incremental shares upon exercise of stock options and warrants,
unless the effect would be anti-dilutive.
A reconciliation of the numerator and denominator of basic and diluted loss per share is provided
as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Numerator basic and diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,349 |
) |
|
$ |
(1,639 |
) |
|
$ |
(5,390 |
) |
|
$ |
(5,088 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator basic and diluted loss per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
14,915 |
|
|
|
14,830 |
|
|
|
14,877 |
|
|
|
13,521 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(0.16 |
) |
|
$ |
(0.11 |
) |
|
$ |
(0.36 |
) |
|
$ |
(0.38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2009, options and warrants to purchase 5,734,000 shares of common stock were
outstanding, but were not included in the calculation of diluted net loss per share because their
inclusion would have been anti-dilutive. Options and warrants to purchase 5,106,000 shares of
common stock were outstanding at June 30, 2008, but were not included in the calculation of diluted
net loss per share because their inclusion would have been anti-dilutive.
Stock-Based Compensation
The companys stock-based compensation plans are described in detail in its Annual Report on Form
10-K for the year ended December 31, 2008.
For the three and six months ended June 30, 2009, the company recorded compensation expense of
$168,000 and $364,000, respectively, compared to $214,000 and $433,000 for the three and six months
ended June 30, 2008. Total unearned compensation of $1,152,000 remains at June 30, 2009 compared to
$1,363,000 at June 30, 2008. These costs will be charged to expense, amortized on a straight line
basis, in future periods through 2013. The remaining weighted average life of the outstanding
options is approximately 1.8 years.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes
option pricing model. Estimates utilized in the calculation include the expected life of option,
risk-free interest rate, and volatility, and are further comparatively detailed below. During the
six months ended June 30, 2009, the company granted 465,000 stock options compared to the 225,000
granted during the six months ended June 30, 2008.
F-35
The fair value of each option grant and stock purchase plan grant combined is estimated on the date
of grant using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in the six months ended June 30, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Six months ended |
|
|
June 30, |
|
|
2009 |
|
2008 |
Fair value of options issued |
|
$ |
0.48 |
|
|
$ |
1.20 |
|
Exercise price |
|
$ |
0.79 |
|
|
$ |
2.32 |
|
Expected life of option |
|
4.0 years |
|
|
4.0 years |
|
Risk-free interest rate |
|
|
1.70 |
% |
|
|
2.83 |
% |
Expected volatility |
|
|
84.05 |
% |
|
|
66.40 |
% |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
On May 29, 2009, the companys five senior executive officers agreed to accept voluntary salary
reductions for the remainder of the 2009 calendar year in exchange for the issuance of restricted
shares of common stock as authorized under the companys 2008 Stock Incentive Plan. Two other key
executives of the company also accepted salary reductions for the balance of the year in exchange
for restricted shares. Each officer and key executive voluntarily accepted a ten percent (10%)
salary reduction for the remainder of 2009, except for one officer who voluntarily accepted a forty
percent (40%) decrease for the remainder of 2009. The number of restricted shares of common stock
issued to each officer and executive was equal to the dollar value of the individuals salary
reduction divided by the closing price per share of the companys common stock on May 29, 2009. The
total number of restricted shares of common stock issued to these officers and executives was
209,000. The company reserves the right to extend these salary reductions into the 2010 calendar
year and beyond.
On May 29, 2009, two members of the companys Board of Directors also voluntarily relinquished
their directors fee for the balance of 2009 in exchange for restricted shares of common stock on
the same terms as the shares granted to the officers. The number of restricted shares of common
stock issued to each director was equal to the dollar value of the individuals relinquished
directors fee divided by the closing price per share of the companys common stock on May 29,
2009. The total number of restricted shares of common stock issued to these directors was 19,000.
Product Warranties
The company warrants finished goods against defects in material and workmanship under normal use
and service for periods of one to three years. Settlement costs consist of actual amounts expensed
for warranty service, which are largely a result of third party service calls, and costs of
replacement products. A liability for the estimated future costs under product warranties is
maintained for products outstanding under warranty (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Balance at the beginning of the period |
|
$ |
289 |
|
|
$ |
190 |
|
|
$ |
292 |
|
|
$ |
212 |
|
Accruals for warranties issued |
|
|
34 |
|
|
|
85 |
|
|
|
58 |
|
|
|
138 |
|
Settlements made during the period
(in cash or in kind) |
|
|
(192 |
) |
|
|
(85 |
) |
|
|
(219 |
) |
|
|
(160 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period |
|
$ |
131 |
|
|
$ |
190 |
|
|
$ |
131 |
|
|
$ |
190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
3. Inventories
Inventories are stated at the lower of standard cost (which approximates actual cost determined
using the first-in, first-out cost method) or market and consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Raw materials |
|
$ |
3,410 |
|
|
$ |
4,738 |
|
Inventory reserve |
|
|
(1,527 |
) |
|
|
(1,795 |
) |
Finished goods |
|
|
3,045 |
|
|
|
2,596 |
|
|
|
|
|
|
|
|
|
|
$ |
4,928 |
|
|
$ |
5,539 |
|
|
|
|
|
|
|
|
4. Fixed Assets
Fixed assets are stated at cost and are depreciated using the straight-line method over the
estimated useful lives of the related assets and consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Equipment (useful life 3 - 15 years) |
|
$ |
8,544 |
|
|
$ |
8,632 |
|
Tooling (useful life 2 - 5 years) |
|
|
2,630 |
|
|
|
2,752 |
|
Furniture and fixtures (useful life 5 years) |
|
|
230 |
|
|
|
200 |
|
Computer software (useful life 3 years) |
|
|
470 |
|
|
|
483 |
|
Leasehold improvements (the shorter of useful life or lease life) |
|
|
885 |
|
|
|
1,639 |
|
Construction in progress |
|
|
2 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
12,761 |
|
|
|
13,766 |
|
Less: accumulated depreciation |
|
|
(9,179 |
) |
|
|
(9,307 |
) |
|
|
|
|
|
|
|
|
|
$ |
3,582 |
|
|
$ |
4,096 |
|
|
|
|
|
|
|
|
5. Long-Term Borrowings
The companys bank line of credit in the United States is based on an agreement with Silicon Valley
Bank (SVB) dated October 15, 2008, modified effective January 31, 2009 and June 12, 2009, and
further modified effective July 22, 2009, as defined below. At June 30, 2009, this agreement
provided for a $2,000,000 revolving line of credit, renewable on a month-to-month basis. The amount
of borrowings available to the company is the lesser of $2,000,000 or 75% of eligible accounts
receivable, as defined by the agreement.
Borrowings under this agreement are collateralized by the companys assets, including intellectual
property, and bear interest at the SVB Prime Rate plus 1.50%, as of June 30, 2009. If the company
terminates the facility prior to maturity, it will be required to pay a 1.00% termination fee. The
company is required to maintain all of its cash and cash equivalents in operating and investment
accounts with SVB and its affiliates. The company is also required to comply with certain covenant
requirements, including a tangible net worth covenant. As of June 30, 2009, the company is not in
compliance with this financial covenant as defined by the original credit agreement. The interest
rate at June 30, 2009 was 5.50% and 5.00% at December 31, 2008. Borrowings under the revolving line
of credit were $1,776,000 at June 30, 2009 and December 31, 2008. Available borrowings under this
revolving line of credit were $256,000 at June 30, 2009 and $263,000 at December 31, 2008. The
revolving line of credit borrowings are recorded in the consolidated balance sheets as a current
liability.
Effective January 31, 2009, the company entered into a First Loan Modification and Forbearance
Agreement with SVB which modified the one year credit agreement entered into on October 15, 2008.
This
modification to the terms of the 2008 credit agreement states that borrowings bear interest at the
SVB Prime Rate plus 1.50%. SVB also agreed to forebear from exercising its rights and remedies
against the company as a result of violating its tangible net worth covenant as of December 31,
2008. This forbearance expired on February 15, 2009.
F-37
Effective June 12, 2009, the company entered into a Second Loan Modification and Forbearance
Agreement with SVB which further modified the one year credit agreement entered into on October 15,
2008, and modified January 31, 2009. This second modification to the terms of the 2008 credit
agreement states that borrowings bear interest at the SVB Prime Rate plus 1.50% through June 30,
2009. Beginning July 1, 2009 through, and including, September 30, 2009, borrowings bear interest
at the SVB Prime Rate plus 2.00%. Beginning October 1, 2009 and thereafter, borrowings bear
interest at the SVB Prime Rate plus 3.00%. While the company remained in violation of its tangible
net worth covenant, the company and SVB continued to cooperate to restructure the existing bank
line of credit. In addition, SVB agreed to forebear from exercising its rights and remedies against
the company as a result of violating its tangible net worth covenant as of June 30, 2009. This
forbearance expired on June 30, 2009.
Effective July 22, 2009, the company entered into a Third Loan Modification and Forbearance
Agreement with SVB which modifies the one year credit agreement entered into on October 15, 2008,
and modified effective January 31, 2009 and June 12, 2009. This third modification to the terms of
the 2008 credit agreement revised the amount of borrowings available to the company to be the
lesser of $2,000,000 or the sum of (i) 75% of eligible accounts receivable, and (ii) other cash
equivalents on deposit with SVB. While the company remained in violation of its tangible net worth
covenant, the company and SVB continued to cooperate to restructure the existing bank line of
credit. In addition, SVB agreed to forebear from exercising its rights and remedies against the
company as a result of violating its tangible net worth covenant as of July 31, 2009. This
forbearance was due to expire on July 31, 2009.
SVB has informed the company that it does not intend to renew the companys line of credit when it
expires on October 15, 2009. The company is actively engaged in discussions with other potential
financing sources to replace the SVB line of credit and is currently reviewing credit agreement
proposals it has received from selected financial institutions.
On May 27, 2009, the company entered into a Promissory Note (Note) with The Quercus Trust (The
Trust) in the amount of $70,000. Under the terms of this Note, the company agrees to pay The Trust
the principal sum of the Note and interest accruing at a yearly rate of 1.00% in one lump sum
payment on or before June 1, 2109. The company received the funds on June 9, 2009.
Through the companys United Kingdom subsidiary, the company maintains a bank overdraft facility of
$415,000 (in British pounds sterling, based on the exchange rate at June 30, 2009) under an
agreement with Lloyds Bank Plc. There were no borrowings against this facility as of June 30, 2009
or December 31, 2008. This facility is renewed annually on January 1. The interest rate on the
facility was 2.75% at June 30, 2009, and 7.25% at December 31, 2008.
Through the companys German subsidiary, the company maintained a credit facility under an
agreement with Sparkasse Neumarkt Bank. This credit facility was put in place to finance the
building of offices in Berching, Germany, which were owned and occupied by the companys German
subsidiary. In June, 2009, the company paid, in its entirety, the balance due on the credit
facility with proceeds received from the sale of the office building in Berching, Germany.
Borrowings against this facility were $299,000 at December 31, 2008 (in Euros, based on the
exchange rate at December 31, 2008). The interest rate was 5.49% at December 31, 2008.
In addition, the companys German subsidiary has a revolving line of credit with Sparkasse Neumarkt
Bank. As of June 30, 2009, there were no borrowings against this line of credit and borrowings of
$128,000 (in Euros, based on the exchange rate at December 31, 2008) at December 31, 2008. This
revolving facility is renewed annually on January 1. The interest rate on this line of credit was
11.00% at December 31, 2008.
F-38
Future maturities of remaining borrowings are (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
United States |
|
|
|
|
|
|
Credit Line |
|
|
Long-Term |
|
|
|
|
Year ending June 30, |
|
Borrowings |
|
|
Borrowings |
|
|
Total |
|
2010 |
|
$ |
1,776 |
|
|
$ |
|
|
|
$ |
1,776 |
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
2015 and thereafter |
|
|
|
|
|
|
71 |
|
|
|
71 |
|
|
|
|
|
|
|
|
|
|
|
Total commitment |
|
$ |
1,776 |
|
|
$ |
71 |
|
|
$ |
1,847 |
|
|
|
|
|
|
|
|
|
|
|
6. Comprehensive Operations
Comprehensive income (loss) is defined as net income (loss) plus sales, expenses, gains and losses
that, under generally accepted accounting principles, are included in comprehensive income (loss)
but excluded from net income (loss). A separate statement of comprehensive loss has been presented
with this report.
7. Segments and Geographic Information
The company has two primary product lines: pool lighting and general commercial lighting, each of
which markets and sells lighting systems and customer specific energy efficient lighting solutions.
The company markets its products and solutions for worldwide distribution through a combination of
direct sales employees, independent sales representatives, and various distributors in different
geographic markets throughout the world.
A summary of sales by geographic area is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
United States Domestic |
|
$ |
2,495 |
|
|
$ |
4,447 |
|
|
$ |
4,089 |
|
|
$ |
7,027 |
|
Other Countries |
|
|
1,320 |
|
|
|
3,169 |
|
|
|
2,531 |
|
|
|
5,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,815 |
|
|
$ |
7,616 |
|
|
$ |
6,620 |
|
|
$ |
12,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of sales by product line is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Pool Lighting |
|
$ |
1,375 |
|
|
$ |
2,740 |
|
|
$ |
2,046 |
|
|
$ |
4,347 |
|
Commercial Lighting |
|
|
2,440 |
|
|
|
4,876 |
|
|
|
4,574 |
|
|
|
8,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,815 |
|
|
$ |
7,616 |
|
|
$ |
6,620 |
|
|
$ |
12,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-39
A summary of long-lived geographic assets (fixed assets) is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
United States Domestic |
|
$ |
3,364 |
|
|
$ |
3,726 |
|
Germany |
|
|
38 |
|
|
|
540 |
|
Other Countries |
|
|
180 |
|
|
|
193 |
|
|
|
|
|
|
|
|
|
|
$ |
3,582 |
|
|
$ |
4,459 |
|
|
|
|
|
|
|
|
8. Income Taxes
At June 30, 2009, we have recorded a full valuation allowance against the companys deferred tax
assets in the United States and Germany, due to uncertainties related to its ability to utilize its
deferred tax assets, primarily consisting of certain net operating losses carried forward. The
valuation allowance is based upon the companys estimates of taxable income by jurisdiction and the
period over which its deferred tax assets will be recoverable.
9. Related Party Transactions
On February 3, 2006, the company had entered into a consulting agreement with David Ruckert, a
member of its Board of Directors. This agreement was terminated on June 30, 2007. No payments were
made during the three months ending June 30, 2009 or June 30, 2008. Additionally, Mr. Ruckert was
granted options to purchase 32,000 shares of the companys common stock. Stock expense incurred
under FAS 123(R) related to these options was $7,000 and $15,000 for the three and six months ended
June 30, 2009, respectively, and $7,000 and $15,000 for the three and six months ended June 30,
2008.
On October 19, 2007, the company entered into a management agreement with Barry Greenwald, General
Manager of its Pool Lighting Division. Per this agreement, the company was to pay Mr. Greenwald
nonrefundable amounts totaling $309,000 of additional compensation, of which $77,000 was paid on
November 1, 2007. Upon Mr. Greenwalds termination on January 21, 2008, the company incurred an
expense of $232,000, of which $77,000 was paid on March 14, 2008.
On March 14, 2008, the company received an additional $9,335,000 in equity financing, net of
expenses. The investment was made by several then current Energy Focus, Inc. shareholders,
including four then current members of the companys Board of Directors. These investors agreed to
an at-market purchase of approximately 3.1 million units for $3.205 per unit, based on the closing
bid price of the companys common shares on March 13, 2008 of $3.08. Each unit comprises one share
of the companys common stock, par value $0.0001 per share, and one warrant to purchase one share
of the companys common stock at an exercise price of $3.08 per share. The warrants were
immediately separable from the units and immediately exercisable, and will expire five years after
the date of their issuance. This additional financing was to be used to fund working capital, pay
debt and perform additional research and development. The company received 100% of the funds from
escrow on March 17, 2008. Among the investors were Ronald A. Casentini, John M. Davenport, John B.
Stuppin, and Philip E. Wolfson, all of whom were members of its Board of Directors at the time of
the transaction, and who invested approximately $100,000 in the aggregate. Also among the investors
was The Quercus Trust (The Trust), whose trustees include David Gelbaum, who became a member of
the companys Board of Directors in February, 2009.
On May 27, 2009, the company entered into a Promissory Note (Note) with The Trust in the amount
of $70,000. Under the terms of this Note, the company agrees to pay The Trust the principal sum of
the Note
and interest accruing at a yearly rate of 1.00% in one lump sum payment on or before June 1, 2109.
The company received the funds on June 9, 2009.
F-40
No dealer, salesperson or any other person is authorized to give any information or make any
representations in connection with this offering other than those contained in this prospectus and,
if given or made, the information or representations must not be relied upon as having been
authorized by us. This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any security other than the securities offered by this prospectus, or an offer to sell
or a solicitation of an offer to buy any securities by anyone in any jurisdiction in which the
offer or solicitation is not authorized or is unlawful.
Up to $3.5 million to be raised with up to 4,670,000 Shares of Common Stock Issuable Upon Exercise
of Rights to Subscribe for those Shares at $0.75 per share
PROSPECTUS
October 6, 2009
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses payable by us in connection with the offering of
securities described in this registration statement. All amounts shown are estimates, except for
the SEC registration fee. We will bear all of these expenses.
|
|
|
|
|
SEC filing fee |
|
$ |
376.93 |
|
Accounting fees and expenses |
|
$ |
59,000.00 |
|
Legal fees and expenses |
|
$ |
245,000.00 |
|
Printing expenses |
|
$ |
15,000.00 |
|
Other |
|
$ |
50,000.00 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
369,376.93 |
|
|
|
|
|
|
Item 14. Indemnification of Directors and Officers.
General Corporation Law
We are incorporated under the laws of the State of Delaware. Section 145 (Section 145) of
the General Corporation Law of the State of Delaware, as the same exists or may hereafter be
amended (the General Corporation Law), among other things, provides that a Delaware corporation
may indemnify any persons who were, are or are threatened to be made, parties to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by reason of the fact
that such person is or was an officer, director, employee or agent of such corporation, or is or
was serving at the request of such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including attorneys fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding, provided such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporations best interests and, with
respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct
was illegal. A Delaware corporation may indemnify any persons who are, were or are threatened to be
made, a party to any threatened, pending or completed action or suit by or in the right of the
corporation by reasons of the fact that such person was a director, officer, employee or agent of
such corporation, or is or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation or enterprise. The indemnity may include expenses
(including attorneys fees) actually and reasonably incurred by such person in connection with the
defense or settlement of such action or suit, provided such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporations best interests, provided
that no indemnification is permitted without judicial approval if the officer, director, employee
or agent is adjudged to be liable to the corporation. Where an officer, director, employee or agent
is successful on the merits or
II-1
otherwise in the defense of any action referred to above, the corporation must indemnify him
against the expenses which such officer or director has actually and reasonably incurred.
Section 145 further authorizes a corporation to purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or agent of another
corporation or enterprise, against any liability asserted against him and incurred by him in any
such capacity, arising out of his status as such, whether or not the corporation would otherwise
have the power to indemnify him under Section 145.
Section 102 of the General Corporation Law permits a corporation to eliminate the personal
liability of directors of a corporation to the corporation or its stockholders for monetary damages
for a breach of fiduciary duty as a director, except where the director breached his duty of
loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a
law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware
corporate law or obtained an improper personal benefit.
Certificate of Incorporation and Bylaws
Article XI and Article XII of our certificate of incorporation (the Certificate) provide
that the liability of our officers and directors shall be eliminated or limited to the fullest
extent authorized or permitted by the General Corporation Law. Under the General Corporation Law,
the directors have a fiduciary duty to us which is not eliminated by these provisions of the
Certificate and, in appropriate circumstances, equitable remedies such as injunctive or other forms
of non-monetary relief will remain available to us. These provisions also do not affect the
directors responsibilities under any other laws, such as the federal securities laws or state or
federal environmental laws.
Article VI of our bylaws provides that we shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than an action by us or
in our right), by reason of the fact that such person is or was a director or officer of us, or is
or was a director or officer of us serving at our request as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise, against expenses
(including attorneys fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or proceeding.
Article VI of our bylaws further provides that in the event a director or officer has to bring
suit against us for indemnification and is successful, we will pay such directors or officers
expenses of prosecuting such claim; that indemnification provided for by the bylaws shall not be
deemed exclusive of any other rights to which the indemnified party may be entitled; and that we
may purchase and maintain insurance on behalf of a director or officer against any liability
asserted against such officer or director and incurred by
such officer or director in such capacity, whether or not we would have the power to indemnify
such director or officer against such expense or liability under the General Corporation Law.
II-2
At present, there is no pending litigation or proceeding involving any director, officer,
employee or agent as to which indemnification will be required or permitted under our Certificate
or bylaws. We are not aware of any threatened litigation or proceeding that may result in a claim
for indemnification.
We have entered into indemnification agreements with certain of our officers, directors and
key employees.
Liability Insurance
Our directors and officers are covered under directors and officers liability insurance
policies maintained by us, insuring such persons against various liabilities.
Undertaking
Reference is made to Undertakings below, for our undertakings in this registration statement
with respect to indemnification of liabilities arising under the Securities Act of 1933.
Item 15. Recent Sales of Unregistered Securities.
The following information relates to all securities issued or sold by the Registrant within
the past three years and not registered under the Securities Act of 1933.
On March 17, 2008, we completed a private placement to 19 accredited investors, including
seven then current shareholders and four then current members of the board of directors, of
3,184,321 units at $3.205 per unit that yielded $9,335,000 to us after expenses. Each unit
consisted of one share of Common Stock, at a price of $3.08 per share, and one warrant, at a price
of $0.125 per warrant, to purchase one share of Common Stock at an exercise price of $3.08 per
share. The warrants were immediately separable from the units and immediately exercisable, and
expire five years from the date of issuance. We paid the placement agent, Merriman Curhan Ford &
Co., a six percent commission of $612,345 and granted the agent warrants to purchase 382,119 shares
of our Common Stock at $3.08 per share. We used the proceeds of the sale to fund working capital,
pay debt, and perform additional research and development. We completed this transaction in
reliance upon the exemptions from registration provided by Section 4(2) of the Securities Act of
1933 and Rule 506 of Regulation D promulgated under the Act. We subsequently registered the resale
of the shares sold and the shares issuable upon exercise of the warrants.
On May 29, 2009, the Company and its five most senior executive officers agreed that those
officers would take salary reductions for the balance of 2009 in exchange for the grant of them of
restricted shares under the Companys 2008 Stock Incentive Plan.
II-3
Those executive officers and the number of restricted shares awarded to each are: Joseph G.
Kaveski, Chief Executive Officer, 23,679 shares; John M. Davenport, President, 94,719 shares;
Nicholas G. Berchtold, Jr., Vice President of Finance and Chief Financial Officer, 16,576 shares;
Eric W. Hilliard, Vice President and Chief Operating Officer, 17,997 shares; and Roger R. Buelow,
Vice President and Chief Technology Officer , 16,576 shares. Each of those officers accepted a ten
percent salary reduction for the year, except Mr. Davenport, who took a forty percent decrease.
The number of shares for each officer was based upon the dollar amount of his salary reduction
divided by the closing price of a share of the Companys common stock on the NASDAQ Global Market
on May 29, 2009. Two other officers of the Company also accepted salary reductions for the balance
of the year in exchange for restricted shares.
The shares are subject to forfeiture and to a restriction on transfer. Each officer will
forfeit his rights in his shares if he ceases to provide service to the Company as an employee,
director, or consultant prior to the closing of the first trading window after December 31, 2009
during which he does not posses material inside information about the Company, other than cessation
of service as a result of (i) his death or (ii) his total and permanent disability, or (iii) within
three months after a change in control of the Company. Should the officer cease to provide service
to the Company as a result of any of these three things, this restriction will lapse and his shares
will not be forfeited. The terms service, total and permanent disability, and change in
control are defined in the Companys Plan. The term trading window means the first twenty
calendar days after the second business day following public disclosure of the Companys quarterly
of annual financial results. Before the forfeiture provision lapses by its terms, or by the
officers earlier death or total and permanent disability, or by his leaving the service of the
company within three months after change in control, the officer is not allowed to transfer any
interest in his shares. Any attempt to transfer the shares will be ineffective.
On May 29, 2009, two members of the Companys Board of Directors also voluntarily relinquished
director fees for the balance of 2009 in exchange for restricted shares on the same terms as the
shares granted to the officers. David Gelbaum gave up all of his director fees for 17,413
restricted shares. Philip E. Wolfson relinquished ten percent of his fees for 2,002 shares.
We completed the transaction with our directors and officers on May 29, 2009 in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
II-4
Item 16. Exhibits.
The following exhibits are filed with this registration statement or incorporated into it by
reference.
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|
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Exhibit |
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Number |
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Description of Documents |
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2.1
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Agreement and Plan of Merger between Fiberstars, Inc., a California
corporation, and Fiberstars, Inc., a Delaware corporation
(incorporated by reference to Appendix C to the Registrants
Definitive Proxy Statement filed on May 1, 2006). |
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3.1
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Certificate of Incorporation of the Registrant (incorporated by
reference to Appendix A to the Registrants Definitive Proxy
Statement filed on May 1, 2006). |
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3.2
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Certificate of Designation of Series A Participating Preferred
Stock of the Registrant (incorporated by reference to Exhibit 3.2
to the Registrants Current Report on Form 8-K filed on November
27, 2006). |
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3.3
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Bylaws of the Registrant (incorporated by reference to Appendix C
to the Registrants Current Report on Form 8-K filed on November
27, 2006). |
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3.4
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Certificate of Ownership and Merger, Merging Energy Focus, Inc., a
Delaware corporation, into Fiberstars, Inc., a Delaware corporation
(incorporated by reference to Exhibit 3.1 to the Registrants
Quarterly Report on Form 10-Q filed on May 10, 2007). |
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4.1
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Form of Warrant for the purchase of shares of common stock
(incorporated by reference to Exhibit 99.3 to the Registrants
Current Report on Form 8-K filed on June 19, 2003). |
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4.2
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Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Registrants Current Report on Form 8-K filed on
November 27, 2006) |
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4.3
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Rights Agreement dated as of October 25, 2006 between the
Registrant and Mellon Investor Services, LLC, as rights agent
(incorporated by reference to Exhibit 4.2 to the Registrants
Current Report on Form 8-K filed on November 27, 2006). |
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4.4
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Form of Warrant for the purchase of shares of common stock
(incorporated by reference to Exhibit 1.2 to the Registrants
Current Report on Form 8-K filed on March 19, 2008). |
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4.5
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Amendment No. 1 to Rights Agreement between the Registrant and
Mellon Investment Services, LLC, as rights agent, dated as of March
12, 2008 (incorporated by reference to Exhibit 3.1 to the
Registrants Current Report on Form 8-K filed on March 19, 2009). |
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4.6
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Form of Subscription Rights Certificate to Purchase Shares of
Common Stock of Registrant (incorporated by referenced to Exhibit
4.6 to the Registrants Registration Statement on Form S-1,
Registration No.333-161768, filed September 4, 2009). |
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4.7
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Form of Subscription Rights Certificate to Exercise Subscription
Rights to Purchase Shares of Common Stock of Registrant. |
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II-5
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Exhibit |
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Number |
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Description of Documents |
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4.8
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Form of Instructions for Use of Subscription Rights Certificate. |
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5.1
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Form of Opinion of Cowden & Humphrey Co. LPA, including the consent
of that firm, regarding the legality of the securities being
offered. |
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10.1
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1994 Employee Stock Purchase Plan, amended as of December 7, 2000
(incorporated by reference to Exhibit 99.3 to the Registrants
Registration Statement on Form S-8 (Commission File No. 333-52042)
filed on December 18, 2000). |
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10.2
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Form of Agreement between the Registrant and independent sales
representatives (incorporated by reference to Exhibit 10.20 to the
Registrants Registration Statement on Form SB-2 (Commission File
No. 33-79116-LA)). |
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10.3*
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Distribution Agreement dated March 21, 1995 between the Registrant
and Mitsubishi International Corporation (incorporated by reference
to Exhibit 10.18 to the Registrants Annual Report on Form 10-KSB
for the year ended December 31, 1994). |
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10.4*
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Three Year Supply Agreement dated November 30, 2000 between the
Registrant and Mitsubishi International Corporation (incorporated
by reference to Exhibit 10.30 to the Registrants Annual Report on
Form 10-K405 filed on April 2, 2001). |
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10.5
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Securities Purchase Agreement dated June 17, 2003 among the
Registrant and the investors named therein (incorporated by
reference to Exhibit 99.2 to the Registrants Current Report on
Form 8-K filed on June 19, 2003). |
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10.6
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Form of Indemnification Agreement for officers of the Registrant
(incorporated by reference to Exhibit 10.42 to the Registrants
Annual Report on Form 10-K filed on March 30, 2004). |
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10.7
|
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Form of Indemnification Agreement for directors of the Registrant
(incorporated by reference to Exhibit 10.44 to the Registrants
Annual Report on Form 10-K filed on March 30, 2004). |
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10.8
|
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Production Share Agreement dated October 9, 2003 among the
Registrant, North American Production Sharing, Inc., and Industrias
Unidas de B.C., S.A. de C.V. (incorporated by reference to
Exhibit 10.45 to the Registrants Annual Report on Form 10-Kfiled
on March 30, 2004). |
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10.9
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Consulting Agreement effective as of December 15, 2004 between the
Registrant and Gensler Architecture, Design, and Planning, P.C.
(incorporated by reference to Exhibit 10.28 to the Registrants
Annual Report on Form 10-K filed on March 31, 2006). |
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10.10
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Consulting Agreement effective as of December 15, 2004 between the
Registrant and Jeffrey H. Brite (incorporated by reference to
Exhibit 10.29 to the Registrants Annual Report on Form 10-K filed
on March 31, 2006). |
II-6
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|
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Exhibit |
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Number |
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Description of Documents |
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10.11
|
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Loan and Security Agreement between Silicon Valley Bank and the
Registrant dated August 15, 2005 (incorporated by reference to
Exhibit 10.1 to the Registrants Current Report on Form 8-K filed
on August 18, 2005). |
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10.12
|
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Employment Agreement between the Registrant and John M. Davenport
dated July 1, 2005 (incorporated by reference from Exhibit 10.2 to
the Registrants Quarterly Report on Form 10-Q filed on
November 14, 2005). |
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10.13
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Severance Agreement between the Registrant and David N. Ruckert
dated September 16, 2005 (incorporated by reference to Exhibit 10.3
to the Registrants Quarterly Report on Form 10-Q filed on
November 14, 2005). |
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10.14*
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Fiberstars Development Agreement between the Registrant and
Advanced Lighting Technologies, Inc. dated September 19, 2005
(incorporated by reference to Exhibit 10.4 to the Registrants
Quarterly Report on Form 10-Q filed on November 14, 2005). |
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10.15*
|
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ADLT Development Agreement between the Registrant and Advanced
Lighting Technologies, Inc. dated September 19, 2005 (incorporated
by reference to Exhibit 10.5 to the Registrants Quarterly Report
on Form 10-Q filed on November 14, 2005). |
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10.16*
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Equipment Purchase and Supply Agreement between the Registrant and
Deposition Sciences, Inc. dated September 19, 2005 (incorporated by
reference to Exhibit 10.6 to the Registrants Quarterly Report on
Form 10-Q filed on November 14, 2005). |
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10.17
|
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Cross-License Agreement between the Registrant and Advanced
Lighting Technologies, Inc. dated September 19, 2005 (incorporated
by reference to Exhibit 10.7 to the Registrants Quarterly Report
on Form 10-Q filed on November 14, 2005). |
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10.18
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Master Services Agreement between the Registrant and Advanced
Lighting Technologies, Inc. dated September 19, 2005 (incorporated
by reference to Exhibit 10.8 to the Registrants Quarterly Report
on Form 10-Qfiled on November 14, 2005). |
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10.19
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First Amendment to Production Share Agreement, effective as of
August 17, 2005, among the Registrant, North American Production
Sharing, Inc., and Industrias Unidas de B.C., S.A. de C.V.
(incorporated by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed on October 25, 2005). |
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10.20
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Sublease between Venture Lighting International, Inc. and the
Registrant dated as of November 11, 2005 (incorporated by reference
to Exhibit 10.1 to the Registrants Current Report on Form 8-K
filed on November 17, 2005). |
II-7
|
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Exhibit |
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|
Number |
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Description of Documents |
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10.21
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Amended and Restated Loan and Security Agreement between the
Registrant and Silicon Valley Bank dated December 30, 2005
(incorporated by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed on January 6, 2006). |
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10.22
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Consulting Agreement between the Registrant and David N. Ruckert
dated as of February 3, 2006 (incorporated by reference to
Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q
filed on May 15, 2006). |
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10.23*
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Equipment Purchase and Product Supply Agreement entered into as of
May 25, 2006 between the Registrant and Deposition Sciences,
Inc. (incorporated by reference to Exhibit 10.1 to Amendment No. 2
to the Registrants Quarterly Report on Form 10-Q filed on March 6,
2009). |
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10.24
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Modification to Sublease between the Registrant and Keystone Ruby,
LLC. (incorporated by reference to Exhibit 10.2 to the Registrants
Quarterly Report on Form 10-Q filed on August 11, 2006). |
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10.25
|
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Amendment No. 1 to Amended and Restated Loan and Security Agreement
between the Registrant and Silicon Valley Bank dated September 25,
2006 (incorporated by reference from Exhibit 10.1 to the
Registrants Quarterly Report on Form 10-Q filed on November 14,
2006). |
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10.26
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First Amendment to Consulting Agreement between the Registrant and
David N. Ruckert dated as of February 3, 2007 (incorporated by
reference to Exhibit 10.32 to the Registrants Annual Report on
Form 10-K filed on March 16, 2007). |
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10.27
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|
Form of Indemnification Agreement for directors and officers of the
Registrant (incorporated by reference to Exhibit 10.31 of the
Registrants Annual Report on Form 10-K filed on March 16, 2007). |
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10.28
|
|
Amendment No. 4 to Amended and Restated Loan and Security Agreement
between Silicon Valley Bank and the Registrant dated as of October
1, 2007 (incorporated by reference to Exhibit 10.39 to the
Registrants Annual Report on Form 10-K filed on March 17, 2008). |
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10.29
|
|
Amendment No. 5 to Amended and Restated Loan and Security Agreement
between Silicon Valley Bank and Registrant dated as of January 29,
2008 (incorporated by reference to Exhibit 10.39 to the
Registrants Annual Report on Form 10-K filed on March 17, 2008). |
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10.30
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Management Agreement between Barry R. Greenwald and the Registrant
dated as of October 19, 2007 (incorporated by reference to Exhibit
10.39 to the Registrants Annual Report on Form 10-K filed on March
17, 2008). |
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10.31
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Form of Securities Purchase Agreement dated as of March 14, 2008
(incorporated by reference to Exhibit 1.1 to the Registrants
Current Report on Form 8-K filed on March 19, 2008). |
II-8
|
|
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Exhibit |
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Number |
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Description of Documents |
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10.32
|
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Second Amended and Restated Loan and Security Agreement between the
Registrant and Silicon Valley Bank dated as of October 15, 2008
(incorporated by reference to Exhibit 10.2 to the Registrants
Quarterly Report on Form 10-Q filed on November 7, 2008). |
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10.33
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1994 Stock Option Plan, amended as of May 24, 2000 (incorporated by
reference to Exhibit 99.1 to the Registrants Registration
Statement on Form S-8 (Commission File No. 333-52042) filed on
December 18, 2000). |
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10.34
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1994 Directors Stock Option Plan, amended as of May 12, 1999
(incorporated by reference to Exhibit 99.2 to the Registrants
Registration Statement on Form S-8 (Commission File No. 333-52042)
filed on December 18, 2000). |
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10.35
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2004 Stock Incentive Plan (incorporated by reference to Exhibit
99.1 to the Registrants Registration Statement on Form S-8
(Commission File No. 333-122-686) filed on February 10, 2005). |
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10.36
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|
2008 Incentive Stock Plan (incorporated by reference to Appendix D
to the Registrants Definitive Proxy Statement filed on August 8,
2008). |
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10.37
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|
Form of Restricted Stock Notice of Grant and Agreement
(incorporated by referenced to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed on June 2, 2009). |
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16.1
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Letter from Grant Thornton, LLP to the Securities and Exchange
Commission dated April 3, 2009 (incorporated by reference to
Exhibit 16.1 to the Registrants Current report on Form 8-K filed
on April 6, 2009.) |
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21.1
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Significant Subsidiaries of the Registrant (incorporated by
reference to Exhibit 21.1 to the Registrants Annual Report on Form
10-K filed on March 31, 2009). |
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23.1
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Consent of Grant Thornton LLP, Independent Registered Public
Accounting Firm. |
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24.1
|
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Power of Attorney (incorporated by reference to Exhibit 24.1 to the
Registrants Registration Statement on Form S-1, Registration No.
333-161768, filed on September 4, 2009). |
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99.1
|
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Form of Notice of Guaranteed Delivery. |
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99.2
|
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Form of Letter to Stockholders Who are Record Holders. |
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99.3
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Form of Letter to Stockholders Who are Acting as Nominees. |
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99.4
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Form of Letter to Clients of Stockholders Who are Acting as Nominees |
II-9
|
|
|
Exhibit |
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Number |
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Description of Documents |
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99.5
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Form of Beneficial Owner Election Form. |
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99.6
|
|
Form of Rights Subscription Agent Agreement between the Registrant
and The Bank of New York Mellon Shareowner Services, LLC. |
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99.7
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Outline of Road Show Power-Point Presentation. |
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99.8
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Form of Letter from Chief Executive Officer. |
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* |
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Confidential treatment has been granted with respect to certain portions of this agreement. |
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Management contract or compensatory plan or arrangement. |
Item 17. Undertakings.
Insofar as indemnification by the registrant for liabilities arising under the Securities Act,
may be permitted to directors, officers and controlling persons of the registrant pursuant to the
provisions referenced in Item 14 of this registration statement, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.
If a claim for indemnification against such liabilities (other than the payment by the registrant
of expenses incurred or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by a director, officer or
controlling person in connection with the securities being registered hereunder, the registrant
will, unless in the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act, and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a post-effective
amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that which was registered) and
any deviation from the low or high end of the estimated maximum offering range may be reflected in
the form of prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes
in volume and price represent no more than a 20% change in the maximum aggregate offering price set
forth in the Calculation of Registration Fee table in the effective registration statement;
and
II-10
(iii) To include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to such information in
the registration statement;
2. That, for the purpose of determining any liability under the Securities Act, each such
post-effective amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and this offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof;
3. To remove from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of this offering;
4. That, for the purpose of determining liability under the Securities Act to any purchaser,
each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an
offering, other than registration statements relying on Rule 430B or other than prospectuses filed
in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement
as of the date it is first used after effectiveness; provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement or made in a
document incorporated or deemed incorporated by reference into the registration statement or
prospectus that is part of the registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify any statement that was made in the
registration or prospectus that was part of the registration statement or made in any such document
immediately prior to such date of first use; and
5. That, for the purpose of determining liability of the registrant under the Securities Act
to any purchaser in the initial distribution of the securities, the undersigned registrant
undertakes that in a primary offering of securities of the undersigned registrant pursuant to this
registration statement, regardless of the underwriting method used to sell the securities to the
purchaser, if the securities are offered or sold to such purchaser by means of any of the following
communications, the undersigned registrant will be a seller to the purchaser and will be considered
to offer or sell such securities to such purchaser:
(i) any preliminary prospectus or prospectus of an undersigned registrant relating to this
offering required to be filed pursuant to Rule 424;
(ii) any free writing prospectus relating to this offering prepared by, or on behalf of, the
undersigned registrant or used or referred to by the undersigned registrant;
(iii) the portion of any other free writing prospectus relating to this offering containing
material information about an undersigned registrant or its securities provided by or on behalf of
the undersigned registrant; and
(iv) any other communication that is an offer in this offering made by the undersigned
registrant to the purchaser.
II-11
6. The undersigned registrant hereby undertakes to file, during any period in which offers or
sales are being made, a supplement to the prospectus included in this Registration Statement which
sets forth, with respect to a particular offering, the specific number of shares of common stock to
be sold, the name of the holder, the sales price, the name of any participating broker, dealer,
underwriter or agent, any applicable commission or discount and any other material information with
respect to the plan of distribution not previously disclosed.
II-12
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant has
duly caused this Amendment No. 1 to Registration Statement on Form S-1 to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Solon, State of Ohio, on October 1,
2009.
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ENERGY FOCUS, INC.
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By: |
/s/ Joseph G. Kaveski
|
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Joseph G. Kaveski |
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Chief Executive Officer |
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|
Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to the
Registration Statement has been signed by the following persons in the capacities and on the dates
indicated.
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Signature |
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Capacity |
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Date |
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|
|
/s/ Joseph G. Kaveski
Joseph G. Kaveski
|
|
Chief Executive Officer and Director
(Principal Executive Officer)
|
|
October 1, 2009 |
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/s/ John M. Davenport
John M. Davenport
|
|
President and Director
|
|
October 1, 2009 |
|
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|
|
/s/ Nicholas G. Berchtold, Jr.
Nicholas G. Berchtold, Jr.
|
|
Vice President Finance and Chief Financial
Officer (Principal Financial and
Accounting Officer)
|
|
October 1, 2009 |
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|
*
Laurence V. Goddard
|
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Director
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|
October 1, 2009 |
|
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|
*
J. James Finnerty
|
|
Director
|
|
October 1, 2009 |
|
|
|
|
|
*
Michael A. Kasper
|
|
Director
|
|
October 1, 2009 |
|
|
|
|
|
*
Paul Von Paumgartten
|
|
Director
|
|
October 1, 2009 |
|
|
|
|
|
*
David N. Ruckert
|
|
Director
|
|
October 1, 2009 |
|
|
|
|
|
*
Philip E. Wolfson
|
|
Director
|
|
October 1, 2009 |
The undersigned, by signing his name hereto, does sign and execute this Amendment No. 1
pursuant to the Power of Attorney executed by the above-named officers and directors of the Registrant and previously filed with the Securities and Exchange on behalf of the officers and
directors.
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By
|
|
/s/ Joseph G. Kaveski
|
|
Attorney-in-Fact
|
|
October 1, 2009 |
|
|
Joseph G. Kaveski
|
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|
II-13
EXHIBIT INDEX
|
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Exhibit |
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Number |
|
Description of Documents |
|
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|
2.1
|
|
Agreement and Plan of Merger between Fiberstars, Inc., a California
corporation, and Fiberstars, Inc., a Delaware corporation
(incorporated by reference to Appendix C to the Registrants
Definitive Proxy Statement filed on May 1, 2006). |
|
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|
3.1
|
|
Certificate of Incorporation of the Registrant (incorporated by
reference to Appendix A to the Registrants Definitive Proxy
Statement filed on May 1, 2006). |
|
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3.2
|
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Certificate of Designation of Series A Participating Preferred
Stock of the Registrant (incorporated by reference to Exhibit 3.2
to the Registrants Current Report on Form 8-K filed on November
27, 2006). |
|
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3.3
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|
Bylaws of the Registrant (incorporated by reference to Appendix C
to the Registrants Current Report on Form 8-K filed on November
27, 2006). |
|
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3.4
|
|
Certificate of Ownership and Merger, Merging Energy Focus, Inc., a
Delaware corporation, into Fiberstars, Inc., a Delaware corporation
(incorporated by reference to Exhibit 3.1 to the Registrants
Quarterly Report on Form 10-Q filed on May 10, 2007). |
|
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4.1
|
|
Form of Warrant for the purchase of shares of common stock
(incorporated by reference to Exhibit 99.3 to the Registrants
Current Report on Form 8-K filed on June 19, 2003). |
II-14
|
|
|
Exhibit |
|
|
Number |
|
Description of Documents |
|
|
|
4.2
|
|
Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Registrants Current Report on Form 8-K filed on
November 27, 2006) |
|
|
|
4.3
|
|
Rights Agreement dated as of October 25, 2006 between the
Registrant and Mellon Investor Services, LLC, as rights agent
(incorporated by reference to Exhibit 4.2 to the Registrants
Current Report on Form 8-K filed on November 27, 2006). |
|
|
|
4.4
|
|
Form of Warrant for the purchase of shares of common stock
(incorporated by reference to Exhibit 1.2 to the Registrants
Current Report on Form 8-K filed on March 19, 2008). |
|
|
|
4.5
|
|
Amendment No. 1 to Rights Agreement between the Registrant and
Mellon Investment Services, LLC, as rights agent, dated as of March
12, 2008 (incorporated by reference to Exhibit 3.1 to the
Registrants Current Report on Form 8-K filed on March 19, 2009). |
|
|
|
|
4.6
|
|
Form of Subscription Rights Certificate to Purchase Shares of
Common Stock of Registrant (incorporated by reference to Exhibit
4.6 to the Registrants Registration Statement on Form S-1,
Registration No. 333-161768, filed on September 4, 2009). |
|
|
|
|
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4.7
|
|
Form of Subscription Rights Certificate to Exercise Subscription
Rights to Purchase Shares of Common Stock of Registrant. |
|
|
|
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4.8
|
|
Form of Instructions for Use of Subscription Rights Certificate. |
|
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5.1
|
|
Form of Opinion of Cowden & Humphrey Co. LPA, including the consent
of that firm, regarding the legality of the securities being
offered. |
|
|
|
10.1
|
|
1994 Employee Stock Purchase Plan, amended as of December 7, 2000
(incorporated by reference to Exhibit 99.3 to the Registrants
Registration Statement on Form S-8 (Commission File No. 333-52042)
filed on December 18, 2000). |
|
|
|
10.2
|
|
Form of Agreement between the Registrant and independent sales
representatives (incorporated by reference to Exhibit 10.20 to the
Registrants Registration Statement on Form SB-2 (Commission File
No. 33-79116-LA)). |
|
|
|
10.3*
|
|
Distribution Agreement dated March 21, 1995 between the Registrant
and Mitsubishi International Corporation (incorporated by reference
to Exhibit 10.18 to the Registrants Annual Report on Form 10-KSB
for the year ended December 31, 1994). |
|
|
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10.4*
|
|
Three Year Supply Agreement dated November 30, 2000 between the
Registrant and Mitsubishi International Corporation (incorporated
by reference to Exhibit 10.30 to the Registrants Annual Report on
Form 10-K405 filed on April 2, 2001). |
II-15
|
|
|
Exhibit |
|
|
Number |
|
Description of Documents |
|
|
|
10.5
|
|
Securities Purchase Agreement dated June 17, 2003 among the
Registrant and the investors named therein (incorporated by
reference to Exhibit 99.2 to the Registrants Current Report on
Form 8-K filed on June 19, 2003). |
|
|
|
10.6
|
|
Form of Indemnification Agreement for officers of the Registrant
(incorporated by reference to Exhibit 10.42 to the Registrants
Annual Report on Form 10-K filed on March 30, 2004). |
|
|
|
10.7
|
|
Form of Indemnification Agreement for directors of the Registrant
(incorporated by reference to Exhibit 10.44 to the Registrants
Annual Report on Form 10-K filed on March 30, 2004). |
|
|
|
10.8
|
|
Production Share Agreement dated October 9, 2003 among the
Registrant, North American Production Sharing, Inc., and Industrias
Unidas de B.C., S.A. de C.V. (incorporated by reference to
Exhibit 10.45 to the Registrants Annual Report on Form 10-K filed
on March 30, 2004). |
|
|
|
10.9
|
|
Consulting Agreement effective as of December 15, 2004 between the
Registrant and Gensler Architecture, Design, and Planning, P.C.
(incorporated by reference to Exhibit 10.28 to the Registrants
Annual Report on Form 10-K filed on March 31, 2006). |
|
|
|
10.10
|
|
Consulting Agreement effective as of December 15, 2004 between the
Registrant and Jeffrey H. Brite (incorporated by reference to
Exhibit 10.29 to the Registrants Annual Report on Form 10-K filed
on March 31, 2006). |
|
|
|
10.11
|
|
Loan and Security Agreement between Silicon Valley Bank and the
Registrant dated August 15, 2005 (incorporated by reference to
Exhibit 10.1 to the Registrants Current Report on Form 8-K filed
on August 18, 2005). |
|
|
|
10.12
|
|
Employment Agreement between the Registrant and John M. Davenport
dated July 1, 2005 (incorporated by reference from Exhibit 10.2 to
the Registrants Quarterly Report on Form 10-Q filed on
November 14, 2005). |
|
|
|
10.13
|
|
Severance Agreement between the Registrant and David N. Ruckert
dated September 16, 2005 (incorporated by reference to Exhibit 10.3
to the Registrants Quarterly Report on Form 10-Q filed on
November 14, 2005). |
|
|
|
10.14*
|
|
Fiberstars Development Agreement between the Registrant and
Advanced Lighting Technologies, Inc. dated September 19, 2005
(incorporated by reference to Exhibit 10.4 to the Registrants
Quarterly Report on Form 10-Q filed on November 14, 2005). |
|
|
|
10.15*
|
|
ADLT Development Agreement between the Registrant and Advanced
Lighting Technologies, Inc. dated September 19, 2005 (incorporated
by reference to Exhibit 10.5 to the Registrants Quarterly Report
on Form 10-Q filed on November 14, 2005). |
II-16
|
|
|
Exhibit |
|
|
Number |
|
Description of Documents |
|
|
|
10.16*
|
|
Equipment Purchase and Supply Agreement between the Registrant and
Deposition Sciences, Inc. dated September 19, 2005 (incorporated by
reference to Exhibit 10.6 to the Registrants Quarterly Report on
Form 10-Q filed on November 14, 2005). |
|
|
|
10.17
|
|
Cross-License Agreement between the Registrant and Advanced
Lighting Technologies, Inc. dated September 19, 2005 (incorporated
by reference to Exhibit 10.7 to the Registrants Quarterly Report
on Form 10-Q filed on November 14, 2005). |
|
|
|
10.18
|
|
Master Services Agreement between the Registrant and Advanced
Lighting Technologies, Inc. dated September 19, 2005 (incorporated
by reference to Exhibit 10.8 to the Registrants Quarterly Report
on Form 10-Q filed on November 14, 2005). |
|
|
|
10.19
|
|
First Amendment to Production Share Agreement, effective as of
August 17, 2005, among the Registrant, North American Production
Sharing, Inc., and Industrias Unidas de B.C., S.A. de C.V.
(incorporated by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed on October 25, 2005). |
|
|
|
10.20
|
|
Sublease between Venture Lighting International, Inc. and the
Registrant dated as of November 11, 2005 (incorporated by reference
to Exhibit 10.1 to the Registrants Current Report on Form 8-K
filed on November 17, 2005). |
|
|
|
10.21
|
|
Amended and Restated Loan and Security Agreement between the
Registrant and Silicon Valley Bank dated December 30, 2005
(incorporated by reference to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed on January 6, 2006). |
|
|
|
10.22
|
|
Consulting Agreement between the Registrant and David N. Ruckert
dated as of February 3, 2006 (incorporated by reference to
Exhibit 10.1 to the Registrants Quarterly Report on Form 10-Q
filed on May 15, 2006). |
|
|
|
10.23*
|
|
Equipment Purchase and Product Supply Agreement entered into as of
May 25, 2006 between the Registrant and Deposition Sciences,
Inc. (incorporated by reference to Exhibit 10.1 to Amendment No. 2
to the Registrants Quarterly Report on Form 10-Q filed on March 6,
2009). |
|
|
|
10.24
|
|
Modification to Sublease between the Registrant and Keystone Ruby,
LLC. (incorporated by reference to Exhibit 10.2 to the Registrants
Quarterly Report on Form 10-Q filed on August 11, 2006). |
|
|
|
10.25
|
|
Amendment No. 1 to Amended and Restated Loan and Security Agreement
between the Registrant and Silicon Valley Bank dated September 25,
2006 (incorporated by reference from Exhibit 10.1 to the
Registrants Quarterly Report on Form 10-Q filed on November 14,
2006). |
II-17
|
|
|
Exhibit |
|
|
Number |
|
Description of Documents |
|
|
|
10.26
|
|
First Amendment to Consulting Agreement between the Registrant and
David N. Ruckert dated as of February 3, 2007 (incorporated by
reference to Exhibit 10.32 to the Registrants Annual Report on
Form 10-K filed on March 16, 2007). |
|
|
|
10.27
|
|
Form of Indemnification Agreement for directors and officers of the
Registrant (incorporated by reference to Exhibit 10.31 of the
Registrants Annual Report on Form 10-K filed on March 16, 2007). |
|
|
|
10.28
|
|
Amendment No. 4 to Amended and Restated Loan and Security Agreement
between Silicon Valley Bank and the Registrant dated as of October
1, 2007 (incorporated by reference to Exhibit 10.39 to the
Registrants Annual Report on Form 10-K filed on March 17, 2008). |
|
|
|
10.29
|
|
Amendment No. 5 to Amended and Restated Loan and Security Agreement
between Silicon Valley Bank and Registrant dated as of January 29,
2008 (incorporated by reference to Exhibit 10.39 to the
Registrants Annual Report on Form 10-K filed on March 17, 2008). |
|
|
|
10.30
|
|
Management Agreement between Barry R. Greenwald and the Registrant
dated as of October 19, 2007 (incorporated by reference to Exhibit
10.39 to the Registrants Annual Report on Form 10-K filed on March
17, 2008). |
|
|
|
10.31
|
|
Form of Securities Purchase Agreement dated as of March 14, 2008
(incorporated by reference to Exhibit 1.1 to the Registrants
Current Report on Form 8-K filed on March 19, 2008). |
|
|
|
10.32
|
|
Second Amended and Restated Loan and Security Agreement between the
Registrant and Silicon Valley Bank dated as of October 15, 2008
(incorporated by reference to Exhibit 10.2 to the Registrants
Quarterly Report on Form 10-Q filed on November 7, 2008). |
|
|
|
10.33
|
|
1994 Stock Option Plan, amended as of May 24, 2000 (incorporated by
reference to Exhibit 99.1 to the Registrants Registration
Statement on Form S-8 (Commission File No. 333-52042) filed on
December 18, 2000). |
|
|
|
10.34
|
|
1994 Directors Stock Option Plan, amended as of May 12, 1999
(incorporated by reference to Exhibit 99.2 to the Registrants
Registration Statement on Form S-8 (Commission File No. 333-52042)
filed on December 18, 2000). |
|
|
|
10.35
|
|
2004 Stock Incentive Plan (incorporated by reference to Exhibit
99.1 to the Registrants Registration Statement on Form S-8
(Commission File No. 333-122-686) filed on February 10, 2005). |
|
|
|
10.36
|
|
2008 Incentive Stock Plan (incorporated by reference to Appendix D
to the Registrants Definitive Proxy Statement filed on August 8,
2008). |
II-18
|
|
|
Exhibit |
|
|
Number |
|
Description of Documents |
|
|
|
10.37
|
|
Form of Restricted Stock Notice of Grant and Agreement
(incorporated by referenced to Exhibit 10.1 to the Registrants
Current Report on Form 8-K filed on June 2, 2009). |
|
|
|
16.1
|
|
Letter from Grant Thornton, LLP to the Securities and Exchange
Commission dated April 3, 2009 (incorporated by reference to
Exhibit 16.1 to the Registrants Current report on Form 8-K filed
on April 6, 2009.) |
|
|
|
21.1
|
|
Significant Subsidiaries of the Registrant (incorporated by
reference to Exhibit 21.1 to the Registrants Annual Report on Form
10-K filed on March 31, 2009). |
|
|
|
23.1
|
|
Consent of Grant Thornton LLP, Independent Registered Public
Accounting Firm. |
|
|
|
|
24.1
|
|
Power of Attorney (incorporated by reference to Exhibit 24.1 to the
Registrants Registration Statement on Form S-1, Registration No.
333-161768, filed on September 4, 2009). |
|
|
|
|
99.1
|
|
Form of Notice of Guaranteed Delivery. |
|
|
|
99.2
|
|
Form of Letter to Stockholders Who are Record Holders. |
|
|
|
99.3
|
|
Form of Letter to Stockholders Who are Acting as Nominees. |
|
|
|
99.4
|
|
Form of Letter to Clients of Stockholders Who are Acting as Nominees |
|
|
|
99.5
|
|
Form of Beneficial Owner Election Form. |
|
|
|
99.6
|
|
Form of Rights Subscription Agent Agreement between the Registrant
and The Bank of New York Mellon Shareowner Services, LLC. |
|
|
|
|
99.7
|
|
Outline of Road Show Power-Point Presentation. |
|
|
|
|
|
99.8
|
|
Form of Letter from Chief Executive Officer. |
|
|
|
|
* |
|
Confidential treatment has been granted with respect to certain portions of this agreement. |
|
|
|
Management contract or compensatory plan or arrangement. |
II-19