Corporate Information
Evolucia was formed in 2007 through a reverse merger whereby the Company acquired Sun Energy Solar, Inc., our accounting predecessor, which developed energy-efficient technologies in solar energy and infrared. The Company has exited the solar and infrared businesses. The Company’s solar subsidiary, Sunovia Solar, Inc. has not had operations since June 2010 and is not anticipated to have operations in the foreseeable future.
LED Lighting
LED lights are the most energy-efficient lighting source on the market today. Our LED lighting products are currently focused on (i) the roadway / walkway lighting market (“cobra head,” “shoebox”, “dusk-to-dawn”) (ii) the area lighting market (utility lights, wall packs, canopy lights and parking garage lights) and (iii), commercial indoor market (“high-bay”, “volumetric troffer”, and “lensed troffer” products). A report issued in January 2011 by Navigant Consulting, Inc. prepared for the Building Technologies Program of the Office of Energy Efficiency and Renewable Energy (EERE) of the Department of Energy estimates that there are 56.2 million roadway lights in the United States, including 26.5 million street lights and 26.1 million highway lights. The same report estimates approximately 36.4 million parking garage lights and 15.8 million parking lot light fixtures installed in the United States. It is estimated that fewer than 5% of the parking light totals and fewer than 1% of the roadway and highway lights utilized LED technology. We believe traditional lighting companies have been somewhat slow to develop LED technologies; however, the large lighting companies have acquired the technology either through acquisition or OEM and licensing arrangements with smaller LED lighting companies. There are currently over 200 competitors in the outdoor LED lighting market. Our Aimed Optics™ technology potentially provides a competitive advantage in this market, as it uses less energy to put more light on the ground, although high product costs have hampered sales of the cobra head and shoebox products in certain markets.
The Company completed the basic design for most of its products in 2009. Improvements in LED performance and the competitive pressures in the lighting industry have driven the need to update product designs and performance to remain competitive and viable. Also, in order for LED lighting to be fully competitive with traditional lighting, the cost of the fixture, is more expensive than comparable legacy lighting fixtures, which must remain viable as well. This will require reductions in final costs through component reductions and increasing manufacturing efficiencies. We anticipate these cost reductions in the product designs to continue and the timeframe to develop new products will be shortened as competition grows.
The three most significant challenges facing the Company in the LED lighting market are (a) developing a recognizable brand name, (b) expanding our distribution network, and (c) lowering the cost of manufacturing and the expense of selling our products thru traditional channels. Each of these issues is an ongoing concern for the Company. In addition, as LED lighting markets continue to expand, the distribution proficiencies of the lighting market are likely to drive consolidation in product lines and expansion as fixture companies compete for new business across various product lines.
Results of Operations for the Quarter ended June 30, 2014
For the three months ended June 30, 2014, the Company had a net loss of ($854,034), as compared to a net loss ($3,290,416) for the three months ended June 30, 2013, or a decrease of $2,436,382. The significant factors contributing to this increase are discussed in more detail below.
Revenues
Revenues for the three months ended June 30, 2014 were $180,076, as compared to $406,776 for the three-month period ending June 30, 2013, which represented a decrease of $226,700 or approximately 55.7%. The decrease was the result of decrease in customers.
Gross Profit
The Company had a gross profit of $67,272, and a gross profit margin of 37.4% for the three months ended June 30, 2014, as compared to a gross loss of ($20,574), and a gross loss margin of (5.1%) for the three months ended June 30, 2013. The gross margin increased as a result of a changing product mix and increase in product costs.
Expenses
Total operating expenses decreased to $741,966 for the three-month period ending June 30, 2014 from $2,049,084 for the three-month period ending June 30, 2013, a decrease of $1,307,118 or 63.8%. The major components are discussed below.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2014 and 2013 were equal to total operating expenses, as the Company had no research and development expense in that period. The major components of Selling, General and Administrative Expenses are discussed below.
Product Development
Product development costs were $4,325 for the three months ended June 30, 2014, compared to $54,317, for the three months ending June 30, 2013, a decrease of $49,992 or 92.0%. Product development expenses in 2014 represented continuing the refining of existing designs and development of aimed optics, the next generation cobra head and shoebox products.
Management expects to continue to support the development, reengineering, and building its current patent portfolio. As management expected product development costs will continue to decrease until the Company formalizes the product development plan as a result of the restructuring. Management expects this to be completed by the end of the second quarter or beginning of the third quarter.
Compensation & Benefits
Compensation & Benefits expenses were $109,978 for the three months ended June 30, 2014, compared to $948,058 for the three months ended June 30, 2013, a decrease of $838,080 or approximately 88.4%. The decrease is related to a decrease in non-cash expenses associated with stock options awarded to Board members and employees and a decrease related to reduction in cash compensation and benefits due to less employees.
Marketing & Sales
Marketing & Sales expenses totaled $23,255 for the three months ended June 30, 2014, as compared to $339,454 for the three months ended June 30, 2013, representing an decrease of $316,199 or 93.2%. The decrease reflects the company’s efforts to continue to support the brand of the company and position it more effectively in the marketplace. Included in this category are tradeshow expenses and related travel, lodging, meals and entertainment expenses to market the product both domestically in the United States and Internationally.
With the relationships developed, as management expected, marketing and sales expenses continue to reduce after the first quarter of 2014. Due to the restructuring of the company and continued focus on developing and supporting the Company’s patents, management expects to minimize expenses related to tradeshows and related travel expenses. Management continues to support the branding of its products, Company and marketing of its patents to the marketplace.
General and Administrative
General and administrative expenses are the expenses of operating the business on a daily basis that are not related directly to cost of goods and include legal and professional fees, consultants and occupancy and office expenses. For the three months ended June 30, 2014 the Company incurred aggregate expense of $604,408 in this area, compared to $707,255 for the three months ended June 30, 2013, a decrease of $102,847 or 14.5%. The majority of this decrease is related to decreases in the use of consultants, including stock based compensation paid to consultants, occupancy and office and legal and professional fees.
These decreases are offset by $237,138 in increases in occupancy expenses related to a judgment in favor of a previous landlord, BKOP1, LLC.
Research and Development
The Company did not incur any research and development expenses in the three months ended June 30, 2014 nor the three months ended June 30, 2013.
Other Income and Expenses
Other income and expense reflects interest expense (net of interest income) as discussed below:
Total interest expense for the three months ended June 30, 2014 was $396,934 compared to $938,435 for the three months ended June 30, 2013, a decrease of $541,501 or 57.7%. $110,394 of interest expense for the three months ended June 30, 2014 is attributable to the accretion of the discount related to the convertible notes which did not occur during the three months ended June 30, 2013. $729,473 of the expense for the three months ended June 30, 2013 is attributable to warrants which did not occur for the three months ended June 30, 2014. The remaining amount is related to an increase in total company borrowings.
We account for our outstanding Common Stock warrants that were issued in connection with our debentures at fair value. For the three months ended June 30, 2014, the change in the fair value of derivative instruments resulted in a gain of $217,594 compared to a charge of $263,794 for the three months ended June 30, 2013.
The fluctuations primarily relate to changes in the price of our common stock during the periods.
Results of Operations for the Six Months ended June 30, 2014
For the six months ended June 30, 2014, the Company had a net loss of ($2,558,717), as compared to a net loss ($5,418,365) for the six months ended June 30, 2013, or a decrease of $2,859,648. The significant factors contributing to this decrease are discussed in more detail below.
Revenues
Revenues for the six months ended June 30, 2014 were $1,142,979, as compared to $863,597 for the six month period ending June 30, 2013, which represented an increase of $279,382 or approximately 32.4%. The increase was the result of sales to three significant customers.
Gross Profit
The Company had a gross profit of $264,569, and a gross profit margin of 23.1% for the six months ended June 30, 2014, as compared to a gross profit of $142,362, and a gross profit margin of 16.5% for the six months ended June 30, 2013. The gross margin increased as a result of a changing product mix and increase in product costs.
Expenses
Total operating expenses decreased to $3,170,950 for the six month period ending June 30, 2014 from $3,475,606 for the six month period ending June 30, 2013, a decrease of $304,656 or 8.8%. The major components are discussed below.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for 2014 and 2013 were equal to total operating expenses, as the Company had no research and development expense in that period. The major components of Selling, General and Administrative Expenses are discussed below.
Product Development
Product development costs were $58,124 for the six months ended June 30, 2014, compared to $68,847, for the six months ending June 30, 2013, a decrease of $10,723 or 15.6%. Product development expenses in 2014 represented continuing the refining of existing designs and development of aimed optics, the next generation cobra head and shoebox products.
Management expects to continue to support the development, reengineering, and building its current patent portfolio. Management expects product development costs to continue to decrease until the Company formalizes the product development plan as a result of the restructuring. Management expects this to be completed by the beginning of the third quarter.
Compensation & Benefits
Compensation & Benefits expenses were $944,161 for the six months ended June 30, 2014, compared to $1,855,809 for the six months ended June 30, 2013, a decrease of $911,648 or approximately 49.1%. The decrease is related to an increase in non-cash expenses associated with stock options awarded to Board members and employees and a decrease related to reduction in cash compensation and benefits due to less employees.
Marketing & Sales
Marketing & Sales expenses totaled $299,306 for the six months ended June 30, 2014, as compared to $491,575 for the six months ended June 30, 2013, representing a decrease of $192,269 or 39.1%. The decrease reflects the company’s efforts to continue to support the brand of the company and position it more effectively in the marketplace. Included in this category are tradeshow expenses and related travel, lodging, meals and entertainment expenses to market the product both domestically in the United States and Internationally.
With the relationships developed, as management expected, marketing and sales expenses continue to reduce through the second quarter of 2014. Due to the restructuring of the company and continued focus on developing and supporting the Company’s patents, management expects to minimize expenses related to tradeshows and related travel expenses. Management continues to support the branding of its products, Company and marketing of its patents to the marketplace.
General and Administrative
General and administrative expenses are the expenses of operating the business on a daily basis that are not related directly to cost of goods and include legal and professional fees, consultants and occupancy and office expenses. For the six months ended June 30, 2014 the Company incurred aggregate expense of $1,869,359 in this area, compared to $1,059,375 for the six months ended June 30, 2013, an increase of $809,984 or 76.5%.
$237,138 of the increase in occupancy expense relates to a judgment in favor of a previous landlord, BKOP1, LLC.
The majority of this increase is related to increases in use of consultants, including stock based compensation paid to consultants, occupancy and office and legal and professional fees.
Research and Development
The Company did not incur any research and development expenses in the six months ended June 30, 2014 nor the six months ended June 30, 2013.
Other Income and Expenses
Other income and expense reflects interest expense (net of interest income) and change in fair value of derivative liabilities as discussed below:
Total interest expense for the six months ended June 30, 2014 was $(140,096) compared to $1,802,798 for the six months ended June 30, 2013, a decrease of $1,942,894 or (107.8)%. $202,630 of this decrease is attributable to the accretion of the discount related to the convertible notes which did not occur during the six months ended June 30, 2013. A significant amount of the decrease is attributable to expense for the six months ended June 30, 2014 associated with warrants in the amount of $1,433,473 which did not occur for the six months ended June 30, 2014. The remaining amount is related to an increase in total company borrowings.
We account for our outstanding Common Stock warrants that were issued in connection with our debentures at fair value. For the six months ended June 30, 2014, the liability related to these instruments fluctuated, resulting in a gain of $487,760 compared to a charge of $263,794 for the six months ended June 30, 2013.
The fluctuations primarily relate to changes in the price of our common stock during the periods.
Liquidity and Capital Resources
The Company’s cash flow from operations is insufficient to meet its current obligations. In fiscal year 2013, the Company relied upon additional investment through sales of common stock, lines of credit, and debentures in order to fund its operations.
Cash Flows and Working Capital
To date, we have financed our operations primarily through the sale of equity and debt. As of June 30, 2014, we had $69,102 in cash and cash equivalents. We had receivables, net of allowances, of $584,664 and inventory, net of reserves, of $368,052. Our current liabilities as of that date were $5,571,029.
Our business cycle is working capital intensive. The sales cycle can be several months or longer and sales are not invoiced until the product has been built and shipped, requiring all cost of goods, and in some cases sales commissions, to be incurred prior to payment on an order. Also, because we build our products based upon a specific order, it can take up to 90 days to fulfill an order, followed by a period of time in which to collect our receivables. As discussed in “Lines of Credit” in Note I to the Financial Statements, we have two lines of credit with a total borrowing capacity of $2.75 million, $2 million of which was provided in cash to the Company and can be used for working capital purposes while the other $750,000 facility is available upon request for specific customer purchase orders pursuant to certain conditions. As of June 30, 2014, the Company had drawn an aggregate of $2,757,952 and had no remaining available balance.
Management intends to continue to finance operations through debt and equity as well as to seek potential acquisitions that have positive cash flows; however, there can be no assurance of successful financing or acquisition activity in the future.
The Company may incur operating losses for the foreseeable future and there can be no guarantee that we will be successful securing funding. In the event we are unable to fund our operations by positive operating cash flows or additional funding, we will be forced to reduce our expenses and may have to cease operations. During the period ended March 31, 2014, the Company’s Chief Executive Officer, who was also the Chief Financial Officer, resigned. In addition, the company is restructuring its organization for greater efficiencies, and is aggressively pursuing sale opportunities, which continue to present themselves to the company. The company is working with distributors and end users in order to maximize potential sales. As a result of the Company scaling back current operations, substantially all of the Company’s employees were terminated. The Company will continue to rely on its relationship with its partner, Leader Electronics, Inc., and optimize its strong industry relationship as it continues to concentrate on its legacy Aimed Optics™ products. It will also continue to supports its development, reengineering, and building its current patent portfolio, which includes the continuing effort to reduce costs in an effort to become a more affordable option in the industry.
The Company uses contract manufacturers to produce its products and therefore does not have significant capital expenditures at this time.
For the Six Month Period Ended
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June 30,
2014
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June 30,
2013
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Cash flows used in Operations
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$
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(743,791
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)
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(3,508,816)
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Investing Activities
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$
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(77,585
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)
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(71,509)
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Financing Activities
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$
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874,358
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2,535,955
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Cash at end of period
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$
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69,102
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598,094
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Operating Activities
Net cash used in operating activities for the six months ended June 30, 2014 totaled ($743,791) as compared to ($3,508,816) for the six months ended June 30, 2013. During the period ended June 30, 2014, the cash used in operating activities consisted principally of the net loss from operations, stock based compensation, change in fair value of debt instruments, increase in accounts receivable, increase in inventory, decrease in inventory reserve and increase in accounts payable and accrued liabilities.
Investing Activities
Net cash used in investing for the six months ended June 30, 2014 was ($77,585) as compared to ($71,509) for the six months ended June 30, 2013. The represents capital expenditures primarily associated with the purchase of computer equipment and software.
Financing Activities
Our net cash provided by financing activities for the six months ended June 30, 2014 was $874,358 as compared to $2,535,955 for the six months ended June 30, 2013, which primarily consisted of proceeds from private placements, notes payable and lines of credit.
Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.
Our company has not entered into any transaction, agreement or other contractual arrangement with an entity unconsolidated with us under which we have
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an obligation under a guarantee contract, although we do have obligations under certain sales arrangements including purchase obligations to vendors
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o
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a retained or contingent interest in assets transferred to the unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets,
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o
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any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument, or
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o
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any obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by us and material to us where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with us.
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Plan of Operation
We have identified an immediate opportunity, particularly in the outdoor lighting market, to supply high quality energy-efficient lighting solutions through our patented technology. We have developed several LED lighting products, primarily for the outdoor lighting industry, that utilize our Aimed Optics™ technology that we sell directly to customers and through a network of manufacturer’s representatives in the U.S. and other countries. In addition, the Company has other lighting products that do not utilize the Aimed Optics™ technology that complement the Company’s portfolio and provide lighting solutions for other areas, such as parking garages. We continue to develop and refine our products to serve the market and are actively pursuing alliances and strategies that will allow us to drive down the production cost of our products.
We also continue developing and reengineering our patents. We have identified the need to continue to reduce costs to be able to offer a competitive product to our customers. This requires an ongoing review of our patents and an analysis with respect to improvements regarding the technology and costs associated with the product. We have also recently engaged DLA Piper to assist the Company in developing our licensing revenues as well as protecting our intellectual property.
The Company and its subsidiaries and affiliates have applied for and obtained a number of patents in various technologies, particularly LED lighting and solar technologies.
On May 1, 2014, we engaged DLA Piper LLP to represent the Company in connection with its Intellectual Property. The purpose of the engagement is to evaluate our patents, provide advice on portfolio development, identify potential litigation and licensing targets and protect the Company’s Intellectual Property. A successful outcome would create an ongoing source of additional revenue stream through potential long term licensing agreements.
The Company had cash of $69,102 as of June 30, 2014. The Company may incur operating losses for the foreseeable future and there can be no guarantee that we will be successful securing funding. In the event we are unable to fund our operations by positive operating cash flows or additional funding, we will be forced to reduce our expenses and may have to cease operations. During the period ended March 31, 2014, the Company’s Chief Executive Officer, who was also the Chief Financial Officer, resigned. In addition, the company is restructuring its organization for greater efficiencies, and is aggressively pursuing sale opportunities, which continue to present themselves to the company. The company is working with distributors and end users in order to maximize potential sales. As a result of the Company scaling back current operations, substantially all of the Company’s employees were terminated. The Company will continue to rely on its relationship with its partner, Leader Electronics, Inc., and optimize its strong industry relationship as it continues to concentrate on its legacy Aimed Optics™ products. It will also continue to supports its development, reengineering, and building its current patent portfolio, which includes the continuing effort to reduce costs in an effort to become a more affordable option in the industry.
We previously leased an operating facility at 106 Cattlemen Road Sarasota, FL 34232. This facility is under a five year and six months lease. The lease required monthly rent, including sales tax, of approximately $10,445. The building consisted of 17,252 square feet of laboratory, warehouse and office space. On October 28, 2012, the Company completely vacated its operations from its former headquarters at 106 Cattlemen Road, Sarasota, FL, 34232 due to the presence of mold. The Company was responsible for an aggregate of approximately $280,000 in future rent payments at the time it vacated the property.
The company received a judgment in August 2014 in favor of the landlord, BKOP1, LLC, in the amount of $237,138. The company has accrued this amount at June 30, 2014.
Headquarters office operations were moved temporarily to 6151 Lake Osprey Drive, Sarasota, FL 34240 while the manufacturing division, which also includes its warehouse, was moved temporarily to 6225 21st Street, Bradenton, FL 34203. These temporary facilities were rented on a month to month basis for approximately $15,622 per month.
Effective July 1, 2013, we moved to our operating facility located at 7040 Professional Parkway East, Sarasota, Florida 34240. The lease is under a six year lease and requires monthly rent, including sales tax, of approximately $16,000 for the first 18 months and escalates to $60,000 for the remainder of the term. In conjunction with the lease, we issued 12,000,000 options at the trading price the day of the agreement to the landlord.
In April 2014, we are restructuring our organization for greater efficiencies, and is aggressively pursuing sale opportunities, which continue to present themselves to the company. The company is working with distributors and end users in order to maximize potential sales. As a result of the Company scaling back current operations, substantially all of the Company’s employees were released. We have received a notice of violation from our landlord related to our facility located at 7040 Professional Parkway East, Sarasota, Florida 34240. The landlord is a shareholder and we are working with the landlord to resolve the current default on the operating facility lease. While we do not know the current outcome in relation to the obligation on the lease, the discussions with the landlord are amicable and both parties are seeking a solution that is agreeable for both parties.
Effective July 9, 2014, we entered into a lease located at 4920 Lena Road, Unit #106, Bradenton, Florida 34211. The lease is under a one year lease and requires monthly rent, plus sales tax, of approximately $1,200.
As of August 6, 2014, we have 4 full-time employees. At present, Evolucia has reduced its personnel and staff in order to eliminate excess overhead and to refocus on the business’ core fundamentals: the protection and monetization of the Aimed Optics intellectual property and the commercialization and sale of the company’s core products that are manufactured through the partnership with Leader Electronics. The Board accepted Mel Interiano’s resignation in April 2014; and the company has employed Thomas Seifert as Interim CEO and Interim CFO.
Effect of Changes in Prices
In the lighting industry, prices of equivalent incandescent lighting products are lower than the Company’s prices. In addition, some competing LED lighting fixtures are priced lower than the Company’s products. Reducing the cost of our products is a primary focus at this time and will be necessary in order for our LED lighting products to be competitive in the marketplace in the future.
Critical Accounting Policies and Estimates
Critical accounting estimates are those that management deems to be most important to the portrayal of our financial condition and results of operations, and that require management’s most difficult, subjective or complex judgments, due to the need to make estimates about the effects of matters that are inherently uncertain. We have identified our critical accounting estimates which are discussed below.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates include the valuation of stock based charges, the valuation of derivatives and the valuation of inventory reserves.
Accounts Receivable
The Company extends credit to its customers based upon a written credit policy. Accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate for the amount of probable credit losses in the Company’s existing accounts receivable. The Company establishes an allowance of doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information. Receivable balances are reviewed on an aged basis and account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not require collateral on accounts receivable.
Accounting for Derivative Instruments
Derivatives are required to be recorded on the balance sheet at fair value. These derivatives, including embedded derivatives in the Company’s structured borrowings, are separately valued and accounted for on the Company’s balance sheet. Fair values for exchange traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates
Revenue Recognition
The Company recognizes revenue when the following conditions have been met: there is persuasive evidence an arrangement exists which includes a fixed price, there is reasonable assurance of collection, the services or products have been provided and delivered to the customer, no additional performance is required, and title and risk of loss has passed to the customer. Products may be placed on consignment to a limited number of resellers. Revenue for these consignment transactions will also be recognized as noted above.
Share-Based Payments
Compensation cost relating to share based payment transactions be recognized in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award).
Going Concern
Our consolidated financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. Although we have incurred losses from operations and have a significant accumulated deficit at June 30, 2014, we believe we have adequate resources, such as our credit facilities and the potential proceeds from a private placement during 2014 to meet our operating commitments in 2014. In the event these resources and operating cash flows are not sufficient to fully fund our operating commitments or our growth, we would look to secure additional debt or equity financing. There can be no guarantee that we will be successful securing funding. In the event we are unable to fund our operations by positive operating cash flows or additional funding, we may be forced to reduce our expenses and slow down our growth rate. Accordingly, our consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Recent Accounting Pronouncements
The Company does not believe that any recently issued accounting pronouncements will have a material impact on its financial statements.
ITEM 3.
QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.
ITEM 4.
CONTROLS AND PROCEDURES.
Management Report on Disclosure Controls
Under the supervision and with the participation of management, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this by this Report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this Report, our disclosure controls and procedures were not effective due to lack of segregation of duties and the need for an updated accounting system, which is in process.
Remediation of Material Weaknesses in Internal Control over Financial Reporting
The Company has not established adequate financial reporting monitoring activities to mitigate the risk of management override, specifically because there are few employees and only one officer with management functions there is lack of segregation of duties. The Company intends to continue to evaluate potentially engaging additional management personnel to alleviate this weakness.
Changes in Internal Control over Financial Reporting
During the quarter ended June 30, 2014, there were no changes in the Company's internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results, other than as described below. However, we are currently evaluating several consulting agreements and strategic relationships that the company entered into during the year ended December 2013. We may commence litigation against such parties if it is determined that such agreements were breached.
Litigation with Supplier
The Company is defending a lawsuit brought by a supplier of a component part of the Evolucia LED light fixtures. The suit alleges that the Company owes a re-stocking fee for the return of certain inventory. The plaintiff has alleged damages in excess of $100,000. The Company believes it has substantial defenses to this lawsuit and intends to vigorously defend it. The lawsuit is in the early stages of pleadings, and the outcome of this case is uncertain at this time. The Company has incurred no significant legal fees to date in this case.
Litigation with
Landlord
We previously leased an operating facility at 106 Cattlemen Road Sarasota, FL 34232. This facility is under a five year and six months lease. The lease required monthly rent, including sales tax, of approximately $10,445. The building consisted of 17,252 square feet of laboratory, warehouse and office space. On October 28, 2012, the Company completely vacated its operations from its former headquarters at 106 Cattlemen Road, Sarasota, FL, 34232 due to the presence of mold. The Company was responsible for an aggregate of approximately $280,000 in future rent payments at the time it vacated the property. The company received a judgment in August 2014 in favor of the landlord, BKOP1, LLC, in the amount of $237,138. The company has accrued this amount at June 30, 2014.
Potential Litigation
Through December 31, 2013, the Company made advances to Affineon Lighting aggregating $636,000 for Affineon to purchase inventory. These advances were to be repaid upon sale of Affineon’s products, however no amounts were repaid. The Company is attempting to collect the advances but has reserved the entire balance at December 31, 2013, and June 30, 2014. In addition, the Company’s former Principal Accounting Officer has been appointed as the Principal Executive Officer at Affineon subsequent to his terminating his employment with the Company. The Company is uncertain as to what additional actions, if any, it will take against Affineon or its former Principal Accounting Officer.
The Company’s Board is reviewing certain vendors, financial obligations, stock based compensation arrangements and contractual obligations committed to by its former Principal Accounting Officer, former Chief Executive Officer and other former employees. The Company’s Board is uncertain as to what additional actions, if any, it will take.
The Company has determined that there may be instances where certain shares of common stock issued pursuant to a Form S-8 were issued in violation of certain provisions of the use of Form S-8. In addition, the Company has been informed by one of its note holders that $50,000 of proceeds received pursuant to a private placement were not authorized by the note holder to be released from escrow. The Company’s board is investigating these items.
None of our directors, officers or affiliates are involved in a proceeding adverse to our business or have a material interest adverse to our business.
As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 1, 2014, a portion of the accredited investors that participated in the PPM #1 offering agreed to exchange their PPM #1 securities representing an aggregate of $2,308,842 in principal and accrued interest, and PPM Warrants to acquire an aggregate of 99,665,910 shares of common stock for 8% Secured Convertible Promissory Notes (the "PPM #2") with a face value of $2,080,237. The PPM #2 securities mature three years from the date of issuance and are convertible into shares of common stock at a conversion price of $0.01 per share subject to the Company increasing its authorized shares of common stock. Interest is due and payable on the maturity date. The PPM #2 securities are secured by assets of the Company and can be prepaid in whole or in part at any time without the consent of the holder.
The Company considered whether the exchange of the PPM #1 Notes and PPM Warrants was within the scope of ASC 470-60-55 Accounting for Troubled Debt Restructuring, which states that if a Company is experiencing financial difficulties and a concession is granted, troubled debt restructuring accounting should be applied. The Company has concluded that it is experiencing financial difficulties and the creditor has granted a concession as the effective borrowing rate for the restructured debt is less than the effective rate of the PPM #1 Notes prior to restructuring. ASC 470 requires that the effects of any sweeteners be considered when determining the cash flows for the restructured debt. As such, the fair value of the cancelled PPM Warrants of approximately $572,000 was considered when determining whether a concession had been granted. Because the total cash outflows required under the restructured debt were greater than the carrying amount of the debt prior to the restructuring, no gain or loss was recognized and there was no adjustment to the carrying amount of the debt. Rather, the carrying amount of the debt will be used to calculate interest expense over the remaining term of the restructured debt so that any unamortized deferred costs from the original debt financing continue to be recognized as interest expense over the remaining term of the restructured debt. Subsequent to the restructuring, the effective interest rate on the debt is approximately 47%.
On January 1, 2014 the holders of two Convertible Promissory Notes issued in 2013 agreed to roll-over their principal and accrued interest of $170,042 into PPM #2 described above in Note L. The transaction was not considered a troubled debt restructuring because the borrower’s effective interest rate before the roll-over was less than the effective interest rate after the rollover. As such, the transaction was treated as a modification and the difference between the carrying amount of the original Convertible Promissory Notes of $170,042 and the fair value of the newly issued PPM #2 Notes was recorded as a gain on extinguishment of approximately $13,000.
On February 18, 2014, holders of 10% notes payable with an outstanding principal balance totaling $290,642 chose to roll their outstanding balances into PPM #2. The Company has concluded that it is experiencing financial difficulties and the creditor has granted a concession as the effective borrowing rate for the restructured debt is less than the effective rate of the 10% notes payable prior to the restructuring. No gain or loss was recognized because the total cash outflows required under the restructured debt were greater than the carrying amount of the debt prior to the restructuring.
During the period ended March 31, 2014, the Company issued 7,412,057 shares to employees as compensation.
During the period ended March 31, 2014, the Company issued 8,016,541 shares to former employees to settle unpaid compensation.
During the period ended March 31, 2014, the Company issued 81,062,535 shares to several consultants for services.
During the period ended March 31, 2014, the Company issued 2,020,000 shares to a note holder to satisfy the outstanding debt.
During the period ended March 31, 2014, 10,000,000 shares were returned to the Company for no consideration and were cancelled.
During the period ended March 31, 2014, the Company issued 18,500,000 stock options to two consultants. The options have exercise price of $0.01, vest immediately and expire five years from the date of issuance.
During the period ended March 31, 2014, the Company issued 12,675,000 stock options to one employee. The options have exercise prices of $0.004, vest immediately and expire five years from the date of issuance.
During the period ended March 31, 2014, the Company received $50,000 proceeds from PPM#2.
During the period ended June 30, 2014, the Company issued 300,000 shares of stock in exchange for $11,970 related to a former employee exercising the stock options.
The above issuances were made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933 and/or Rule 506 promulgated under Regulation D there under. The holders of the above securities are accredited investors as defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 5. OTHER INFORMATION
Subsequent Events
In April 2014, pursuant to restructuring our organization for greater efficiencies the Company has relocated its current operations to a smaller facility as part of its scaling back current operations. We have received a notice of violation from our landlord related to our facility located at 7040 Professional Parkway East, Sarasota, Florida 34240. The landlord is a shareholder and we are working with the landlord to resolve the current default on the operating facility lease. While we do not know the current outcome in relation to the obligation on the lease, the discussions with the landlord are amicable and both parties are seeking a solution that is agreeable for both parties.