LSCG Lighting Science Group Corporation (CE)

Note 1. Description of Business and Basis of Presentation

Overview

Lighting Science Group Corporation (the “Company”) was incorporated in Delaware in 1988 and designs, develops, manufactures and markets general illumination products that use light emitting diodes (“LEDs”) as their exclusive light source. The Company’s product portfolio includes LED-based retrofit lamps (replacement bulbs) used in existing light fixtures as well as purpose built LED-based luminaires (light fixtures). The Company’s lamps and luminaires are used for many common indoor and outdoor residential, commercial, industrial and public infrastructure lighting applications. The Company assembles and manufactures products primarily through its contract manufacturers in Asia.

Basis of Financial Statement Presentation

The accompanying unaudited condensed consolidated financial statements are presented pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) in accordance with the disclosure requirements for the quarterly report on Form 10-Q and therefore do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to fairly state the results for the interim periods presented. The condensed consolidated balance sheet as of December 31, 2014 is derived from the Company’s audited financial statements. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results of the Company that may be expected for the year ending December 31, 2015. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2014 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2015.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the accompanying condensed consolidated financial statements.

Note 2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with GAAP 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 dates of the financial statements and the reported amounts of revenue and expense during the reporting periods. The Company’s actual results could differ from these estimates.

Restricted Cash

As of September 30, 2015 and December 31, 2014, as required by the Company’s five-year term loan (as amended from time to time, the “Medley Term Loan”) with Medley Capital Corporation (“Medley”), the Company maintained a minimum restricted cash balance of $3.0 million to collateralize the Medley Term Loan. Changes in the restricted cash balance are reflected as a financing activity in the consolidated statement of cash flows.

Accounts Receivable

The Company records accounts receivable at the invoiced amount when its products are shipped to customers or when specific milestone billing requirements are completed. The Company’s accounts receivable balance is recorded net of allowances for amounts not expected to be collected from customers. This allowance for doubtful accounts is the Company’s best estimate of probable credit losses in the Company’s existing accounts receivable. Estimates used in determining the allowance for doubtful accounts are based on historical collection experience, age of receivables and known collectability issues. The Company writes off accounts receivable when it becomes apparent, based on age or customer circumstances, that such amounts will not be collected. The Company reviews its allowance for doubtful accounts on a quarterly basis. Recovery of bad debt amounts previously written off is recorded as a reduction of bad debt expense in the period the payment is collected. Generally, the Company does not require collateral for its accounts receivable and does not regularly charge interest on past due amounts. As of September 30, 2015 and December 31, 2014, the Company’s accounts receivable were reflected net of an allowance for doubtful accounts of $483,000 and $408,000, respectively.

As of September 30, 2015 and December 31, 2014, $6.6 million and $5.4 million, respectively, of eligible accounts receivable were pledged as collateral for the three-year asset based revolving credit facility (as amended from time to time, the “FCC ABL”) entered into on April 25, 2014 with FCC, LLC d/b/a First Capital (“First Capital”). First Capital sold the FCC ABL to ACF Finco I LP (“Ares”) in May 2015, and the FCC ABL is hereinafter referred to as the “Ares ABL.”

Revenue Recognition

The Company records revenue when its products are shipped and title passes to customers. When sales of products are subject to certain customer acceptance terms, revenue from such sales is recognized once those terms have been met. The Company also provides its customers with limited rights of return for non-conforming shipments or product warranty claims.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014‑09”). ASU 2014-09 seeks to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. ASU 2014‑09 initially was effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. However, at its July 9, 2015 meeting, the FASB agreed to defer by one year the mandatory effective date of this standard, but will also provide the option to adopt it as of the original effective date. The Company is currently evaluating the impact of adopting ASU 2014‑09, but the standard is not expected to have a significant effect on its consolidated financial statements.

Product Warranties

The Company generally provides a five-year limited warranty covering defective materials and workmanship of its products. Such warranty may require the Company to repair, replace or reimburse the purchaser for the purchase price of the product. The estimated costs related to warranties are accrued at the time products are sold based on various factors, including the Company’s stated warranty policies and practices, the historical frequency of claims and the cost to repair or replace its products under warranty. The warranty provision is included in accrued expenses on the condensed consolidated balance sheet. Changes in the warranty provision for the nine months ended September 30, 2015 were as follows:

Fair Value Measurements

The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

Fair Value of Financial Instruments

Cash and cash equivalents, accounts receivable, accounts payable, amounts due under lines of credit and other short term borrowings, accrued expenses and the note payable are carried at amounts that approximate their fair value due to the short-term maturity of these instruments and/or variable, market driven interest rates.

The liabilities under derivative contracts, which represent warrants to purchase shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”), were initially recorded at fair value and subsequently reflected at their fair value at the end of each reporting period. The fair value of the warrant issued to The Home Depot, Inc. (the “THD Warrant”) in January 2011 is determined using the Monte Carlo valuation method and will be adjusted at each reporting date until the underlying shares have been earned for each year. Such adjustments will be recorded as a reduction in the related revenue (sales incentive) from The Home Depot, Inc. (“The Home Depot”). Once a portion of the THD Warrant vests it is recorded at its fair value at the end of each subsequent reporting period.

Reclassification

Certain prior period amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported net loss or stockholders’ deficit.

Note 3. Liquidity and Capital Resources 

As shown in the condensed consolidated financial statements, the Company has experienced significant historical net losses as well as negative cash flows from operations since its inception, resulting in an accumulated deficit of $816.1 million and stockholders’ deficit of $524.0 million as of September 30, 2015. As of September 30, 2015, the Company had cash and cash equivalents of $574,000 and an additional $3.0 million in restricted cash subject to a cash collateral dominion agreement pursuant to the Medley Term Loan. The Company’s cash expenditures primarily relate to procurement of inventory, payment of salaries, employee benefits and other operating costs.

The Company’s primary sources of liquidity have historically been borrowings from Ares under the Ares ABL, from Medley under the Medley Term Loan and from other previous lenders, as well as sales of Common Stock and Preferred Stock (as defined below) to, and short-term loans from, affiliates of Pegasus Capital Advisors, L.P. (“Pegasus Capital”), including Pegasus Partners IV, L.P. (“Pegasus IV”), LSGC Holdings LLC (“LSGC Holdings”), LSGC Holdings II LLC (“Holdings II”), LSGC Holdings III LLC (“Holdings III”) and PCA LSG Holdings, LLC (“PCA Holdings” and collectively with Pegasus Capital, Pegasus IV, LSGC Holdings, Holdings II, Holdings III and their affiliates, “Pegasus”). Pegasus is the Company’s controlling stockholder.

The Company obtained the five-year, $30.5 million Medley Term Loan from Medley on February 19, 2014, pursuant to a Term Loan Agreement (as amended from time to time the “Medley Loan Agreement”). Pursuant to the Medley Loan Agreement, the Company is required to achieve a minimum quarterly fixed charge coverage ratio for the preceding 12-month period and to maintain certain minimum EBITDA levels. In connection with the Medley Term Loan, the Company issued a warrant to purchase 5,000,000 shares of Common Stock to each of Medley and Medley Opportunity Fund II LP (the “Medley Warrants”).

The Company also obtained a three-year revolving credit facility with a maximum line amount of $22.5 million from Ares on April 25, 2014, pursuant to the terms of a Loan and Security Agreement (as amended from time to time, the “Ares ABL Agreement”). As of September 30, 2015, the Company had $7.0 million in borrowings outstanding under the Ares ABL Agreement and additional borrowing capacity of $9.1 million. The maximum borrowing capacity under the Ares ABL Agreement is based on a formula of eligible accounts receivable and inventory. The Ares ABL Agreement also requires the Company to achieve a minimum quarterly fixed charge coverage ratio for the preceding 12-month period.

On September 30, 2015, September 11, 2015 and January 30, 2015, the Company issued 62, 10,000 and 11,525 units of its Series J securities (“Series J Securities”), respectively, to Holdings III and certain other purchasers, at a purchase price of $1,000 per Series J Security for aggregate gross proceeds of $21.6 million. Each Series J Security consists of (i) one share of Series J Convertible Preferred Stock (“Series J Preferred Stock”) and (ii) a warrant to purchase 2,650 shares of Common Stock, at an exercise price of $0.001 per share (the “Series J Warrants”).

The Company continues to face challenges in its efforts to achieve positive cash flows from operations and profitability. The Company’s ability to continue to meet its obligations in the ordinary course of business is dependent upon establishing profitable operations, which may be supplemented by any additional funds raised through public or private financing or increased borrowing capacity.

As a result of the Company’s historical losses, the Company believes it will likely need to raise additional capital to fund its operations. Sources of additional capital may not be available in an amount or on terms that are acceptable to the Company, if at all. The Company’s complex capital structure, including its obligations to the holders of the outstanding shares of its Preferred Stock (as well as the shares of Series K Preferred Stock that it will be required to issue upon posting the Appeal Bond (as defined below)), may make it more difficult to raise additional capital from new or existing investors or lenders. If the Company is not able to raise such additional capital, the Company may need to restructure or refinance its existing obligations, which restructuring or refinancing would require the consent and cooperation of the Company’s creditors and certain stockholders. In such event, such restructuring or refinancing may not be accomplished on terms that are acceptable to the Company, if at all. If the Company is unable to obtain sufficient capital when needed, the Company’s business, compliance with its credit facilities and future prospects may be adversely affected.

RW LSG Holdings LLC (“Riverwood”) and Pegasus each have the right to cause the Company to redeem their shares of Series H Convertible Preferred Stock (“Series H Preferred Stock”) and Series I Convertible Preferred Stock (“Series I Preferred Stock”) and collectively with the Series H Preferred Stock and the Series J Preferred Stock, the “Preferred Stock”), respectively, at any time on or after March 27, 2017. If either Riverwood or Pegasus elects to cause the Company to redeem its shares of Series H Preferred Stock or Series I Preferred Stock, all other holders of the applicable series will similarly have the right to request the redemption of their shares of Preferred Stock. In addition, Portman Limited (“Portman”) and affiliates of Zouk Holdings Limited acting together, have a contractual right to require the Company to redeem their respective shares of Series H Preferred Stock on or after March 27, 2017, subject to certain conditions and limitations. The Company is also required to redeem the outstanding shares of its Series J Preferred Stock (a) subject to certain limited exceptions, immediately prior to the redemption of the Series H Preferred Stock, Series I Preferred Stock or any other security that ranks junior to the Series J Preferred Stock and (b) on November 14, 2019, at the election of the holders of Series J Preferred Stock (a “Special Redemption”). Holders of Preferred Stock would also have the right to require the Company to redeem such shares upon the uncured material breach of the Company’s obligations under its outstanding indebtedness or the uncured material breach of the terms of the certificates of designation governing the Preferred Stock. As of September 30, 2015, in the event the Company was required to redeem all of its outstanding shares of Preferred Stock, the Company’s maximum payment obligation would have been $512.1 million. The Company would be required to repay its outstanding obligations under the Medley Term Loan and the Ares ABL prior to the redemption of any shares of Preferred Stock. As of September 30, 2015, the Company had $35.8 million of aggregate borrowings outstanding under these credit facilities.

Any redemption of the Preferred Stock would be limited to funds legally available therefor under Delaware law. The certificates of designation governing the Preferred Stock provide that if there is not a sufficient amount of cash or surplus available to pay for a redemption of Preferred Stock, then the redemption must be paid out of the remaining assets of the Company. In addition, the certificates of designation governing the Preferred Stock provide that the Company is not permitted or required to redeem any shares of Preferred Stock for so long as such redemption would result in an event of default under the Company’s credit facilities.

As of September 30, 2015, based solely on a review of the Company’s balance sheet, the Company did not have legally available funds under Delaware law to satisfy a redemption of its Preferred Stock. In addition, based solely on the Company’s projected balance sheet as of March 27, 2017, the Company does not believe that it will have legally available funds on or before March 27, 2017 to satisfy any such redemption.

The certificate of designation governing the Series H Preferred Stock also provides that upon the occurrence of a “control event,” the Company must take any and all actions required and permitted to fix the size of its board of directors to a size that would permit Riverwood (as the primary investor of the Series H Preferred Stock) to appoint a majority of the directors to the board until the Company satisfies or otherwise cures the obligations giving rise to the control event. A control event occurs if, among other things, Riverwood exercises its optional redemption right under the certificate of designation governing the Series H Preferred Stock and the Company is unable to redeem Riverwood’s Preferred Stock. If Riverwood were to exercise its optional redemption right and a control event were to occur, Riverwood could take control of the board of directors.

The certificate of designation governing the Series J Preferred Stock provides that if the Company does not have sufficient capital available to redeem the Series J Preferred Stock in connection with a Special Redemption of the Series J Preferred Stock, the Company will be required to issue a non-interest bearing note or notes (payable 180 days after issuance) in the principal amount of the liquidation amount of any shares of Series J Preferred Stock not redeemed by the Company in connection with such Special Redemption, subject to certain limitations imposed by Delaware law governing distributions to stockholders.

Note 4. Detail of Certain Balance Sheet Accounts

Inventories

Inventories consisted primarily of finished goods as of September 30, 2015 and December 31, 2014. As of September 30, 2015 and December 31, 2014, inventories were stated net of inventory write downs of $4.7 million and $7.9 million, respectively. The Company considered a number of factors in estimating the required inventory write downs, including (i) the focus of the business on the next generation of the Company’s products, which utilize lower cost technologies, (ii) the strategic focus on core products to meet the demands of key customers and (iii) the expected demand for the Company’s current generation of products, which is approaching the end of its lifecycle upon the introduction of the next generation of products.

Property and Equipment, Net

Depreciation related to property and equipment was $454,000 and $599,000 for the three months ended September 30, 2015 and 2014, respectively. Depreciation related to property and equipment was $1.4 million and $2.6 million for the nine months ended September 30, 2015 and 2014, respectively.

Intangible Assets

Intangible assets that have finite lives are amortized over their useful lives. The Company’s intangible assets as of September 30, 2015 and December 31, 2014 are detailed below:

Total intangible asset amortization expense was $21,000 and $17,000 for the three months ended September 30, 2015 and 2014, respectively. Total intangible asset amortization expense was $62,000 and $46,000 for the nine months ended September 30, 2015 and 2014, respectively.

Note 5. Debt Issuance Costs

The Company capitalizes its costs related to the issuance of long-term debt and amortizes these costs using the effective interest rate method over the life of the loan. Amortization of debt issuance costs and the accelerated write-off of debt issuance costs in connection with refinancing activities are recorded as a component of interest expense. As of September 30, 2015, the current portion of the debt issuance costs was $1.6 million and was included in other current assets. In connection with the Ares ABL and the Medley Term Loan, $6.0 million of debt issuance costs were capitalized, including $2.8 million related to the fair value of the guaranty of the Company’s obligations under the Medley Loan Agreement in favor of Medley (the “Pegasus Guaranty”) provided by Pegasus Capital Partners IV, L.P. and Pegasus Capital Partners V, L.P. (collectively, the “Pegasus Guarantors”). The Company amortized $398,000 and $312,000 of debt issuance costs for the three months ended September 30, 2015 and 2014, respectively. The Company amortized $1.1 million and $1.3 million of debt issuance costs for the nine months ended September 30, 2015 and 2014, respectively.

Note 6. Lines of Credit and Note Payable

Ares ABL

On April 25, 2014, the Company, entered into the Ares ABL, which provides the Company with a maximum borrowing capacity of $22.5 million, which capacity is based on a formula of eligible accounts receivable and inventory. As of September 30, 2015, the Company had additional borrowing capacity of $9.1 million. As of September 30 2015, eligible collateral included $6.6 million of accounts receivable and $10.0 million of inventory. Borrowings under the Ares ABL bear interest at a floating rate equal to one-month LIBOR plus 5.5% per annum. As of September 30, 2015, the interest rate on the Ares ABL was 5.7%.

On September 11, 2015, the Company entered into an amendment to the Ares ABL, which among other things (i) increased the interest margin payable under the Ares ABL by 150 basis points, such that the interest accrues on the outstanding borrowings at a rate equal to LIBOR plus 5.5%, (ii) provided for a mandatory repayment in full of the obligations under the Ares ABL if the Company redeems the Series K Preferred Stock, (iii) allows the Company to enter into the Appeal Bond and certain related agreements without further consent or approval from Ares, (iv) provides that the Company must notify Ares of entry of the August 28^th Order within two business days of the entry thereof, and (v) adds certain events of default relating to the Geveran litigation.

Medley Term Loan

On February 19, 2014, the Company entered into the Medley Term Loan, which provided the Company with a $30.5 million term loan facility. The Medley Term Loan bears interest at a floating rate equal to three-month LIBOR plus 12% per annum, and as of September 30, 2015, the interest rate on the Medley Term Loan was 12.33%. Additionally, $3.0 million of the Medley Term Loan was funded directly into a deposit account to which Medley has exclusive access, to further secure the loan. The outstanding principal balance and all accrued and unpaid interest on the Medley Term Loan are due and payable on February 19, 2019. The Company recognized $195,000 of interest expense for the accretion of the discounts to the balance of the Medley Term Loan related to commitment fees and the Medley Warrants for both the three months ended September 30, 2015 and 2014, and $160,000 and $157,000 of accrued interest for the three months ended September 30, 2015 and 2014, respectively. The Company recognized $584,000 of interest expense for the accretion of the discounts to the balance of the Medley Term Loan related to commitment fees and the Medley Warrants and $474,000 of accrued interest for the nine months ended September 30, 2015, and $474,000 of interest expense for the accretion of the discounts to the balance of the Medley Term Loan related to the commitment fees and the Medley Warrants and $382,000 of accrued interest for the period from February 19, 2014 (date of issuance) to September 30, 2014.

On September 11, 2015, the Company entered into an amendment to the Medley Term Loan, which among other things, (i) amends the minimum EBITDA covenant levels with respect to each of the twelve-month period ended September 30, 2015, the twelve-month period ending December 31, 2015, the twelve-month period ending March 31, 2016 and the twelve-month period ending June 30, 2016 (collectively, the “ Specified Covenant Periods ”) to provide that a portion of the cash proceeds from the sale of Series J Securities on September 11, 2015 will be included in the calculation of EBITDA for such periods, (ii) amends the definition of “Fixed Charge Coverage Ratio” in the Medley Term Loan Agreement to provide that $10.0 million of the cash proceeds from the September 11, 2015 offering will be included in EBITDA for purposes of calculating the “Fixed Charge Coverage Ratio” for each of the Specified Covenant Periods, (iii) allows the Company to enter into the Appeal Bond and certain related agreements without further consent or approval from Medley and (iv) adds certain events of default relating to the Geveran litigation.

Note 7. Fair Value Measurements

The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2015, according to the valuation techniques the Company used to determine their fair values:

The following table is a reconciliation of the beginning and ending balances for assets and liabilities that were accounted for at fair value on a recurring basis using Level 3 inputs, as defined above, for the nine months ended September 30, 2015:

The following table is a reconciliation of the beginning and ending balances for assets and liabilities that were accounted for at fair value on a recurring basis using Level 3 inputs, as defined above, for the nine months ended September 30, 2014:

Note 8. Stockholders’ Equity

For the three months ended September 30, 2015 and 2014, the Company recorded expense of $128,000 and $221,000, respectively, related to restricted stock awards to the Company’s directors. For the nine months ended September 30, 2015 and 2014, the Company recorded expense of $258,000 and $412,000, respectively, related to restricted stock awards to the Company’s directors.

On June 12, 2014, the Board approved the formation of a Scientific Advisory Board (the “SAB”) and issued restricted stock awards to each of the five members of the SAB as part of their compensation package. For the three and nine months ended September 30, 2015, the Company recorded expense of $0 and $37,000, respectively, related to restricted stock awards to the Company’s SAB. For the three and nine months ended September 30, 2014, the Company recorded expense of $26,000 and $31,000, respectively, related to restricted stock awards to the Company’s SAB.

Warrants for the Purchase of Common Stock

As of September 30, 2015, the following warrants for the purchase of Common Stock were outstanding:

Note 9: Earnings (Loss) Per Share

In 2012, the Company determined that two classes of Common Stock had been established for financial reporting purposes only, with Common Stock attributable to controlling stockholders representing shares beneficially owned and controlled by Pegasus and the Common Stock attributable to noncontrolling stockholders representing the minority interest stockholders. For the three and nine months ended September 30, 2015 and 2014, the Company computed net loss per share of noncontrolling stockholders and controlling stockholders of Common Stock using the two-class method. Net loss from operations is initially allocated based on the underlying common shares held by controlling and noncontrolling stockholders. The allocation of the net losses attributable to the Common Stock attributable to controlling stockholders is then reduced by the amount of the deemed dividend related to the warrants issued to the Pegasus Guarantors, while the allocation of net losses attributable to the Common Stock attributable to noncontrolling stockholders is increased by the amount of the deemed dividend related to the warrants issued to the Pegasus Guarantors.

The following table sets forth the computation of basic and diluted net loss per share of Common Stock:

Basic earnings per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding for the applicable period. The Series J Warrants have an exercise price of $0.001 per share of Common Stock, and are included in the weighted average number of shares of Common Stock outstanding as there are no conditions that must be satisfied before such warrant may be exercised into the shares of Common Stock underlying such warrants. Diluted earnings per share is computed in the same manner as basic earnings per share except the number of shares is increased to assume exercise of potentially dilutive stock options, unvested restricted stock and contingently issuable shares using the treasury stock method and convertible preferred shares using the if-converted method, unless the effect of such increases would be anti-dilutive. The Company had 213.3 million and 177.1 million common stock equivalents for the three months ended September 30, 2015 and 2014, respectively, and 209.8 million and 190.4 million common stock equivalents for the nine months ended September 30, 2015 and 2014, respectively, which were not included in the diluted net loss per common share as the common stock equivalents were anti-dilutive, as a result of the Company being in a net loss position.

Note 10: Related Party Transactions

Pegasus Capital is an affiliate of Pegasus IV and LSGC Holdings, which are the Company’s largest stockholders and beneficially owned approximately 90.0% of the Common Stock as of September 30, 2015.

On September 11, 2015 and January 30, 2015, the Company issued an additional 10,000 and 11,525 units of Series J Securities, at a purchase price of $1,000 per Series J Security for aggregate gross proceeds of $21.5 million. The Series J Securities were issued pursuant to subscription agreements between the Company and Holdings III, an affiliate of Pegasus Capital.

Note 11. Restructuring Expense

The following table summarizes the Company’s restructuring expense and related charges for the periods indicated:

As of September 30, 2015, the accrued liability associated with the restructuring and other related charges consisted of the following:

The remaining accrual of $504,000 as of September 30, 2015 is expected to be paid during the year ending December 31, 2016.

The restructuring and other related charges are included in the line item restructuring expense in the condensed consolidated statement of operations and comprehensive loss.

Note 12. Concentrations of Credit Risk

For the three months ended September 30, 2015 and 2014, revenue derived from sales to The Home Depot represented 89% and 82%, respectively, of the Company’s total revenue. For the nine months ended September 30, 2015 and 2014, revenue derived from sales to The Home Depot represented 88% and 78%, respectively, of total revenue.

As of September 30, 2015 and December 31, 2014, The Home Depot accounts receivable balance represented 78% and 77%, respectively, of the Company’s total accounts receivable, net of allowances.

Note 13. Commitments and Contingencies

The Company is subject to the possibility of loss contingencies arising in its business. Such contingencies are accounted for in accordance with ASC Topic 450, “Contingencies.” In determining loss contingencies, the Company considers the possibility of a loss and the ability to reasonably estimate the amount of such loss or liability. An estimated loss is recorded when it is considered probable that a liability has been incurred and when the amount of loss can be reasonably estimated.

Legal Proceedings

In the ordinary course of business, the Company is routinely a party to various pending and threatened legal claims and proceedings. While the ultimate outcome of these matters cannot be predicted with certainty, based on information currently available and advice of counsel, and taking into account available insurance coverage, except as noted below, the Company does not believe that the outcome of any of these claims will have a material adverse effect on its business, financial condition or results of operations. However, the results of legal proceedings cannot be predicted with certainty, and in the event of unexpected future developments the ultimate resolution of one or more of these matters could be unfavorable. Should the Company fail to prevail in any of these legal matters or should several of these legal matters be resolved against the Company in the same reporting period, the consolidated financial position or operating results could be materially adversely affected. Regardless of the outcome, any litigation may require the Company to incur significant expenses and may result in significant diversion of management’s attention. Further, during its ordinary course of business, the Company enters into obligations to defend, indemnify and/or hold harmless various customers, officers, directors, employees, and other third parties. These contractual obligations could give rise to additional litigation costs and involvement in court proceedings.

Geveran Investments Limited v. Lighting Science Group Corporation, et al. (the “Geveran Case”)

On June 22, 2012, Geveran Investments Limited (“Geveran”), one of the Company’s stockholders, filed a lawsuit against the Company and several other defendants in the Circuit Court of the Seventeenth Judicial Circuit in and for Broward County, Florida. On October 30, 2012, the court entered an order transferring the lawsuit to the Ninth Judicial Circuit in and for Orange County, Florida. The Geveran Case names the Company as a defendant, as well as Pegasus Capital and nine other entities affiliated with Pegasus Capital; Richard Weinberg, our former Director and former interim Chief Executive Officer and a former partner of Pegasus Capital; Gregory Kaiser, a former Chief Financial Officer; J.P. Morgan Securities, LLC (“J.P. Morgan”); and two employees of J.P. Morgan. Geveran seeks rescissionary damages in connection with its $25.0 million investment in the Company, as well as recovery of interest, attorneys’ fees and court costs, jointly and severally against the Company, Pegasus Capital, Mr. Weinberg, Mr. Kaiser, J.P. Morgan and the two J.P. Morgan employees, for alleged violations of Florida securities laws. Geveran alternatively seeks unspecified money damages, as well as recovery of court costs, for alleged common law negligent misrepresentation against these same defendants. In August 2014, the court granted Geveran’s motion to amend their first amended complaint to assert a claim for punitive damages against the defendants.

GE Lighting Solutions v. Lighting Science Group Corporation, et al.

Other

In addition, the Company may be a party to a variety of legal actions, such as employment and employment discrimination-related suits, employee benefit claims, breach of contract actions, tort claims, shareholder suits, including securities fraud, intellectual property related litigation, and a variety of legal actions relating to its business operations. In some cases, substantial punitive damages may be sought. The Company currently has insurance coverage for certain of these potential liabilities. Other potential liabilities may not be covered by insurance, insurers may dispute coverage or the amount of insurance may not be sufficient to cover the damages awarded. In addition, certain types of damages, such as punitive damages, may not be covered by insurance and insurance coverage for all or certain forms of liability may become unavailable or prohibitively expensive in the future.