NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 and markets general illumination products that exclusively use light emitting diodes (“LEDs”) as their light source. The Company’s product portfolio includes LED-based retrofit lamps (replacement bulbs) that can be used in existing light fixtures and sockets as well as purpose built LED-based luminaires (light fixtures) for many common indoor and outdoor residential, commercial, industrial and public infrastructure lighting applications. The Company assembles and manufactures its products 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, 2016 is derived from the Company’s audited financial statements. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results of the Company that may be expected for the year ending December 31, 2017. 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, 2016 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on April 14, 2017.
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 the accompanying condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenue and expenses. Such estimates include the valuation of accounts receivable, inventories, intangible assets and other long-lived assets, legal contingencies, and customer incentives, among others. These estimates and assumptions are based on management’s best estimates and judgments. Management evaluates its estimates and assumptions on an on
-going basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency and energy markets and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.
Restricted Cash
As of March 31, 2017 and December 31, 2016, 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 was required to maintain a minimum restricted cash balance of $3.0 million to collateralize the Medley Term Loan.
Accounts Receivable
The Company records accounts receivable at the invoiced amount when its products are shipped to customers or upon the completion of specific milestone billing requirements. The Company’s 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, aging of receivables and known collectability issues. The Company writes off accounts receivable when it becomes apparent, based upon 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 March 31, 2017 and December 31, 2016, the Company’s allowance for doubtful accounts was $341,000 and $324,000, respectively.
As of March 31, 2017, $2.0 million 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, as amended from time to time, is hereinafter referred to as the “Ares ABL”.
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:
|
•
|
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
|
|
•
|
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
|
|
•
|
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
|
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 these terms have been met. The Company also provides its customers with limited rights of return for non-conforming shipments or product warranty claims.
Product Warranties
The Company generally provides a five-year limited warranty covering defective materials and workmanship of its products and 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 following table summarizes changes in the warranty liability for the three months ended March 31, 2017:
Warranty liability as of December 31, 2016
|
|
$
|
2,598,567
|
|
Additions to liability
|
|
|
83,999
|
|
Less warranty costs
|
|
|
(201,772
|
)
|
Warranty liability as of March 31, 2017
|
|
$
|
2,480,794
|
|
Recent Accounting Pronouncements Not Yet Adopted
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, which will replace most existing revenue recognition guidance in United States generally accepted accounting principles (“GAAP”) and is intended to improve and converge the financial reporting requirements for revenue from contracts with customers with
International Financial Reporting Standards (“IFRS”). The core principle of ASU 2014-09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU 2014-09 also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 allows for both retrospective and prospective methods of adoption and is effective for
annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. Early application is permitted but not before annual reporting periods beginning after December 15, 2016.
Management expects to adopt ASU No. 2014-09 for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting year. While Management is still in its assessment process, the Company generally does not expect the impact of the adoption of this ASU to be significant to its consolidated financial statements, it is still evaluating the impact on the disclosures in the notes to consolidated financial statements. Management currently expects to apply ASU 2014-09 retrospectively with the cumulative effect of initially applying the ASU recognized at the date of initial application recorded as an adjustment to retained earnings, referred to as the "Modified Retrospective Approach."
Leases
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”. ASU 2016-02 introduces a lessee model that brings most leases on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in ASC 606, the FASB's new revenue recognition standard (e.g., those related to evaluating when profit can be recognized). Furthermore, ASU 2016-02 addresses other concerns related to the current leases model. For example, ASU 2016-02 eliminates the requirement in current GAAP for an entity to use bright-line tests in determining lease classification. The standard also requires lessors to increase the transparency of their exposure to changes in value of their residual assets and how they manage that exposure. The Company is required to adopt ASU 2016-02 for periods beginning after December 15, 2018, including interim periods, with early adoption permitted. Management is currently evaluating the method of adoption of this ASU on the Company’s consolidated financial statements, but expects that it will not have a material impact on the consolidated financial statements since the Company’s lease commitments are not material and are not for extended periods of time.
Cash Flows
In November 2016, the FASB issued ASU 2016-18, which requires that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This update is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. The Company is currently assessing the effect that adoption will have on its consolidated financial statements.
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 $855.4 million and stockholders’ deficit of $588.1 million as of March 31, 2017. As of March 31, 2017, the Company had cash and cash equivalents of $1.8 million 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 and payment of salaries, employee benefits and other operating costs.
The Company’s primary sources of liquidity have historically been borrowings from various lenders and sales of the Company’s common stock, par value $0.001 per share (the “Common Stock”) and Convertible 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 Fund 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 Fund IV, LSGC Holdings, Holdings II, Holdings III and their affiliates, “Pegasus”). Pegasus is the Company’s controlling stockholder and has led a majority of the Company’s capital raises.
Cash Flows and Operating Results
The Company continues to face challenges in its efforts to achieve profitability and positive cash flows from operations. 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 that the Company may raise through public or private financing or increased borrowing capacity.
The Company’s cash flows were adversely affected by the loss of certain business from its largest customer, The Home Depot, following a 2015 product line review. Although the Company was selected to supply certain new products to The Home Depot under the new supplier buying agreement with The Home Depot that went into full effect in the second quarter of 2016, such new business only partially offset the negative effects of the lost business. As was the case under the Company’s prior agreement with The Home Depot, The Home Depot is not required to purchase any minimum amount of products under the new supplier agreement.
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 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, the Company may not be able to complete a restructuring or refinancing 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 would be adversely affected.
Joint Venture
On March 20, 2017, the Company and its newly formed subsidiary, LSG MLS JV Holdings, Inc. (“LSG JV Holdings”), entered into an operating agreement (the “JV Operating Agreement”) with MLS Co., Ltd. (“MLS”) relating to the formation of Global Value Lighting, LLC (“GVL”). GVL was formed for the purpose of carrying out the manufacturing, marketing, sale and distribution of private label LED lighting products and services to retail and commercial customers in North America and South America (the “Joint Venture”). The Joint Venture is an integral part of the Company’s long-term strategy. As discussed further in Note 15, the Company may be required to make up to $7.65 million in additional capital contributions to GVL prior to May 8, 2018.
Outstanding Indebtedness
The Medley Term Loan is subject to the terms of the Term Loan Agreement, dated February 19, 2014 (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.
As a condition to Medley’s consent to closing of the Joint Venture transaction, the Company is required to repay $5.0 million of the outstanding indebtedness under the Medley Term Loan on or before June 1, 2017. The Company made the mandatory prepayment on May 8, 2017.
The Company had a three-year revolving credit facility with a maximum line amount of $22.5 million from Ares, which was governed by the terms of the Loan and Security Agreement, dated April 25, 2014 (as amended from time to time, the “Ares ABL Agreement”). As of March 31, 2017, the Company had $2.2 million in borrowings outstanding under the Ares ABL Agreement and additional borrowing capacity of $3.1 million. The maximum borrowing capacity under the Ares ABL Agreement was based on a formula of eligible accounts receivable and inventory. The Ares
ABL Agreement also requires the Company to maintain certain minimum EBITDA levels
.
The Company repaid the $1.3 million outstanding balance of the Ares ABL when it matured on April 25, 2017.
Preferred Stock
As of March 31, 2017, the Company had issued 103,062 units of securities (“Series J Securities”), including 3,000 and 7
,000 Series J Securities issued to Holdings III on January 27, 2017 and February 3, 2017, respectively. On April 24, 2017 and May 8, 2017, the Company issued an additional 4,400 and 10,600 Series J Securities, respectively, to Holdings III. In each case, the Series J Securities were issued at a purchase price of $1,000 per Series J Security. The Company received aggregate gross proceeds of approximately $10.0 million from the issuances of Series J Securities during the three months ended March 31, 2017 and an additional $15.0 million from the issuances of Series J Securities on April 24, 2017 and May 8, 2017. 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”).
Pursuant to the certificates of designation governing the Company’s 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 “Convertible Preferred Stock”), Pegasus has the right to cause the Company to redeem such shares at any time on or after March 27, 2017 and, if Pegasus were to exercise such right and cause the Company to redeem its shares of Convertible Preferred Stock, all other holders of the applicable series would similarly have the right to request the redemption of their shares of Convertible Preferred Stock. Nonetheless, Pegasus has agreed that it will not exercise its optional redemption rights through November 14, 2019, The Company is also required to redeem the outstanding shares of 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 Convertible 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 Convertible Preferred Stock.
Depending on whether the Appeal Bond (as defined below) has been drawn or fully released, the Series K Certificate of Designation requires the Company to redeem the outstanding shares of Series K Preferred Stock in the event of a liquidation, dissolution or winding up of the Company or an earlier change of control or “junior security redemption,” which includes events triggering a redemption of the outstanding shares of Convertible Preferred Stock.
As of March 31, 2017, in the event the Company was required to redeem all of its outstanding shares of Convertible Preferred Stock and Series K Preferred Stock (collectively, the “Preferred Stock”), the Company’s maximum payment obligation would have been $564.0 million. Prior to the redemption of any shares of Preferred Stock, however, the Company would be required to repay its outstanding obligation under the Medley Term Loan, which was $31.0 million as of March 31, 2017.
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 March 31, 2017, based solely on a review of the Company’s balance sheet, the Company did not have legally available funds under Delaware law to satisfy the redemption of all of its outstanding shares of Preferred Stock. 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.
Geveran Litigation
As discussed further in Note 14, one of the Company’s stockholders, Geveran Investments Limited (“Geveran”), filed a lawsuit against the Company and certain other defendants seeking, among other things, rescissionary damages in connection with its $25.0 million investment in the Company. On November 30, 2015, the Circuit Court of the Ninth Judicial Circuit in and for Orange County, Florida
, the court presiding over the lawsuit, entered an Order Granting Plaintiff’s Motion for Partial Summary Judgment Under its First Cause of Action for Violation of the Florida Securities and Investment Protection Act (the “Summary Judgment Order”). Accordingly, the Company, with the assistance of Pegasus Fund IV, posted an appeal bond in the amount of $20.1 million (the “Appeal Bond”) in support of the Company’s appeal of the Summary Judgment Order. As contemplated by the Preferred Stock Subscription and Support Agreement dated September 11, 2015 (the “Subscription and Support Agreement”) among the Company, Holdings III and Pegasus Fund IV, Pegasus Fund IV agreed to assist the Company in securing the Appeal Bond on the terms set forth in a General Indemnity Agreement and related side letter to be entered into by and among the Company, Pegasus Fund IV and the issuer of the Appeal Bond (the “Appeal Bond Agreements”). The Company executed the Appeal Bond Agreements with Pegasus Fund IV and the issuer of the Appeal Bond on December 4, 2015, and on December 7, 2015, in consideration of Pegasus Fund IV’s entry into the Appeal Bond Agreements and as security for the potential payments to be made to the issuer of the Appeal Bond for draws upon the Appeal Bond, the Company issued 20,106.03 units of its securities (the “Series K Securities”) to Pegasus Fund IV pursuant to the Subscription and Support Agreement, with each Series K Security consisting of (a) one share of Series K Preferred Stock and (b) a warrant to purchase 735 shares of Common Stock (a “Series K Warrant”). The number of Series K Securities issued to Pegasus Fund IV was determined based on the quotient obtained by dividing (x) the aggregate amount of the bonds, undertakings, guarantees and/or contractual obligations underlying Pegasus Fund IV’s initial commitment with respect to the Appeal Bond by (y) $1,000. Although the Company cannot predict the ultimate outcome of this lawsuit, it believes the court’s Summary Judgment Order in favor of Geveran is in error and that it has strong defenses against Geveran’s claims. However, in the event that the Company is not successful on appeal, it could be liable for the full amount of Geveran’s $25.0 million investment, as well as interest, attorneys’ fees and court costs. Accordingly, the Summary Judgment Order and the Appeal Bond could have a material adverse effect on the Company’s liquidity and its ability to raise capital in the future.
Management’s Assessment Regarding the Company’s Ability to Continue as a Going Concern
In connection with the preparation of the financial statements for the three months ended March 31, 2017, the Company concluded that due to the Company’s historical cash flows and operating results, its existing and future obligations with respect to its outstanding indebtedness, the redemption rights of certain preferred stockholders and the Company’s obligations to make capital contributions to GVL (collectively, the “Liquidity Challenges”), substantial doubt exists regarding the Company’s ability to continue as a going concern. However, management believes that (i) certain events that have occurred since March 31, 2017, as discussed in further detail above and in Note 15, and (ii) certain actions expected to be implemented in 2017 will alleviate such substantial doubt. Specifically, management has concluded that it is probable that the following events will alleviate the substantial doubt raised by the Liquidity Challenges and, as a result, that the Company will be able to satisfy its estimated liquidity needs for 12 months from the issuance of the financial statements included in this report: (a) the issuance of an aggregate of 15,000 Series J Securities on April 24, 2017 and May 8, 2017 (the “Q2 Series J Issuances”), which provided $15.0 million in aggregate gross proceeds to the Company; (b) the payoff of the outstanding borrowings under the Ares ABL on April 25, 2017; (c) the expected cost savings resulting from headcount reductions in February 2017; (d) the Company’s expectations regarding the benefits of the Joint Venture that closed on May 8, 2017, including but not limited to anticipated improvements in gross margins and cash flows within the next 12 months; (e) Pegasus’s agreement that it will not exercise its optional redemption rights with respect to the Convertible Preferred Stock through November 14, 2019; and (f) Pegasus’s commitment to provide financial support to fund the Company’s operations and debt service requirements of up to $13.2 million for at least twelve months from April 12, 2017, all of which was funded in connection with the issuances of Series J Securities on April 24, 2017 and May 8, 2017, discussed in Note 15.
Nonetheless, the Company cannot predict, with certainty, the long-term impact of the actions that it has taken to date in order to generate liquidity, or the potential outcome of the actions that the Company intends to take in the near future, including whether such actions will generate the expected liquidity as currently planned. If the Company continues to experience operating losses and is not able to generate additional liquidity through the actions described above or through some combination of other actions, the Company will need to secure additional sources of funds, which may or may not be available on favorable terms, if at all.
Note 4. Detail of Certain Balance Sheet Accounts
Inventories
Inventories consisted of finished goods as of March 31, 2017 and December 31, 2016 and were stated net of inventory reserves of $4.9 million and $5.4 million, respectively. The Company considered a number of factors in estimating the required inventory reserves, 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 life-cycle upon the introduction of the next generation of products.
Property and Equipment, Net
Property and equipment, net consisted of the following as of the dates indicated:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Leasehold improvements
|
|
$
|
343,149
|
|
|
$
|
343,150
|
|
Office furniture and equipment
|
|
|
284,986
|
|
|
|
284,986
|
|
Computer hardware and software
|
|
|
7,897,097
|
|
|
|
7,928,538
|
|
Tooling, production and test equipment
|
|
|
4,134,405
|
|
|
|
4,055,255
|
|
Trailers
|
|
|
45,996
|
|
|
|
45,996
|
|
Construction-in-process
|
|
|
31,312
|
|
|
|
33,787
|
|
Total property and equipment
|
|
|
12,736,945
|
|
|
|
12,691,712
|
|
Accumulated depreciation
|
|
|
(12,125,908
|
)
|
|
|
(12,055,474
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
611,037
|
|
|
$
|
636,238
|
|
Depreciation related to property and equipment was $107,000 and $198,000 for the three months ended March 31, 2017 and 2016, respectively.
Note 5. Intangible Assets
Intangible assets that have finite lives are amortized over their useful lives. The Company’s intangible assets as of March 31, 2017 and December 31, 2016 are detailed below:
|
|
Cost, Less
Impairment
Charges
|
|
|
Accumulated
Amortization
|
|
|
Net Book
Value
|
|
Estimated
Remaining
Useful Life
(in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and intellectual property
|
|
$
|
4,016,592
|
|
|
$
|
(445,054
|
)
|
|
$
|
3,571,538
|
|
0.9
|
to
|
19.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technology and intellectual property
|
|
$
|
3,908,796
|
|
|
$
|
(412,628
|
)
|
|
$
|
3,496,169
|
|
0.9
|
to
|
19.7
|
Total intangible asset amortization expense was $32,000 and $23,000 for the three months ended March 31, 2017 and 2016, respectively.
Note 6. Debt Issuance Costs
The Company capitalizes its costs related to the issuance of long-term debt (including amendment fees) 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. The Company had net unamortized debt issuance costs of $1.6 million and $2.1 million as of March 31, 2017 and December 31, 2016, respectively. The Company amortized $530,000 and $357,000 of debt issuance costs for the three months ended March 31, 2017 and 2016, respectively
.
Note 7. Lines of Credit and Note Payable
Ares ABL
The Ares ABL provided the Company with a maximum borrowing capacity of $22.5 million, calculated based on a formula of eligible accounts receivable and inventory.
As of March 31, 2017, the Company had additional borrowing capacity of $3.1 million.
At March 31, 2017 and December 31, 2016, borrowings outstanding under the Ares ABL were as follows:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Ares ABL, revolving line of credit
|
|
$
|
2,168,296
|
|
|
$
|
6,080,911
|
|
Less: Debt issuance costs
|
|
|
-
|
|
|
$
|
(295,891
|
)
|
Line of credit, net of debt issuance costs
|
|
|
2,168,296
|
|
|
|
5,785,020
|
|
As of March 31, 2017, loan collateral value included $1.7 million of accounts receivable and $4.7 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 March 31, 2017, the interest rate on the Ares ABL was 6.29%.
The Company repaid the outstanding balance of the Ares ABL when it matured on April 25, 2017.
Medley
Term Loan
The Medley Term Loan is a $30.5 million term loan facility that bears interest at a floating rate equal to three-month LIBOR plus 12% per annum, as follows: (i) up to 2% (at the Company’s election) of interest may be paid as “payment in kind” by adding such accrued interest to the unpaid principal balance of the Medley Term Loan and (ii) the remaining accrued interest amount is payable in cash monthly in arrears. As of March 31, 2017, the interest rate on the Medley Term Loan was 13.1%. 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. This $3.0 million is recorded as restricted cash in the accompanying condensed consolidated balance sheets. The outstanding principal balance and all accrued and unpaid interest on the Medley Term Loan are due and payable on February 19, 2019.
At March 31, 2017 and December 31, 2016, borrowings outstanding under the Medley Term Loan were as follows:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Medley Term Loan
|
|
$
|
31,016,864
|
|
|
$
|
30,660,183
|
|
Less: Debt issuance costs
|
|
$
|
(1,629,059
|
)
|
|
$
|
(1,801,605
|
)
|
Note payable, net of debt issuance costs
|
|
|
29,387,805
|
|
|
|
28,858,578
|
|
For the three months ended March 31, 2017 and 2016, the Company recognized $195,000 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. In addition, the Company also recognized $162,000 and $155,000 of paid in kind interest accretion for the three months ended March 31, 2017 and 2016, respectively.
Note 8. 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 March 31, 2017, according to the valuation techniques the Company used to determine their fair values:
|
|
Fair Value Measurement as of March 31, 2017
|
|
|
|
Quoted Price in
Active Markets for
Identical Assets
|
|
|
Significant Other
Observable Inputs
|
|
|
Significant
Unobservable Inputs
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Liabilities (Recurring):
|
|
|
|
|
|
|
|
|
|
|
|
|
Riverwood Warrants
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,067,458
|
|
Pegasus Warrant
|
|
|
-
|
|
|
|
-
|
|
|
|
590,000
|
|
THD Warrant
|
|
|
-
|
|
|
|
-
|
|
|
|
15,798
|
|
Medley Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
348,601
|
|
Pegasus Guaranty Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
396,301
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,418,158
|
|
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 in Note 2 above
, for the three months ended March 31, 2017:
|
|
|
|
|
|
Realized and
unrealized
gains
|
|
|
Purchases, sales,
|
|
|
Transfers in
|
|
|
|
|
|
|
|
Balance
|
|
|
(losses) included
|
|
|
issuances and
|
|
|
or out of
|
|
|
Balance
|
|
|
|
December 31, 2016
|
|
|
in net loss
|
|
|
settlements
|
|
|
Level 3
|
|
|
March 31, 2017
|
|
Pegasus Commitment
|
|
$
|
40,000
|
|
|
$
|
(40,000
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Riverwood Warrants
|
|
|
(345,568
|
)
|
|
|
(721,890
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,067,458
|
)
|
September 2012 Warrants
|
|
|
(40,000
|
)
|
|
|
40,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Pegasus Warrant
|
|
|
(191,000
|
)
|
|
|
(399,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(590,000
|
)
|
THD Warrant
|
|
|
(2,782
|
)
|
|
|
(13,016
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,798
|
)
|
Medley Warrants
|
|
|
(218,262
|
)
|
|
|
(130,339
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(348,601
|
)
|
Pegasus Guaranty Warrants
|
|
|
(250,445
|
)
|
|
|
(145,856
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(396,301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(1,008,057
|
)
|
|
$
|
(1,410,101
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(2,418,158
|
)
|
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 for the three months ended March 31, 2016:
|
|
|
|
|
|
Realized and
unrealized
gains
|
|
|
Purchases, sales,
|
|
|
Transfers in
|
|
|
|
|
|
|
|
Balance
|
|
|
(losses) included
|
|
|
issuances and
|
|
|
or out of
|
|
|
Balance
|
|
|
|
December 31, 2015
|
|
|
in net loss
|
|
|
settlements
|
|
|
Level 3
|
|
|
March 31, 2016
|
|
Pegasus Commitment
|
|
$
|
214,400
|
|
|
$
|
(5,600
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
208,800
|
|
Riverwood Warrants
|
|
|
(1,747,737
|
)
|
|
|
1,810
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,745,927
|
)
|
September 2012 Warrants
|
|
|
(214,400
|
)
|
|
|
5,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(208,800
|
)
|
Pegasus Warrant
|
|
|
(966,000
|
)
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(965,000
|
)
|
THD Warrant
|
|
|
(63,635
|
)
|
|
|
(16,516
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(80,151
|
)
|
Medley Warrants
|
|
|
(565,776
|
)
|
|
|
(25,274
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(591,050
|
)
|
Pegasus Guaranty Warrants
|
|
|
(615,261
|
)
|
|
|
(39,754
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(655,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(3,958,409
|
)
|
|
$
|
(78,734
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(4,037,143
|
)
|
Note 9. Stockholders’ Equity
For the three months ended March 31, 2017 and 2016, the Company recorded expense of $2,000 and $12,000, respectively, related to stock compensation for awards to the Company’s directors. For the three months ended March 31, 2017, there were forfeitures of stock compensation awards for directors of $12,000.
Warrants for the Purchase of Common Stock
As of March 31, 2017, the following warrants for the purchase of Common Stock were outstanding:
Warrant Holder
|
|
Reason for Issuance
|
|
Number of Common Shares
|
|
|
Exercise Price
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investors in rights offering
|
|
Series D Warrants
|
|
|
1,535,801
|
|
|
$2.06
|
to
|
$2.07
|
|
March 3, 2022 through April 19, 2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Home Depot
|
|
Purchasing agreement
|
|
|
2,723,756
|
|
|
|
$0.79
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pegasus
|
|
Riverwood Warrants
|
|
|
18,092,511
|
|
|
|
Variable
|
|
|
May 25, 2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aquillian Investments LLC
|
|
Private Placement Series H
|
|
|
830,508
|
|
|
|
$1.18
|
|
|
September 25, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pegasus
|
|
Pegasus Warrant
|
|
|
10,000,000
|
|
|
|
Variable
|
|
|
May 25, 2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investors in Series J Follow-On Offering
|
|
Series J Warrants
|
|
|
273,114,300
|
|
|
|
$0.001
|
|
|
January 3, 2019 through February 3, 2022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medley
|
|
Medley Warrants
|
|
|
10,000,000
|
|
|
|
$0.95
|
|
|
February 19, 2024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pegasus
|
|
Pegasus Guaranty Warrants
|
|
|
10,000,000
|
|
|
|
$0.50
|
|
|
February 19, 2024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pegasus
|
|
Series K Warrants
|
|
|
14,777,932
|
|
|
|
$0.12
|
|
|
December 31, 2025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
341,074,807
|
|
|
|
|
|
|
|
Note 10: Earnings (Loss) Per Share
The Company has two classes of Common Stock 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 months ended March 31, 2017 and 2016, 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 dividends.
The following table sets forth the computation of basic and diluted net loss per share of Common Stock:
|
|
For the Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
Controlling Stockholders
|
|
|
Noncontrolling Stockholders
|
|
|
Controlling Stockholders
|
|
|
Noncontrolling Stockholders
|
|
Basic and diluted net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stock
|
|
$
|
(6,089,764
|
)
|
|
$
|
(1,709,624
|
)
|
|
$
|
(3,632,930
|
)
|
|
$
|
(1,087,318
|
)
|
Deemed dividends related to the Series J Preferred Stock
attributable to all shareholders
|
|
|
(8,767,492
|
)
|
|
|
(2,461,363
|
)
|
|
|
(2,930,787
|
)
|
|
|
(877,170
|
)
|
Undistributed net loss
|
|
$
|
(14,857,256
|
)
|
|
$
|
(4,170,987
|
)
|
|
$
|
(6,563,717
|
)
|
|
$
|
(1,964,488
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted weighted average number of common shares outstanding
|
|
|
375,961,974
|
|
|
|
105,546,568
|
|
|
|
327,637,170
|
|
|
|
98,060,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per common share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
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 283.8 million and 270.8 million common stock equivalents for the three months ended March 31, 2017 and 2016, 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 being in a net loss position.
Note 11: Related Party Transactions
Pegasus Capital is an affiliate of Pegasus IV and LSGC Holdings, which are the Company’s largest stockholders. Pegasus beneficially owned approximately 92.5% of the Common Stock as of March 31, 2017.
On January 27, 2017 and February 3, 2017, the Company issued 3,000 and 7,000 Series J Securities, respectively, to Holdings III pursuant to the Series J Preferred Stock Subscription Agreement dated January 27, 2017, between the Company and Holdings III (as amended from time to time, the “2017 Subscription Agreement”) for aggregate gross proceeds of $10.0 million.
On February 3, 2017, Pegasus purchased all of the outstanding membership interests of RW LSG Holdings LLC and renamed the entity LSGC Holdings IIIa, LLC. Such entity owns 45,000 shares of Series H Preferred Stock and is one of the preferred stockholders entitled to the redemption rights described in Note 3 above. Pegasus also purchased an aggregate of 49,000 shares of Series H Preferred Stock from three other preferred stockholders who, acting together, could also trigger redemption rights with respect to the Convertible Preferred Stock. In addition, warrants held by these parties, representing the right to purchase an aggregate of 8,000,000 shares of Common Stock, were purchased by Pegasus and subsequently cancelled. As a result of the foregoing transactions, Pegasus is currently the only preferred stockholder possessing the right to require the Company to, at any time on or after March 27, 2017, redeem its shares of Convertible Preferred Stock and,consequently, trigger the rights of all other holders of the applicable series to request the redemption of their shares of Convertible Preferred Stock. Nonetheless, Pegasus agreed that it will not exercise such redemption rights through November 14, 2019. Finally, on February 3, 2017, Pegasus also purchased warrants to purchase an aggregate of 18,092,511 shares of Common Stock from affiliates of Riverwood LSG Management Holdings LLC.
Note 12. Restructuring Expense
In February 2017, the Company implemented restructuring plan to increase efficiencies across the organization and lower the overall cost structure. This restructuring plan included a reduction in full time headcount in the United States, which was substantially completed at March 31, 2017 and is expected to be finalized by May 31, 2017. For the three months ended March 31, 2017, the Company incurred $409,000 of costs as a result of severance and termination benefits.
As of March 31, 2017, the accrued liability associated with the restructuring and other related charges consisted of the following:
|
|
Workforce
|
|
|
Excess
|
|
|
Other
|
|
|
|
|
|
|
|
Reduction
|
|
|
Facilities
|
|
|
Exit Costs
|
|
|
Total
|
|
Accrued liability as of December 31, 2016
|
|
$
|
20,000
|
|
|
$
|
241,493
|
|
|
$
|
4,200
|
|
|
$
|
265,693
|
|
Charges
|
|
|
409,199
|
|
|
|
-
|
|
|
|
-
|
|
|
|
409,199
|
|
Payments
|
|
|
(99,837
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(99,837
|
)
|
Accrued liability as of March 31, 2017
|
|
$
|
329,362
|
|
|
$
|
241,493
|
|
|
$
|
4,200
|
|
|
$
|
575,054
|
|
The remaining accrual of $575,000 as of March 31, 2017 is expected to be paid during the years ending December 31, 2017 and 2018.
Note 13. Concentrations of Credit Risk
For the three months ended March 31, 2017 and 2016, revenue from sales to one customer represented 81% and 91% of the Company’s total revenue, respectively.
As of March 31, 2017 and December 31, 2016, the Company had one customer whose accounts receivable balance represented 69% and 58% of accounts receivable, net of allowances.
Note 14. Commitments and Contingencies
The Company is subject to the possibility of loss contingencies arising in its business and such contingencies are accounted for in accordance with ASC Topic 450, "Contingencies.” In determining loss contingencies, the Company considers the possibility of a loss as well as 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. In the ordinary course of business, the Company is routinely a defendant in or party to various pending and threatened legal claims and proceedings. The Company believes that any probable liability resulting from these various claims will not have a material adverse effect on its results of operations or financial condition; however, it is possible that extraordinary or unexpected legal fees could adversely impact the Company’s financial results during a particular period. 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.
On June 22, 2012, Geveran filed a lawsuit against the Company and several others 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 action, styled Geveran Investments Limited v. Lighting Science Group Corp., et al., Case No. 12-17738 (07), names the Company as a defendant, as well as Pegasus Capital and nine other entities affiliated with Pegasus Capital; Richard Weinberg, the Company’s 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 rescission of 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.
The Summary Judgment Order was issued on August 28, 2014 and entered
on November 30, 2015. Accordingly, on December 4, 2015, the Company, along with certain other related defendants, filed a Notice of Appeal to the Florida Fifth District Court of Appeal and posted a bond securing the judgment in the amount of approximately $20.1 million. Defendant J.P. Morgan also posted a separate bond in the amount of approximately $20.1 million, resulting in total bonding of approximately $40.2 million. On March 29, 2016, the trial court judge determined that the posted bonds were sufficient security to stay execution of the judgment pending the appeal.
Although the Company cannot predict the ultimate outcome of this lawsuit, it believes the court’s summary judgment award in favor of Geveran was in error, that the Company will prevail on the appeal and the judgment will be overturned, and that the case will be remanded to the trial court for further proceedings. If the case is remanded to the trial court, the Company believe it has strong defenses against Geveran’s claims. However, in the event that the Company is not successful on appeal, it could be liable for the full amount of the $40.2 million judgment, plus post judgment interest. Such an outcome would have a material adverse effect on its financial position.
The Company believes that, subject to the terms and conditions of the relevant policies (including retention and policy limits), directors’ and officers’ (“D&O”) insurance coverage will be available to cover a substantial majority of its legal fees and costs in this matter. However, insurance coverage may not be available for, or such coverage may not be sufficient to fully pay, a judgment or settlement in favor of Geveran. On July 26, 2016, the Company,
along with certain other related defendants, filed a lawsuit in Delaware state court against its D&O carriers, Liberty Insurance, Starr, and Continental Casualty, seeking a declaratory judgment and damages arising out of the defendant carriers’ breach of their coverage obligations under various applicable D&O policies.
Based upon the terms of an indemnification agreement, the Company has also paid, and may be required to pay in the future, reasonable legal expenses incurred by J.P. Morgan and its affiliates in this lawsuit in connection with the engagement of J.P. Morgan as placement agent for the private placement with Geveran. Such payments are not covered by the Company’s insurance coverage. The agreement executed with J.P. Morgan provides that the Company will indemnify J.P. Morgan and its affiliates from liabilities relating to J.P. Morgan’s activities as placement agent, unless such activities are finally judicially determined to have resulted from J.P. Morgan’s bad faith, gross negligence or willful misconduct.
The Company was also a defendant in an action brought by GE Lighting Solutions LLC (“GE Lighting”) in Federal District Court for the Northern District of Ohio in or about January 2013. GE Lighting asserted a claim of patent infringement against the Company under U.S Patent No. 6,787,999, entitled
LED-Based Modular Lamp
, and U.S. Patent No. 6,799,864, entitled
High Power LED Power Pack for Spot Module Illumination
, and sought monetary damages and an injunction. On May 10, 2017, the Company and GE Lighting entered into a Settlement and Patent Cross-License Agreement that resolved the matter and released the underlying claims. Pursuant to the agreement, among other things, each of the parties agreed to grant the other party non-exclusive licenses for the patents underlying the claims, and the Company agreed to pay GE Lighting $600,000, which is payable in four installments commencing on June 1, 2017 and ending on December 3, 2018.
In April 2015, the Company filed a lawsuit against several former employees and a company they formed seeking damages and injunctive relief arising out of the defendants’ misappropriation of the Company’s trade secrets and other intellectual property. Pursuant to the terms of a settlement agreement entered into in December 2015, certain of the individual defendants agreed not to use or disclose our intellectual property and to reimburse us for $200,000 in costs, and the defendants’ company agreed to pay us a commission equal to the greater of (i) $1.7 million and (ii) 5% of such company’s gross sales of biological and agricultural products during the three-year period ending January 2019
.
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.
Note 15. Subsequent Events
On April 24, 2017 and May 8, 2017, the Company issued 4,400 and 10,600 Series J Securities, respectively, to Holdings III pursuant to the 2017 Subscription Agreement for aggregate gross proceeds of $15.0 million.The Company repaid the $1.3 million outstanding balance of the Ares ABL when it matured on April 25, 2017.
The Company made the $5.0 million prepayment to Medley under the Medley Term Loan on May 8, 2017
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In connection with the closing of the Joint Venture transaction on May 8, 2017, the Company (through LSG JV Holdings) made an initial capital contribution of $5.1 million in cash to GVL and owns 51% of the membership interests of GVL. MLS made an initial capital contribution of $2.0 million in cash to GVL and is required to contribute an additional $2.9 million by May 15, 2017. MLS owns 49% of the membership interests of GVL. Upon the determination of GVL’s board of managers, each of LSG JV Holdings and MLS will be required to make additional capital contributions of up to $7.65 million and $7.35 million in the aggregate, respectively, during the first 12 months following the closing date.