SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q /A
Amendment No. 1
For the quarterly period ended September 30, 2011
For the transition period from ______________to _______________.
Commission File Number 000-53590
SUNOVIA ENERGY TECHNOLOGIES, INC.
(Exact name of small business issuer as specified in its charter)
106 Cattlemen Rd. Sarasota, FL 34232
(Address of principal executive offices)
(Issuer’s telephone number)
(Former name, former address and former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
The number of shares of the Registrant’s Common Stock outstanding as of November 8, 2011 was 849,857,303.
This Amendment No. 1 on Form 10-Q/A (“Amendment”) amends our quarterly report on Form 10-Q for the fiscal quarter ended September 30, 2011 as filed with the Securities and Exchange Commission on November 14, 2011. This Amendment is being filed to correct two typographical errors and to correct the descriptions of net cash used in operating activities and the components of selling, general and administrative expenses, all of which appear in Part 1, Item 2 Management’s Discussion and Analysis.
Part I Financial Information
Item 1. Financial Statements
The Company’s unaudited financial statements for the three and nine months ended September 30, 2011 and for comparable periods in the prior year are included below. The financial statements should be read in conjunction with the notes to financial statements that follow.
Sunovia Energy Technologies, Inc.
Consolidated Balance Sheets
See the accompanying notes to the consolidated financial statements.
Sunovia Energy Technologies, Inc.
Consolidated Statements of Operations
For the Three Months and Nine Months Ended September 30, 2011 and October 31, 2010
See the accompanying notes to the consolidated financial statements.
See the accompanying notes to the consolidated financial statements.
SUNOVIA ENERGY TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization, Nature, and Continuance of Operations
Sunovia Energy Technologies, Inc. (“the Company”) is a Nevada corporation engaged in the business of providing energy-efficient and sustainable energy solutions primarily through the design, manufacture and sale of light emitting diode (LED) lighting solutions for outdoor and area lighting. Through its wholly-owned subsidiary, EvoLucia, Inc., the Company designs, manufactures and sells environmentally responsible, energy-efficient lighting products based on the latest and most efficient LED technologies and its own patented Aimed Optics™ technology, which improves efficiency and energy savings by aiming light where it is needed most, providing for safe and more effective outdoor and area lighting while eliminating wasted light. In the past, the Company also engaged in research and development in solar energy and infrared technologies; however, the Company is no longer engaged in those activities.
Basis of presentation
The accompanying unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. All material inter-company accounts, transactions and profits have been eliminated. In the opinion of management, these consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of the results for and as of the periods shown. The accompanying consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles. However, certain information or footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The results of operations for such periods are not necessarily indicative of the results expected for 2011 or for any future period. These financial statements should be read in conjunction with the financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended July 31, 2010 and the transition period ended December 31, 2010, filed with the Securities and Exchange Commission.
The Company changed its year end from July 31 to December 31 effective December 31, 2010. The financial statements presented herein include the statements of operations and cash flows for the three months ended September 30, 2011, and October 31, 2010, and the nine months ended September 30, 2011, and October 31, 2010, which represents the period of the prior year most comparable to the current period. There are no material factors or trends that affect the comparability of the periods. The recasting of the comparable period in 2010 was not considered to be practical.
Continuance of Operations
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. For the nine months ended September 30, 2011, the Company has experienced a loss of $3,218,924 and has working capital and stockholders’ deficits of $1,668,304 and $1,547,997, respectively, at September 30, 2011. To date the Company has funded operations through capital infusions from investors through the sale of its common stock and certain debt instruments, particularly convertible debentures. The Company needs significant funding from capital investment in the short term in order to support its operations and continue as a going concern. The ability of the Company to continue its operations as a going concern depends on raising sufficient new capital to fund its business and development activities for a sufficient period of time to implement strategies designed to result in profitable operations.
The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates include the valuation of stock based charges, the valuation of derivatives and the valuation of investments.
ASC 718, Stock Compensation requires that all stock-based compensation be recognized as an expense in the financial statements and that such cost be measured at the grant date fair value of the award.
We record the grant date fair value of stock-based compensation awards as an expense over the vesting period of the related stock options. In order to determine the fair value of the stock options on the date of grant, we use the Black-Scholes option-pricing model. Inherent in this model are assumptions related to expected stock-price volatility, option life, risk-free interest rate and dividend yield. Although the risk-free interest rates and dividend yield are less subjective assumptions, typically based on factual data derived from public sources, the expected stock-price volatility, forfeiture rate and option life assumptions require a greater level of judgment which make them critical accounting estimates.
We use an expected stock-price volatility assumption that is based on historical volatilities of our common stock and we estimate the forfeiture rate and option life based on historical data related to prior option grants.
Inventory consists principally of electronic components used in the assembly of LED lights. Inventory is stated at the lower of cost or market on a first in first out basis.
Loss Per Share
Loss per share is computed using the basic and diluted calculations on the statement of operations. Basic loss per share is calculated by dividing net loss available to common share stockholders by the weighted average number of shares of common stock outstanding for the period. Weighted average number of shares has been adjusted for stock splits and reverse stock splits. Diluted loss per share is calculated by dividing net loss by the weighted average number of shares of common stock outstanding for the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method. The total number of share equivalents not included in the calculation at September 30, 2011 based on this methodology was 103,733,186.
Certain amounts for the period ended October 31, 2010, have been reclassified in the comparative financial statements to be comparable to the presentation for the period ended September 30, 2011. These reclassifications had no effect on net loss as previously reported.
Prior to January 1, 2011, the Company reported results in two business segments based on historical product groupings: Lighting Product and Solar. The Company’s settlement of the EPIR litigation during the second quarter of 2011 (see Note C, below) ended its active participation in the solar business, and the solar business will no longer be presented as a business segment for the Company. Also, as of this time, the Company has no other business segment besides its lighting product; therefore, future financial statement presentation will not include segment information unless the Company enters into new lines of business or products in the future.
NOTE B - STOCKHOLDERS' EQUITY
During February 2011 a former officer cancelled 3,328,333 shares of common stock which were returned to the Company. In addition, a company controlled by this former officer cancelled a stock option covering 500,000,000 shares of common stock of the Company. The Company paid no compensation in connection with these transactions.
During the period ended September 30, 2011, the Company issued 2,089,838 shares of common stock for services. These shares were valued at their fair value based on the trading prices of the shares of $69,272.
During the period ended September 30, 2011, the Company issued 710,514 shares of common stock pursuant to the exercise of options and received cash of $71.
During the period ended September 30, 2011, the company cancelled 59,405,829 shares of common stock returned pursuant the EPIR settlement discussed in Note D and 550,000 shares of common stock issued in error.
NOTE C – COMMITMENTS, CONCENTRATIONS AND CONTINGENCIES
As previously reported, the Company and EPIR Technologies, Inc. were engaged in a dispute over their respective contractual and other obligations in their joint pursuit of certain solar and infrared technologies.
On May 12, 2011, the Company, EPIR Technologies, Inc. ("EPIR"), Sivananthan Laboratories, Inc. ("Labs") and Sivalingam Sivananthan entered into a settlement agreement settling this litigation between all of the parties. Pursuant to the terms of that settlement:
In addition, the settlement provides that the Company and EPIR will share equally in the proceeds of a sale or license of the jointly developed solar patent. Pursuant to the terms of the settlement, the case was dismissed with prejudice on June 1, 2011.
The Company is defending a lawsuit brought by a supplier of a component part of its LED lighting fixtures. The suit alleges that the Company owes a re-stocking fee in excess of $100,000 for the return of certain parts. The Company believes it has substantial defenses to this suit and intends to vigorously defend it. The lawsuit is in the early stages of pleadings, and the outcome is uncertain. No significant legal fees have been incurred in this case to date.
During the nine months ended September 30, 2011, and October 31, 2010, the Company sold LED lighting products aggregating $519,209 to 2 customers and $311,803 to one customer, respectively, which sales individually represented in excess of 10% of the Company’s net revenues. At September 30, 2011, only one customer accounted for more than 10% of net accounts receivable; this customer’s accounts receivable represent 44.8% of our total accounts receivable at quarter-end.
NOTE D – STOCK OPTIONS
On May 1, 2008, the Company adopted the 2008 Incentive Stock Plan (“the Plan”) designed to retain directors, employees, executives and consultants and reward them for making major contributions to the success of the Company. The Plan was approved by the Company’s shareholders in November, 2010. The following is a summary of the Plan and does not purport to be a complete description of all of its provisions.
The Plan is administered by the board of directors. The plan did not have any individual caps other than the limitation of granting incentive stock options to employees and the exercise of more than $100,000 in fair market value of stock per year. The plan permits the grant of restricted stock and nonstatutory options to participants where appropriate. The maximum number of shares issuable under the Plan is 125,000,000. The Plan shall terminate ten years from the date it was adopted. The board of directors may, as permitted by law, modify the terms of any grants under the Plan, and also amend, suspend, or extend the Plan itself. In addition, options may be issued outside of the plan by the Company.
During the nine months ended September 30, 2011, the Company issued an aggregate of 13,925,000 options to purchase common shares at an exercise price of $.03 per share. These options were valued using the Black-Scholes option pricing model with the following assumptions:
Term 10 years, Volatility 130%, Discount rate 3% and dividend yield 0%
The options had a fair value of $406,626 which is being amortized over the vesting period of the options.
During the nine months ended September 30, 2011, an aggregate of $1,269,000 was charged to operations related to options granted during the current year and prior years.
At September 30, 2011, there was an aggregate of $2,617,000 of unrecognized charges related to stock options which vest in future periods.
A summary of stock options outstanding, including options granted outside of the Plan is as follows:
The unvested options vest as follows:
2011 – 20,887,500; 2012 – 20,887,500; 2013 – 20,887,500; 2014 and beyond –17,758,186
The aggregate intrinsic value in the tables above represents the total pre-tax intrinsic value (difference between the Company’s closing stock price on September 30, 2011 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all the option holders exercised their options on September 30, 2011. This amount changes based upon the fair market value of the Company’s stock.
NOTE F – CONVERTIBLE DEBENTURES
On June 10, 2011, the Company completed an offering of 9% Convertible Secured Promissory Notes (the “Notes”) in the aggregate principal amount of $1,000,000 to 10 existing shareholders. The Notes bear interest at an annual rate of 9%. Interest on the Notes is accrued and payable on the earlier of conversion to common stock or the maturity date of the 9% Notes. The Notes are secured by a lien on all of the assets of the Company. The Notes mature on July 1, 2012 and may be prepaid at any time without penalty upon ten days’ notice to the holders of the Notes.
The Notes are convertible on or after September 1, 2011 at a conversion price of $.06, which is 150% of the market value of the Company’s common stock, determined based upon the closing price of the Company’s common stock for the 20-day period beginning May 31, 2011 and ending June 20, 2011. The Registrant may require conversion of the Notes if the market value of the Company’s common stock exceeds 200% of the conversion price over a 20-day trading period, provided that a minimum trading volume of 50,000 shares per day exists during that time period.
NOTE G – SUBSEQUENT EVENTS
On October 6, 2011, the Company granted a stock option covering 4,500,000 shares to Erich Hofer, as director of the Company, under its 2008 Incentive Stock Plan. The option is intended to replace the annual grant of 200,000 shares included in Mr. Hofer's current compensation arrangement with the Company. The option has the same terms as the employee options granted during the year: term of 10 years, exercise price equal to market value on the date of grant ($.02 in this case) and a vesting schedule of 25% after one year and ratably thereafter on a quarterly basis. Also, the option becomes fully vested in event of a change of control of the Company.
On October 22, 2011 an employee exercised a stock option for 50,000 shares of common stock at $.0001 per share.
PART 1: FINANCIAL STATEMENTS
SUNOVIA ENERGY TECHNOLOGIES, INC.
Caution Concerning Forward-Looking Statements
This Report and our other communications and statements may contain “forward-looking statements,” including statements about our beliefs, plans, objectives, goals, expectations, estimates, projections and intentions. These statements are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements, including when used in the negative. All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
Although we believe that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that the expectations reflected in these forward-looking statements will prove to be correct. Although we believe that the expectations reflected in these forward-looking statements are reasonable and achievable, these statements involve risks and uncertainties and no assurance can be given that actual results will be consistent with these forward-looking statements. Current shareholders and prospective investors are cautioned that any forward-looking statements are not guarantees of future performance. Such forward-looking statements by their nature involve substantial risks and uncertainties, certain of which are beyond our control, and actual results for future periods could differ materially from those discussed in this report, depending on a variety of important factors, among which are our ability to implement our business strategy, our ability to compete with major established companies, the acceptance of our products in our target markets, the outcome of litigation, our ability to attract and retain qualified personnel, our ability to obtain financing, our ability to continue as a going concern, and other risks described from time to time in our filings with the Securities and Exchange Commission. Forward-looking statements contained in this report speak only as of the date of this report. Future events and actual results could differ materially from the forward-looking statements. You should read this report completely and with the understanding that actual future results may be materially different from what management expects. We will not update forward-looking statements even though the Company’s situation, and its impact on a forward-looking statement previously made, may change in the future.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis summarizes the significant factors affecting: (i) our results of operations for the three months and nine months ended September 30, 2011; and (ii) financial liquidity and capital resources. This discussion and analysis should be read in conjunction with our financial statements and notes included in this Form 10-Q.
The Company changed its year end from July 31 to December 31 effective December 31, 2010. The financial statements presented herein include the statements of operations and cash flows for the three and nine months ended September 30, 2011, and the three and six months ended October 31, 2010, which represents the period of the prior year most comparable to the current period. There are no material factors or trends that affect the comparability of the periods. The recasting of the comparable period in 2010 was not considered to be practical.
We encourage you to review our periodic reports filed with the SEC and included in the SEC’s Edgar database, including the annual report on Form 10-K filed for the year ended October 31, 2010, and the transition report on Form 10-K filed for the period ended December 31, 2010 The Company is focusing solely on building its LED lighting business at this time, while attempting to preserve the value of its shared solar technology for possible commercialization in the future.
Our lighting fixtures continue to show improvements in cost and efficiency (lumens per watt) driven in part by rapid industry expansion and improvements in the core components (optics, LEDs and LED drivers) that comprise our patent pending Aimed Optics ™ platform. In addition, we completed during the third quarter of 2011 the work to standardize our core product line, consisting of 55 products for our cobrahead, shoebox, parking garage and canopy lights. This standardization is allowing us to leverage volume purchasing and facilitate forward pricing from our vendors, which will improve our ability to competitively quote sales opportunities and continue to reduce the cost of our core components across all product lines. The standardization is also a key component in the Company’s improving profitability, as it allows for pricing models to be tailored to the level of customization in products.
In addition to superior efficiency, our products are beating the competition in the performance metric of Fitted Target Efficacy (FTE) which is a standard the U.S. Department of Energy (DOE) has proposed for ENERGY STAR™ to evaluate how effectively a luminaire delivers light to the target area that it was designed to illuminate. Our patent pending Aimed Optics™ technology consistently outperforms our competitors, as recognized by our receipt of the 2010 Next Generation Luminaries™ Solid State Lighting Design Award for our outdoor street and area cobra-head product, which was selected by judging representatives from the lighting industry, International Association of Lighting Designers, the Illuminating Engineering Society and the Department of Energy from more than 350 applicants to be recommended to lighting specifiers.
EvoLucia’s Aimed Optics™ technology consistently outperforms “light bar” technology on FTE tests, as shown in the chart below:
*DOE evaluated hundreds of High Intensity Discharge (HID) fixtures to establish ENERGY STAR™ minimum FTE requirements. Minimum FTEs for LED luminaries were established to achieve at least 20% energy savings compared to top performing HID products.
The Company continues to develop relationships with sales reps in the U.S. and abroad and with OEMs to support sales of its products. We also periodically review our existing relationships with sales reps and terminate those that are not productive.
On April 18, 2011, the Company entered into a Purchasing Agreement with OSRAM SYLVANIA Inc. (“Sylvania”) relating to the terms under which the Company would sell certain of its lighting products to Sylvania if orders were placed for those products. The agreement is a set of master terms for future purchase orders, and there is no obligation imposed on Sylvania to place any orders for the Company’s products. The first significant purchase order under this arrangement was submitted by Sylvania in early August of 2011, and this relationship represented approximately 28% of the Company’s total sales during the third quarter. The Company anticipates further growth in this relationship in future quarters.
We have had a limited operating history in the LED lighting business. There are many factors that could have a material adverse effect on our business and operating results, particularly our ability to raise capital in the near term. You should read the following information in conjunction with our financial statements and related notes contained elsewhere in this report. You also should consider the risks and difficulties frequently encountered by early-stage companies, in new and rapidly evolving markets, such as the outdoor LED lighting market.
Exit From Solar Business Segment
In fiscal year 2010, we faced obstacles to developing the solar and infrared technologies that were our core business segments at the time. These obstacles included cash flow constraints, changes in the solar market that lengthened the time horizon in which that technology could become economically viable and shifts in our alliances with strategic research partners. We do not believe that those technologies will yield valuable opportunities in the future, even with additional capital commitments to them. Also, we do not have sufficient resources to pursue those technologies. Current market conditions in the solar market particularly indicate that even aggressive pursuit of the technology would not yield profitable operations in that segment for a number of years to come, if at all.
We exited the solar business as an active business segment in the second quarter of this year, following our settlement of the dispute with EPIR Technologies, Inc. in May. We retain rights to share in any revenue that is generated from the sale or license of the solar technology we jointly developed with EPIR; however, we do not anticipate recognizing significant revenue from this source in the foreseeable future, if at all. At this time, we do not foresee investing further in solar technologies.
Results of Operations
The Company has shifted its focus over the course of fiscal year 2010 and the first three quarters 2011 to the LED lighting market, particularly outdoor roadway and area lighting, and its results of operations have improved steadily over that period. We intend to continue to focus on the LED outdoor lighting market exclusively for the foreseeable future.
Results of Operations for the Quarter ended September 30, 2011
For the three months ended September 30, 2011, the Company had a net loss from operations of $721,056, as compared to a net loss from operations of $2,127,140 for the three months ended October 31, 2010, or a decrease of $1,406,084. The loss from operations for the nine months ended September 30, 2011 was $3,094,005 as compared to a loss from operations in the nine months ended October 31, 2010 of $10,519,759, or a decrease of $7,425,754. The significant factors contributing to this improved performance are discussed in more detail below.
Revenues for the three months ended September 30, 2011 were $708,214, as compared to $570,359 for the three-month period ending October 31, 2010, which represented an increase of $137,855 or approximately 24.2%. All of the Company’s sales originated from its LED lighting division, and all of the increase in revenue was a result of sales of LED lighting fixtures.
The increase in revenues resulted from increased sales of LED products through various channels previously developed, including original equipment manufacturers, energy service companies, our network of manufacturers’ reps and direct sales to municipalities. In addition, as our products have been sold and installed, , the marketplace has accepted our products and potential customers are increasingly familiar with their superior performance and energy savings over traditional outdoor lighting products and technologies. In addition, as more outdoor LED fixtures are installed and the potential purchasers and specifiers become more knowledgeable of the advantages of our Aimed Optics™ technology, we are increasingly competitive in the LED marketplace as well. Increasing sales revenue reflect a combination of improvement in sales effectiveness in the Company and increasing adoption of LED technology generally.
The Company had a gross profit of $138,182, and a gross profit margin of 19.50% for the three months ended September 30, 2011, as compared to a gross loss of $268,064, or a negative margin of 47.0% for the three months ended October 31, 2010. The increase in gross profit is attributable primarily to the exit from the solar business and the resulting elimination of expenses associated with developing that technology, as well as reductions in the cost of components for LED products, increased efficiencies through overhead and other cost reductions and sales of LED products to more profitable markets.
Overall expenses decreased by 53.8% from the comparable three-month period in the prior year. The major categories of expense for the Company are discussed individually below.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $859,238 for the three-month period ending September 30, 2011 from $1,859,076 for the three-month ended October 31, 2010, a decrease of $999,838, or 53.78%. The major components are discussed below.
Product development costs were $362,251 for the three months ended September 30, 2011, compared to $693,929 for the three months ended October 31, 2010, a decrease of $331,678 or approximately 47.8% . The decrease in product development costs was driven by the Company’s focus on standardizing products and selling to markets that do not need customized products, as well as the need to preserve cash and reduce expenses short-term while developing the next generation of lighting fixtures . If the Company is successful in raising capital, we anticipate product development costs to return to previous levels in the future, particularly as we begin to develop the next generation of our LED products.
General and Administrative
General and administrative expenses are the expenses of operating the business on a daily basis that are not related directly to cost of goods and include managerial salaries, legal fees, and rent and utilities. For the three months ended September 30, 2011 the Company incurred aggregate expense of $496,987 in this area, compared to $1,165,147 for the three months ended October 31, 2010, a decrease of $668,160 or 57.3%. The majority of the decrease is a reduction in compensation and legal fees.
Other Income and Expenses
Other income and expense reflects interest costs (net of interest income) as discussed below:
Total of interest and other expense for the three months ended September 30, 2011 was $93,976 compared to $10,212 for the three months ended October 31, 2010. The reduction in interest expense from the prior quarter is attributable primarily to the conversion of certain debentures in the prior period. The Company incurred no derivatives or impairment costs in either period.
Revenues for the nine months ended September 30, 2011 were $1,964,736, as compared to $1,161,181 for the nine-month period ending October 31, 2010, which represented an increase of $803,555 or approximately 69.2%. All of the Company’s sales originated from its LED lighting division, and all of the increase in revenue was a result of sales of LED lighting fixtures.
The increase in revenue over the period is due primarily to the Company’s ability to sustain and build relationships with significant distribution channels (particularly its primary original equipment manufacturer and energy service companies), and wider recognition and acceptance of LED technology and the Company’s products in the market.
Gross Profit Margin
The Company had a gross profit margin of 18.5% for the nine months ended September 30, 2011, as compared to a negative gross profit margin of 16.9% for the nine months ended October 31, 2010. The dramatic improvement in gross profit margin is attributable to a combination of improved sales performance and efficiencies and reductions in the cost of components used to produce our LED lighting products. Some of the cost reductions resulted from market forces and others are a direct result of management’s efforts to maximize purchasing efficiencies and to utilize lower cost components of equal or higher quality than comparable components available from other sources.
Overall expenses decreased 335% from the prior year period, from $10,323,401 for the nine months ended October 31, 2010 to $3,457,826 for the nine months ended September 30, 2011. More than half of the decrease ($4,118,769) was attributable to the Company’s decision to exit the solar business and elimination of research and development expenses in that area. In addition, we recognized efficiencies through standardizing products, reductions in component costs and administrative expense reductions.
The major categories of expense for the Company are discussed individually below.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $3,457,826 for the nine-month period ending September 30, 2011 from $6,204,632 for the nine months ended October 31, 2010, a decrease of 44.3%. The major components are discussed below.
General and Administrative
General and administrative expenses are the expenses of operating the business on a daily basis that are not related directly to cost of goods and include managerial salaries, legal fees, and rent and utilities. Over the nine-month period ended September 30, 2011, the Company significantly reduced legal and consulting fees and experienced a reduction in compensation and benefits expense due to reduced headcount. In addition, the Company has implemented a cost reduction program throughout the operation that continues to yield reductions in operating expenses.
Sales and Marketing Costs
Sales and marketing costs decreased significantly over the period, in part to reduced sales travel expense, elimination of outside marketing expenses and elimination of the royalty fees paid in the prior period. The Company’s focus on sales through channels that generated the lowest cost of sale contributed significantly to the improved efficiencies in the cost of sales.
Liquidity and Capital Resources
The Company’s cash flow from operations is insufficient to meet its current obligations. In fiscal year 2010, the Company relied upon additional investment through sales of common stock and debentures in order to fund its operations. The Company raised $1,000,000 from the sale of convertible debentures in the second quarter of 2011 and anticipates a need to raise an additional $500,000 to $1,000,000 in the next six months in order to fund its operations.
Cash Flows and Working Capital
To date, we have financed our operations primarily through the sale of equity and convertible debt. As of September 30, 2011, we had $734,194 in cash and cash equivalents. We had receivables, net of allowances, of $127,245 and inventory of $644,842. Our current liabilities as of that date were $3,174,585. Of this amount, $1,000,000 is convertible into common stock at the option of the holder. The Company does not have the ability to force conversion of any of the debt.
Our sales cycle can be several months or longer, with some costs incurred up front, making our business working capital intensive. Also, because we build our products based upon a specific order, it can take up to 90 days to fulfill an order, followed by a period of time in which to collect our receivables. We do not have a credit line, and commercial credit is unavailable for the Company at this time. The Company does not anticipate a profitability level that would resolve its cash flow issues in the foreseeable future and expects to rely upon capital contributed by investors to fund its operations.
The Company outsources its manufacturing; consequently, we do not have significant capital equipment expenditures, although tooling costs can reduce our product cost when justified by the level of sales.
Net cash used in operating activities for the nine months ended September 30, 2011 totaled $1,436,204 as compared to $4,692,330 for the nine months ended October 31, 2010. This change resulted primarily from a decrease in our net loss, offset partially by increased cost of sale associated with higher sales volumes .
Net cash used in investing for the nine months ended September 30, 2011 was $20,465 as compared to $366,372 for the nine months ended October 31, 2010, a decrease of $345,907. The amounts incurred in 2010 were due primarily to our purchase of tooling and software for product development. While the Company believes that it could lower its product cost through additional tooling, we have insufficient capital to make that investment of resources at this time. The Company anticipates expenditures on tooling in 2012.
Our net cash provided by financing activities for the nine months ended September 30, 2011 was $905,288, which consisted of $1,000,000 raised through the sale of convertible promissory notes in the prior quarter, offset by $94,783 paid as principal payments on promissory notes outstanding at the beginning of the period. The Company also received $71 on the exercise of stock options during the quarter.
As noted in the Quarterly Report on Form 10-Q for the period ended June 30, 2011, the Company sold 9% Convertible Secured Promissory Notes (the “Notes”) in the aggregate principal amount of $1,000,000 to existing shareholders during the prior quarter. The Notes bear interest at an annual rate of 9%. Interest on the Notes is accrued and payable on the earlier of conversion to common stock or the maturity date of the 9% Notes. The Notes are secured by a lien on all of the assets of the Company. The Notes mature on July 1, 2012 and may be prepaid at any time without penalty upon ten days’ notice to the holders of the Notes.
The Notes are convertible on or after September 1, 2011 at a conversion price of $.06, which is 150% of the market value of the Company’s common stock, determined based upon the closing price of the Company’s common stock for the 20-day period beginning May 31, 2011 and ending September 20, 2011. The Company may require conversion of the Notes if the market value of the Company’s common stock exceeds 200% of the conversion price over a 20-day trading period, provided that a minimum trading volume of 50,000 shares per day exists during that time period.
Off-Balance Sheet Arrangements
We do not currently have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.
Our company has not entered into any transaction, agreement or other contractual arrangement with an entity unconsolidated with us under which we have
Plan of Operation
The Company is continuing to focus its operations on generating sales of LED products through regional sales managers and our network of manufacturers’ reps, as well as reducing the cost of producing its LED products in order to make them more price-competitive in the market. In addition, the Company is pursuing development of its next generation lighting products and targeted marketing of its product lines. We are leveraging several key relationships with energy service companies and original equipment manufacturers to increase sales to take advantage of price concessions associated with larger orders. The Company’s margins have improved steadily over the last twelve months and, if current trends continue, we expect to achieve profitability in early 2012.
The Company leases office space/warehouse facilities in Sarasota, Florida under an operating lease. The lease term is for a period of sixty-six months beginning in April of 2010. Monthly payments under the lease are currently $10,445.
As of November 8, 2011, we had 10 full-time employees and 1 active independent contractor. Several employees currently either defer a portion of their compensation or take stock rather than cash, either as an accommodation to preserve cash in the Company or as a term of their employment arrangement. These arrangements are expected to continue until the Company has raised capital to fund its ongoing operations.
The Company does not have sufficient operating funds to continue to conduct its business without a significant capital infusion or a significant curtailment of operations in the next fiscal quarter. The Company will need to raise or earn $2,000,000 to cover budgeted fixed costs for the next 12 months. Although profitability is improving, and significant overhead and other cost reduction measures have been effective in reducing our operating expenses, we need capital in order to purchase the components necessary to build our products and fulfill orders to our customers. Without additional capital the Company will not be able to fund its operations for a sufficient time to execute its plans to reduce product costs, increase sales and generate profits. There can be no assurance that the Company will be successful in raising the capital needed to continue its operations.
With our present cash and cash equivalents, management expects to be able to continue our operations for approximately another three to six months. The continuation of our company depends upon our ability to raise additional capital and to ultimately attain and maintain profitable operations. We cannot assure you that financing will be available in the amounts we need or on terms acceptable to us, if at all. The issuance of additional equity securities, including convertible debt securities, by us could result in a significant dilution in the equity interests of our current stockholders. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, we will be forced to scale down or perhaps even cease our operations.
We have undertaken steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond. These steps include
While we have made significant progress in all of these areas over the course of the current fiscal year, with improvement each quarter this year, we are not yet profitable on a net basis and do not have sufficient capital to fund our operations long-term. There can be no assurance that we will successfully accomplish these steps and it is uncertain we will achieve a profitable level of operations and/or obtain additional financing. In the event we are unable to continue as a going concern, we may elect or be required to seek protection from our creditors by filing a voluntary petition in bankruptcy or may be subject to an involuntary petition in bankruptcy.
These consolidated financial statements do not give effect to any adjustments which would be necessary should the Company be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities in other than the normal course of business and at amounts different from those reflected in the accompanying consolidated financial statements.
Quantitative and Qualitative Disclosures about Market Risk
We have no material exposure to interest rate changes. We are subject to changes in the price of energy, which are out of our control.
Effect of Changes in Prices
Prices of equivalent incandescent lighting are lower than the price of the Company’s, and its competitors’, LED lighting products. Subsidies and cost-savings achieved over the life of our LED products have supported sales; however, in order to remain competitive, it will be necessary for us to reduce the cost of our products. We have reduced the cost of our products and the sales prices of those products in a meaningful way over the current fiscal year and are continuing to focus efforts in this area.
Critical Accounting Policies and Estimates
Critical accounting estimates are those that management deems to be most important to the portrayal of our financial condition and results of operations, and that require management’s most difficult, subjective or complex judgments, due to the need to make estimates about the effects of matters that are inherently uncertain. We have identified our critical accounting estimates which are discussed below.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. To date the Company has funded operations primarily through capital infusions from investors through the sale of its common stock and certain debt instruments, particularly convertible debentures. The Company anticipates a need for significant funding from capital investment in order to support its operations and continue as a going concern. The ability of the Company to continue its operations as a going concern is dependent on continuing to raise sufficient new capital to fund its business and development activities and to fund ongoing losses, if needed, and ultimately on generating profitable operations.
The financial statements included in this report do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and revenue and expenses during the reporting period. Actual results could differ from those estimates.
Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to bad debt expense and a credit to an allowance for uncollectible accounts based on its assessment of the current status of individual accounts. Accounts receivable balances that remain outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for uncollectible accounts and a credit to accounts receivable.
Accounting for Derivative Instruments
Derivatives are required to be recorded on the balance sheet at fair value. These derivatives, including embedded derivatives in the Company’s structured borrowings, are separately valued and accounted for on the Company’s balance sheet. Fair values for exchange traded securities and derivatives are based on quoted market prices. Where market prices are not readily available, fair values are determined using market based pricing models incorporating readily observable market data and requiring judgment and estimates.
Research and Development
Research and Development ("R&D") expenses are charged to expense when incurred. The Company has consulting arrangements which are typically based upon a fee paid monthly or quarterly. Samples are purchased that are used in testing, and are expensed when purchased. R&D costs also include salaries and related personnel expenses, direct materials, laboratory supplies, equipment expenses and administrative expenses that are allocated to R&D based upon personnel costs.
The Company recognizes revenue when the following conditions have been met: there is persuasive evidence an arrangement exists which includes a fixed price; there is reasonable assurance of collection; the services or products have been provided and delivered to the customer; no additional performance is required and title and risk of loss has passed to the customer. Products may be placed on consignment to a limited number of resellers. Revenue for these consignment transactions will also be recognized as noted above.
Compensation cost relating to share-based payment transactions are recognized in the financial statements. The cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity award).
Recent Accounting Pronouncements
The Company does not believe that any recently issued accounting pronouncements will have a material impact on its financial statements.
ITEM 3. QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.
ITEM 4. CONTROLS AND PROCEDURES.
Under the supervision and with the participation of management, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this Report. Based upon that evaluation, the Chief Executive Officer and Acting Chief Financial Officer concluded that, as of the end of September 30, 2011, our disclosure controls and procedures were not effective, because certain deficiencies in internal controls constituted material weaknesses as discussed in our transition report on Form 10-K for the period ended December 31, 2010. The material weaknesses identified did not result in the restatement of any previously reported financial statements or any other related financial disclosure, nor does management believe that it had any effect on the accuracy of the Company's financial statements for the current reporting period. However, management has made certain changes to its processes for internal control over financial reporting function, including segregation of duties for general ledger transactions, reconciliations and financial statement preparation which it believes has significantly improved the internal controls for this function.
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. None of our directors, officers or affiliates is involved in a proceeding adverse to our business or has a material interest adverse to our business.
We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results, other than as described below:
As a result of the litigation between the Company and EPIR Technologies, Inc. (“EPIR”), which was settled in the prior quarter, the Company has been billed for legal fees totaling $471,047, of which $195,365 was paid in 2010. The Company pledged 9,700,000 shares of common stock returned to it in the settlement to secure the payment of any legal fees that may be due but unpaid related to the case.
Litigation with Supplier
The Company is defending a lawsuit brought by a supplier of a component part of the EvoLucia LED light fixtures. The suit alleges that the Company owes a re-stocking fee for the return of certain inventory. The plaintiff has alleged damages in excess of $100,000. The Company believes it has substantial defenses to this lawsuit and intends to vigorously defend it. The lawsuit is in the early stages of pleadings, and the outcome of this case is uncertain at this time. The Company has incurred no significant legal fees to date in this case.
None of our directors, officers or affiliates are involved in a proceeding adverse to our business or have a material interest adverse to our business.
ITEM 1A. RISK FACTORS
As a smaller reporting company, as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information required by this Item.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company issued 300,000 shares of common stock upon the exercise of stock options during the quarter ended September 30, 2011, which shares are not registered. In addition, the Company issued 996,539 shares in exchange for services during the period.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4 – (Removed and Reserved)
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SUNOVIA ENERGY TECHNOLOGIES, INC.