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SUNOVIA ENERGY TECHNOLOGIES INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis summarizes the significant factors affecting: (i) our results of operations for the three months ended June 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 six months ended June 30, 2011, and the three and six months ended July 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. MANAGEMENT'S DISCUSSION AND ANALYSIS 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 July 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. 11 -------------------------------------------------------------------------------- LED Lighting 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 are working to standardize our product designs and component selections in common, reusable sub-assemblies. This will better 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. 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: Company Roadway Type FTE Required* Actual FTE AEL Type II 37 29 Beta LED Type II 37 40 General Electric Type II 37 42 EvoLucia Type II 37 56 *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. We have had a limited operating history, particularly in the LED lighting business, that can serve as the basis to evaluate our business and prospects. 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. Solar The solar market is no longer a viable business for the Company, even in the long-term, and the Company has exited this business. This resulted from a combination of factors, including dramatic reductions in the cost of competing technologies and an increase in supply. In addition, a dispute with EPIR, the Company's former research partner in the solar industry, disrupted development of the product for more than a year. The dispute with EPIR was settled in May of this year. Under the terms of the settlement, the Company will share equally with EPIR in revenue generated from a sale or license of the solar technology they jointly developed. The Company does not anticipate recognizing significant revenue from this source, however. In addition, the Company does not intend to invest further in solar technologies. Results of Operations Overview In fiscal year 2010, the Company faced obstacles to developing its solar and infrared technologies, arising from 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. The Company does not believe that these technologies will yield valuable opportunities in the future; in addition, the Company does not have sufficient resources to pursue them aggressively in the near-term. 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. By contrast, the LED lighting market presents an immediate opportunity for revenue growth and ultimate profitability. The Company has shifted its focus over the course of fiscal year 2010 and the early part of 2011 to the LED lighting market, particularly outdoor roadway and area lighting, and anticipates continuing that focus for the foreseeable future. 12 -------------------------------------------------------------------------------- Results of Operations for the Quarter ended June 30, 2011 For the three months ended June 30, 2011, the Company had a net loss of $1,004,916, as compared to a net loss of $9,173,368 for the three months ended July 31, 2010, or a decrease of $8,168,452. The loss from operations for the three months ended June 30, 2011 was $1,003,031 as compared to a loss from operations in the three months ended July 31, 2010 of $5,074,894, or a decrease of $4,071,863. The significant factors contributing to these changes are discussed in more detail below. Revenues Revenues for the three months ended June 30, 2011 were $503,689, as compared to $95,208 for the three-month period ending July 31, 2010, which represented an increase of $408,481 or approximately 429%. 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 previouslydeveloped, including energy service companies, our network of manufacturers' reps and direct sales to municipalities. In addition, as our products have been sold and installed, and our marketing and sales strategies have been implemented, 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 Gross Profit The Company had a gross profit of 15.9% for the three months ended June 30, 2011, as compared to a gross profit of 3.8% for the three months ended July 31, 2010. The increase in gross profit is attributable primarily to reductions in the cost of components and sales of LED products to markets that are not driven entirely by low cost, allowing the Company to sell its products at higher prices than in other market segments. Expenses Overall expenses decreased from $5,078,538 for the three months ended July 31, 2010 compared to $1,082,903 for the three months ended June 30, 2011. This decrease of $3,995,635, or 78.7%, resulted from the decrease in research on solar, and decreases in cash and noncash expenses related to compensation costs. The major categories of expense for the Company are discussed individually below. Research and Development Research and development expenses are not a significant portion of the expenses for the three months ended June 30, 2011; however, they were significant in the three months ended July 31, 2010. During that period, research and development expenses were primarily associated with solar and infrared technology development. The Company recorded no R&D expenses for the three months ended June 30, 2011, compared to $3,086,613 for the three months ended July 31, 2010. Based on the current climate and in light of the litigation with EPIR, the Company does not anticipate expending significant funds on research and development in the solar or infrared technologies in the foreseeable future. If the Company is able to raise sufficient capital, it anticipates increased research and development expenses associated with its next generation of LED products in the next twelve months. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased to $1,082,903 for the three-month period ending June 30, 2011 from $1,991,925 for the three-month ended July 31, 2010, a decrease $ 909,022 or 45.6%. The major components are discussed below. 13 -------------------------------------------------------------------------------- Selling, 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. The majority of the decrease from the prior quarter is a reduction in compensation and legal fees. Other Income and Expenses Other income and expense reflects interest costs (net of interest income), including derivatives and impairment costs, as discussed below: Total of interest and other expense for the three months ended June 30, 2011 was $1,885 compared to $4,098,474 for the three months ended July 31, 2010. The reduction of $4,096,589 was mainly based of the impairment $3,680,385 of the EPIR investment. Results of Operations for the Six months Ended June 30, 2011 Revenues for the six months ended June 30, 2011 were $1,256,522, as compared to $590,822 for the six-month period ending July 31, 2010, which represented an increase of $665,700 or approximately 113%. 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 due to the Company's ability to sustain and build relationships with significant distribution channels, particularly energy service companies, wider recognition and acceptance of the Company's products in the market and an increased and targeted focus on sales through additions to the sales force and managing relationships with manufacturers' representatives. Gross Profit The Company had a gross profit of 18% for the six months ended June 30, 2011, as compared to a gross profit of 12% for the six months ended July 31, 2010. The slight increase in gross profit is attributable primarily to reductions in the cost of components used to produce its LED lighting products and efficiencies in sales processes, which reduce the cost of sales. Expenses Overall expenses decreased from $8,464,325 for the six months ended July 31, 2010 to $2,598,588 for the six months ended June 30, 2011. The vast majority of this decrease of $5,865,737, or 69% resulted from the Company's exit from the solar business and the resulting elimination of research and development expenses for that effort. In addition, cost reduction measures implemented throughout the Company's operations during 2011 are ongoing and contributed to reduction in overall expense. The major categories of expense for the Company are discussed individually below. Research and Development The Company incurred no research and development expenses during the six months ended June 30, 2011; however, those expenses represented a significant expense in the six months ended July 31, 2010. The Company recorded R&D expenses for the six months ended July 31, 2010 of $4,118,769 principally related to its solar technology that was being developed with EPIR. The Company does not anticipate expending funds on research and development in solar or infrared technologies in the future. If the Company is able to to raise sufficient capital to develop its next generation of LED products, it will increase R&D expense in the next twelve months. Selling, General and Administrative Expenses Selling, general and administrative expenses decreased to $2,595,588 for the six-month period ending June 30, 2011 from $4,345,556 for the six-month ended July 31, 2010, a decrease of 40%. 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 six-month period ended June 30, 2011, the Company significantly reduced legal and consulting fees, as well as a reduction in staff costs due to reduced headcount and an ongoing cost reduction strategy throughout the Company. 14 -------------------------------------------------------------------------------- Other Income and Expenses Other income and expense reflects interest costs (net of interest income) including derivatives and impairment costs, as discussed below: Total interest and other expense for the six months ended June 30, 2011 was $30,943 compared to $4,097,185 for the six months ended July 31, 2010. The reduction of $4,066,242 was primarily a result of the $3,680,385 impailment of the EPIR investment during the prior period. 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. 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 needs to raise significant amounts of capital in order to fund its operations in the next fiscal year. Cash Flows and Working Capital As a result of losses we have incurred to date, we have financed our operations primarily through equity and debentures. As of June 30, 2011, we had $881,152 in cash and cash equivalents. We had receivables, net of allowances, of $295,416 and inventory of $634,168 and our current liabilities were $2,928,966. However, $650,000 of the liabilities is convertible into common stock. 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 until we are profitable, commercial credit is unavailable for the Company. 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 expenditures, although tooling costs can reduce our product cost when justified by the level of sales. For the Six Month Period Ended June 30, 2011 July 31, 2010 Cash flows used in Operations $ (1,306,151) $ (2,768,531) Investing Activities $ (4,785) $ (358,386) Financing Activities $ 906,513 $ 1,500,738 Cash at end of period $ 881,152 $ 1,058,872 Operating Activities Net cash used in operating activities for the six months ended June 30, 2011 totaled $1,306,151 as compared to $2,768,531 for the six months ended July 31, 2010. This change resulted primarily from the decrease in net loss and increase in notes payable. Investing Activities Net cash used in investing for the six months ended June 30, 2011 was $4,785 as compared to $358,386 for the six months ended July 31, 2010, a decrease of $353,601. The amounts incurred in both periods 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. Financing Activities Our net cash used in financing activities for the six months ended June 30, 2011 was $93,528, which consisted entirely of principal payments on promissory notes. Our net cash raised in financing activities for the six months ended June 30, 2011 was $1,000,041, which consisted of $1,000,000 from the sale of promissory notes and $41 from the sale of common stock. 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. 15 -------------------------------------------------------------------------------- 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. 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 o an obligation under a guarantee contract, although we do have obligations under certain sales arrangements including purchase obligations to vendors o a retained or contingent interest in assets transferred to the unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets, o any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument, or o any obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by us and material to us where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with us. Plan of Operation The Company raised $1 million from nine existing shareholders through the sale of convertible promissory notes during the quarter as discussed bove. 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 and targeted marketing of its product lines. 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 August 10, 2011, we had 12 full-time employees and 2 active independent contractors. Several employees currently either to defer a portion of their compensation or to 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 CEO was paid in stock rather than cash for the months of March and April of 2011 Cash Requirements 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 raised $1,000,000 during the quarter; however, it will need to raise at least $3,000,000 to cover budgeted fixed costs for the next 12 months. 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. Going Concern With our present cash and cash equivalents, management expects to be able to continue some of our operations for approximately another ninety days. 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. 16 -------------------------------------------------------------------------------- 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 ††† raising additional capital and/or obtaining financing; ††† increasing our revenues and gross profits; and ††† reducing fixes expenses. 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. |