US LIGHTING GROUP, INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue," or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with theSecurities and Exchange Commission . Important factors currently known to Management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for materials, and competition. General Overview We are engaged in the business of manufacturing and distributing LED digital gauges, automotive electronics, and accessories for commercial and industrial customers, as well as LED lighting tubes and bulbs. Principal Products
US Lighting Group designs, manufactures, and distributes 4' LED tube lights that are superior in power usage, lifespan, warranty, and cost savings, because of the exclusive minimalistic design and proprietary manufacturing processes. Channels to market include The Home Depot drop ship program, and earlier in the company history, a chain of reginal distributors.US Lighting Group, Inc. has research and development, testing, and production facilities based inEuclid, Ohio , USA where all products are engineered and manufactured from domestic
and imported components.
The
? BH4 Series is our flagship LED light bulb line and has remained our top seller
throughout the years. The BH4 bulb is a powerful, highly efficient top-level
bulb offering the greatest savings potential and longest life span at 21
years. This light has been engineered to emit zero RF.
? GFY Series designed for those looking for something a little less powerful and
lower cost. This series combines the demand for lower-watt bulbs with the need
for highly efficient, sustainable lighting options to create two highly
affordable LED bulb options. This tube is more cost-effective on the upfront
purchase, while still offering a 15-year warranty and significant savings on
energy costs.
? FEB Series is our plug-and-play LED lighting option with power at each end
that works with both electronic and magnetic ballasts.
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Distribution and Current Market
LED lighting is a commodity product, which has become very competitive due to overseas imports with low pricing, making it a difficult climate forUS Lighting Group, Inc. to operate in. We are looking into other LED lighting product lines that would leverage our electronics innovativeness to provide more specialty-type LED lighting.US Lighting Group has a supplier contractual relationship with The Home Depot. Customers can order product online at HomeDepot.com and it ships to the customer directly from our warehouse, however the sales have been minimal in the last two years.
Intellitronix Corporation In recent years, the Company's primary activity has been centered around Intellitronix. Intellitronix is engaged in automotive electronics manufacturing, serving a niche market of aftermarket electronics for customer installations as well as several emerging OEM applications. Products
? Automotive - Our portfolio includes direct fit replacement gauge panels for
specific vehicle models manufactured by Chevrolet, Ford,
universal gauges for numerous other makes and models of classic cars. Other
products include vehicle lighting, ignition systems, RPM switches and other
automotive electronics.
that is available to consumers through major aftermarket distributors. The
Company offers a Limited Lifetime Factory Warranty on all its branded
products.
? Marine - We design and manufacture products for the marine industry including
GPS controlled marine speedometer and Prometheus Ignition System to guard
against ignition failures.
? OEM - In recent years, we have developed several custom OEM projects from
design to production for companies such as
The Energy Management Multifunctional System (EMMS) was designed and
manufactured for recreational vehicles as an OEM project, and our first
customer orders were recently received. The 4-in-1 unit that is currently in
development incorporates energy management and load shed, a breaker panel,
automatic transfer switch, automatic generator starter plus display unit,
Bluetooth, WiFi and multiplexing capabilities.
Our capabilities include a broad range of design and manufacturing services,
such as various microprocessor-controlled products for the automotive,
electronic, marine, and recreational vehicle markets and the Company has been
leveraging its competitive advantage as an efficient low-cost manufacturing
partner to other OEM providers. We are focusing on growing the OEM and private
label segments that provide high-volume and low-overhead manufacturing
opportunities.
The vast majority of our products are manufactured at our facility in
Distribution We currently have three sales channels, including Intellitronix branded automotive product lines sold through business-to-consumer (B2C) and retail channels, business-to-business (B2B) and private labeled product lines, and original equipment manufacturers (OEM). For OEM customers, we provide design and manufacturing services to meet original equipment manufacturer's specifications, and these products are incorporated in the new vehicles. The most recent projects have been completed in the growing RV industry, meeting all applicable safety standards. Our customers include O'Reilly Auto Parts,Summit Racing Equipment, JEGS,Kawasaki Motors , Coachman RV,US Auto Parts ,CJ Pony Parts , Corvette Central,Mid America Motorworks , Eckler's, and others. We also sell our products through eBay, Amazon, and other e-commerce platforms. 16 COVID-19 Considerations Through the date these financial statements were issued, the COVID-19 pandemic did not have a net material impact on our operating results. In the future, the pandemic may cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment, which negatively effects the consumers who purchase our products. Our ability to operate without significant negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees and our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities to protect our employees. Through the date that these financial statements were issued, we maintained the consistency of our operations during the onset of the COVID-19 pandemic. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example, an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations. Through the date that these financial statements were issued, the COVID-19 pandemic has not negatively impacted the Company's liquidity position as of such date, and the Company continues to generate cash flows to meet its short-term liquidity needs, and it expects to maintain access to the capital markets. The Company has not observed any material impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic.
Critical Accounting Policies
This "Management's Discussion and Analysis of Financial Condition and Results of Operations" section is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP"). The preparation of consolidated financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, net sales and expenses and related disclosures. On an ongoing basis, we evaluate our estimates, including, but not limited to, those related to inventories, income taxes, accounts receivable allowance, fair value derivatives, and reserve for warranty claims. We base our estimates on historical experience, performance metrics and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results will differ from these estimates under different assumptions or conditions. We apply the following critical accounting policies in the preparation of our consolidated financial statements: Use of Estimates Financial statements prepared in accordance with accounting principles generally accepted inthe United States require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among other things, management estimates include the estimated collectability of its accounts receivable, the valuation of long lived assets, warranty reserves, the assumptions used to calculate derivative liabilities, assumptions used to value equity instruments issued for financing and compensation, and the valuation of deferred tax assets. Actual results could differ from those estimates. Revenue recognition
We recognize revenue in accordance with Accounting Standard Update ("ASU") No.
2014-09. This standard provides authoritative guidance clarifying the principles
for recognizing revenue and developing a common revenue standard for U.S.
generally accepted accounting principles. The core principle of the guidance is
that an entity should recognize revenue to depict the transfer of promised goods
and services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in the exchange for those goods or services.
Under this guidance, revenue is recognized when control of promised goods or
services is transferred to the Company's customers, in an amount that reflects
the consideration the Company expects to be entitled to in exchange for those
goods or services. The Company reviews its sales transactions to identify
contractual rights, performance obligations, and transaction prices, including
the allocation of prices to separate performance obligations, if applicable.
Revenue and costs of sales are recognized once products are delivered to the
customer's control and performance obligations are satisfied.
17
Products sold by the Company are distinct individual products. The products are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them. Most of the Company's sales are received through several eBay web-commerce websites, which requires customer payment at time of order placement.
The Company does offer a 30-day return policy from the date of shipment. The Company also provides a limited lifetime warranty on its products. Due to a limited history of returns, the Company does not maintain a warranty reserve.
Recent Accounting Pronouncements
See Note 2 of Notes to the Condensed Consolidated Financial Statements for management's discussion of recent accounting pronouncements.
Results of Operations for the Three Months Ended
Our revenue, operating expenses, and net loss from operations for the three
months ended
For the three months ended Percentage
March 31, Change
2021 2020 Change Inc. (Dec.)
Total Sales, net 944,000 756,000 188,000 25 %
Total Cost of goods sold 406,000 226,000 180,000 80 %
Gross profit 538,000 530,000 8,000 2 %
Operating expenses
Selling, general and administrative expenses 562,000 521,000 41,000 8 %
Product development costs 84,000 95,000 (11,000 ) (12 )%
Total operating expenses 646,000 616,000 30,000 5 %
Loss from operations (108,000 ) (86,000 ) (22,000 ) 26 %
Other expense (40,000 ) (43,000 ) 3,000 (7 )%
Net Loss $ (148,000 ) $ (129,000 ) $ (19,000 ) 15 %
Sales
Sales increased by $188,000 (25%) to $944,000 for the three months ended March
31, 2021 , compared to $756,000 for the three months ended March 31, 2020 . The
increase in revenue is attributed to the successful completion of several R&D
projects that resulted in increased purchasing activity by OEM and private label
customers as well as organic growth of the market share of Intellitronix branded
products.
Cost of Goods Sold
Cost of goods sold increased by $180,000 (80%) to $406,000 for the three months
ended March 31, 2021 , compared to $226,000 for the three months ended March 31,
2020 . The increase in costs of goods sold was primarily attributable to
increased sales. Gross profit as a percentage of sales decreased to 57% for
three months ended March 31, 2021 from 70% for the three months ended March 31,
2020 , or 13%, a decrease of 19%. The decline in gross margin is attributed to
significant increases in direct material pricing, higher direct labor expense
due a very tight labor market and a change in our sales mix from less direct to
consumer sales at higher margins to more business to business sales at lower
margins.
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Operating Expenses
Operating expenses include selling, general and administrative expenses, and product development costs.
Selling, general and administrative expenses increased by 41,000 (8%) to$562,000 for the three months endedMarch 31, 2021 , compared to$521,000 for the three months endedMarch 31, 2020 . The increase in selling, general and administrative expenses is primarily attributable to additional financial and customer support personnel.
Product development costs decreased by 11,000 (12%) to
Loss from Operations Loss from operations increased to approximately$108,000 during the three months endedMarch 31, 2021 , compared to a loss from operations of$86,000 during the three months endedMarch 31, 2020 . The increase in loss from operations was due to increased gross profit, offset by increased operating expenses, as discussed above. Other Expense Other expense for the three months endedMarch 31, 2021 was$40,000 , as compared to other expense of$43,000 for the three months endedMarch 31, 2020 . During the three months endedMarch 31, 2021 , we recorded a gain on extinguishment of debt of$9,000 and sublease income from a related party of$15,000 , both of which did not exist during the prior year period. Interest expense for the three months endedMarch 31, 2021 was$64,000 , as compared to$43,000 for the three months endedMarch 31, 2020 . Net Loss Net loss was$148,000 during the three months endedMarch 31, 2020 , compared to a net loss of$129,000 for the three months endedMarch 31, 2020 . The increase in net loss was due to increased gross profit, decreased other expenses, offset by increased operating expenses, as discussed above.
Liquidity and Capital Resources
Our working capital deficiency as ofMarch 31, 2020 andDecember 31, 2020 was as follows: As of As of March 31, December 31, 2021 2020 Current Assets$ 577,000 $ 908,000 Current Liabilities 3,468,000 3,795,000
Net Working Capital Deficiency
The following summarizes our cash flow activity for the three months endedMarch 31, 2021 and 2020: Cash Flows Three months Three months ended ended March 31, March 31, 2021 2020 Net cash provided by (used in) Operating Activities$ 277,000 $ (57,000 ) Net cash used in Investing Activities (141,000 ) (2,000 ) Net cash provided by (used in) Financing Activities (135,000 ) 159,000 Increase in cash during the period 1,000 100,000 Cash, Beginning of Period 108,000 107,000 Cash, End of Period$ 109,000 $ 207,000 19
At
Net cash provided by operating activities for the three months endedMarch 31, 2021 totaled$277,000 , compared to net cash used in operating activities for the three months endedMarch 31, 2020 of$57,000 . The improvement in net cash provided by operating activities for the three months endedMarch 31, 2021 was primarily due to the decrease in our accounts receivable balance of$381,000 , and routine changes in our working capital accounts of$36,000 . Net cash used in investing activities was approximately$141,000 for the three months endedMarch 31, 2021 , compared to$2,000 for the three months endedMarch 31, 2020 . During the three months endedMarch 31, 2021 , the Company purchased production equipment for$86,000 , a vehicle for$40,000 , and other property and equipment for$15,000 . Net cash used in investing activities was approximately$2,000 for three months endedMarch 31, 2020 and relates to the purchase of office equipment. Net cash used in financing activities for the three months endedMarch 31, 2021 was$135,000 and included proceeds of$150,000 received in the private placement of common stock, and$125,000 from proceeds from the issuance of notes payable. These proceeds were offset by the repayment of$45,000 of notes payable, repayment of$14,000 on the line of credit, and repayment of$351,000 of notes payable to a related party. Net cash provided by financing activities for the three months endedMarch 31, 2020 was$159,000 and included$50,000 of proceeds from the private placement of common stock,$88,000 from the issuance of secured convertible promissory notes,$150,000 in proceeds from loans payable, and$40,000 in proceeds from notes payable to a related party. These proceeds were offset by the payment of$4,000 on a finance lease, repayment of$71,000 of notes payable, and repayment of$94,000 of notes payable to a related party. Since inception, our principal sources of liquidity have been cash provided by financing, including through the private placement of convertible notes and equity securities, loans, and gross profit from the sales of our products. Our principal uses of cash have been primarily for labor and outside services, expansion of our operations, development of new products and improvement of existing products, expansion of marketing efforts to promote our products and brand, and capital expenditures. We anticipate that additional expenditures will be necessary to develop and expand our assets before sufficient and consistent positive operating cash flows will be achieved, including sufficient cash flows to service existing liabilities and related interest. Additional funds may be needed in order to continue production and operations, maintain profitability and to achieve our objectives. As such, our cash resources may not be sufficient to meet our current operating expense and production requirements, and planned business objectives beyond the date of this Form 10-K filing without additional financing.
Loans Payable to Related Parties
OnDecember 1, 2016 , the Company acquiredIntellitronix Corporation from the Company's President and shareholder. The Company agreed to pay$4,000,000 in exchange for all the shares ofIntellitronix Corporation . The sixty-month loan matures inDecember 2021 , requires monthly payments of$74,000 , carries an interest rate of 6.25%, and is secured by the assets ofIntellitronix Corporation . The loan balance onMarch 31, 2021 andDecember 31, 2020 , including accrued interest, was$1,805,000 and$2,130,000 . During the year endedDecember 31, 2017 , the Company's President and shareholder, contributed$125,000 of working capital to the Company. The contributed working capital balance were converted into a loan with no interest rate, and due on demand. The loan balance was$125,000 on bothMarch 31, 2021 andDecember 31, 2020 . OnApril 24, 2020 , the Company entered into a loan agreement (the "Loan Agreement") with the Company's President and shareholder,Paul Spivak (the "Lender"), pursuant to which the Company borrowed$408,000 from the Lender. The Loan has a term of twelve months and carries an interest rate of 6.00%. The loan balance onMarch 31, 2021 andDecember 31, 2020 , including accrued interest, was$335,000 and$330,000 . Loans Payable
OnAugust 12, 2019 , the Company entered into aPayPal Working Capital loan. The principal amount of the loan was for$216,000 . The Company received net proceeds of$200,000 , net of loan fees of$16,000 . The loan has a 20-month term and requires monthly payments equal to 20% of monthly PayPal sales proceeds, but no less than$11,000 every 90-day period. The loan balance onMarch 31, 2021 andDecember 31, 2020 , was$32,000 and$38,000 , respectively. 20 OnNovember 25, 2019 , the Company entered into aPayPal Working Capital loan. The principal amount of the loan was for$66,000 . The Company received net proceeds of$50,000 , net of loan fees of$16,000 . The loan has a 20-month term and requires monthly payments equal to 20% of monthly PayPal sales proceeds, but no less than$3,300 every 90-day period. The loan balance onMarch 31, 2021 andDecember 31, 2020 , was$10,000 and$14,000 , respectively. OnMarch 12, 2020 , the Company entered into a loan agreement withCeltic Bank in the principal amount of$150,000 with interest at 32.09% per annum and due onSeptember 12, 2021 . The loan requires minimum monthly principal and interest payments of$11,000 and is secured by the Company's assets and future sales and is personally guaranteed by the Company's CEO. The loan balance onMarch 31, 2021 andDecember 31, 2020 , was$58,000 and$86,000 , respectively. OnAugust 26, 2020 , the Company entered into a loan agreement withApex Commercial Capital Corp. in the principal amount of$266,000 with interest at 9.49% per annum and due onSeptember 10, 2030 . The loan requires one hundred nineteen (119) monthly payments of$2,322 , with a final balloon payment on the one hundred twentieth (120) month, orSeptember 10, 2030 , of$224,835 . The loan is guaranteed by the Company and the Company's Chief Executive Officer and secured by the Company's real estate. The loan balance onMarch 31, 2021 andDecember 31, 2020 , was$265,000 and$265,000 , respectively. The Company purchases vehicles for its Chief Executive Officer and for research and development activities. Generally, vehicles are sold or traded in at the end of the vehicle loan period. The aggregate vehicle loan balance on three vehicles was$131,000 atDecember 31, 2020 , with an original loan period of 72 to 144 months, and interest rates of zero percent to 10.99%. During the three months endedMarch 31, 2021 , the Company purchased a vehicle for$40,000 , with a 72 month loan term, and an interest rate of 4.15%, and made total principal payments of$4,000 on its vehicle loans. The aggregate loan balance onMarch 31, 2021 andDecember 31, 2020 , was$167,000 and$131,000 , respectively. OnAugust 3, 2020 , the Company entered into a$18,000 term loan withLeaf Capital related to the purchase of production equipment. The loan requires monthly payments over the term of 36 months, has an interest rate of 8.48% per annum, and is secured by the production equipment. The loan balance onMarch 31, 2021 andDecember 31, 2020 , was$15,000 and$16,000 , respectively. OnNovember 29, 2020 , the Company entered into a$17,000 term loan withCIT Bank related to the purchase of software for its production equipment. The loan requires monthly payments over the term of 36 months, has an interest rate of 13.18% per annum, and is personally guaranteed by the Company's CEO. The loan balance onMarch 31, 2021 andDecember 31, 2020 , was$15,000 and$17,000 , respectively. OnFebruary 22, 2021 , the Company entered into a$86,000 term loan withCIT Bank related to the purchase of production equipment. The loan requires monthly payments over the term of 36 months, has an interest rate of 9.96% per annum, and is personally guaranteed by the Company's CEO. During the three months endedMarch 31, 2021 , the Company made principal payments of$1,000 , leaving a total of$85,000 owed atMarch 31, 2021 .
Convertible Secured Notes Payable
The Company issued convertible secured debentures ("Convertible Notes") to
accredited investors with interest at 10% per annum, a term of eighteen months,
and secured by all of the assets of the Company and its subsidiaries. The
Convertible Notes provide a conversion right, in which the principal amount of
the Convertible Notes, together with any accrued but unpaid interest, could be
converted into the Company's common stock at a conversion price at $0.25 per
share. The Convertible Notes balance on March 31, 2021 and December 31, 2020 ,
was $57,000 and $55,000 , respectively. As of March 31, 2021 , the Convertible
Notes were convertible into 226,356 shares of common stock.
Critical Accounting Policies and Estimates
The Securities and Exchange Commission ("SEC") defines "critical accounting policies" as those that require application of management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of the accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within theSEC definition. 21 Revenue recognition
We recognize revenue in accordance with Accounting Standard Update ("ASU") No.
2014-09. This standard provides authoritative guidance clarifying the principles
for recognizing revenue and developing a common revenue standard for U.S.
generally accepted accounting principles. The core principle of the guidance is
that an entity should recognize revenue to depict the transfer of promised goods
and services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in the exchange for those goods or services.
Under this guidance, revenue is recognized when control of promised goods or
services is transferred to the Company's customers, in an amount that reflects
the consideration the Company expects to be entitled to in exchange for those
goods or services. The Company reviews its sales transactions to identify
contractual rights, performance obligations, and transaction prices, including
the allocation of prices to separate performance obligations, if applicable.
Revenue and costs of sales are recognized once products are delivered to the
customer's control and performance obligations are satisfied.
Products sold by the Company are distinct individual products. The products are
offered for sale as finished goods only, and there are no performance
obligations required post-shipment for customers to derive the expected value
from them. Most of the Company's sales are received through several eBay
web-commerce websites, which requires customer payment at time of order
placement.
The Company does offer a 30-day return policy from the date of shipment. The Company also provides a limited lifetime warranty on its products. Due to a limited history of returns, the Company does not maintain a warranty reserve.
Recent Accounting Pronouncements
See Note 2 of the condensed consolidated financial statements for management's discussion of recent accounting pronouncements.
Off-Balance Sheet Arrangements
We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.
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