S-1/A
Table of Contents

As filed with the Securities and Exchange Commission on June 23, 2014.

Registration No. 333-196129

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 2

to

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

TCP INTERNATIONAL HOLDINGS LTD.

(Exact name of registrant as specified in its charter)

 

Switzerland   3641   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

Alte Steinhauserstrasse 1

6330 Cham, Switzerland

(330) 995-6111

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Ellis Yan

325 Campus Drive

Aurora, Ohio 44202

(330) 995-6111

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Phyllis G. Korff

Joshua A. Kaufman

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, NY 10036-6522

Tel: (212) 735-3000

Fax: (212) 735-2000

 

Joseph A. Hall
Davis Polk & Wardwell LLP
450 Lexington Avenue

New York, NY 10017
Tel: (212) 450-4000
Fax: (212) 450-4188

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

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. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer (Do not check if a smaller reporting company)   x    Smaller reporting company   ¨

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement with respect to these securities filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities, in any state where the offer or sale of such securities is not permitted.

 

Subject to Completion

Preliminary Prospectus, dated June 23, 2014

PROSPECTUS

7,142,858 Common Shares

 

LOGO

 

 

 

This is TCP International Holdings Ltd.’s initial public offering. We are offering 7,142,858 of our common shares.

We expect the public offering price to be between $13.00 and $15.00 per share. Currently, no public market exists for our common shares. We have been approved to list our common shares on the New York Stock Exchange, or NYSE, under the symbol “TCPI” subject to notice of official issuance.

We are an emerging growth company as that term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements for future filings.

Investing in our common shares involves risk. See “Risk Factors” beginning on page 12 of this prospectus.

 

 

 

     Per Share      Total  

Public offering price

   $                    $                

Underwriting discounts and commissions

   $         $     

Proceeds, before expenses, to TCP International Holdings Ltd.(1)

   $         $     
  (1) See “Underwriting.”

We have granted the underwriters an option to purchase up to 1,071,428 shares from us, to cover over-allotments, at the initial public offering price less underwriting discounts and commissions.

The underwriters expect to deliver the shares on or about                     , 2014.

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

 

Deutsche Bank Securities   Piper Jaffray
Canaccord Genuity   Cowen and Company

The date of this prospectus is                     , 2014


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     PAGE  

PROSPECTUS SUMMARY

     1   

THE OFFERING

     7   

SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

     9   

RISK FACTORS

     12   

FORWARD-LOOKING STATEMENTS

     37   

USE OF PROCEEDS

     39   

DIVIDEND POLICY

     40   

CAPITALIZATION

     41   

DILUTION

     42   

SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

     43   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     46   

BUSINESS AND INDUSTRY

     71   

MANAGEMENT

     98   

PRINCIPAL SHAREHOLDERS

     108   

RELATED PARTY TRANSACTIONS

     110   

DESCRIPTION OF SHARE CAPITAL

     111   

COMPARISON OF SWISS LAW AND DELAWARE LAW

     120   

SHARES ELIGIBLE FOR FUTURE SALE

     126   

TAXATION

     128   

ENFORCEABILITY OF CIVIL LIABILITIES

     136   

UNDERWRITING

     137   

LEGAL MATTERS

     143   

EXPERTS

     144   

WHERE YOU CAN FIND ADDITIONAL INFORMATION

     144   

INDEX TO THE FINANCIAL STATEMENTS

     F-1   

GLOSSARY OF TERMS

     A-1   

We have not, and the underwriters and their affiliates have not, authorized anyone to provide you with any information or to make any representation not contained in this prospectus. We do not, and the underwriters and their affiliates do not, take any responsibility for, and can provide no assurances as to, the reliability of any information that others may provide you. We are not, and the underwriters and their affiliates are not, making an offer to sell, or seeking offers to buy, these securities in any jurisdiction where the offer or sale thereof is not permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common shares. Our business, financial condition, operating results and prospects may have changed since that date.

TRADEMARKS

We have proprietary rights in the trademarks Connected by TCP™, Connected™, Elite Series by TCP™, Elite Designer Series by TCP™, Spring Lamp™, SpringLight™, TCP®, TruDim®, TruStart®, Brilliant choice™, Powerlume®, Pulse Plus® and Sky Bay® in the United States. We reserve all rights to our trademarks, regardless of the manner in which we refer to them in this prospectus. All other trademarks, trade names and service marks appearing in this prospectus are the property of their respective owners.

MARKET AND INDUSTRY DATA

This prospectus includes statistical data, market data and other industry data and forecasts, which we obtained or derived from market research, publicly available information and independent industry publications and reports that we believe to be reliable sources, including an industry study conducted by McKinsey & Company, or McKinsey, that is publicly available. These industry publications generally state that they obtain their information from sources that they believe to be reliable, but they do not guarantee the accuracy and completeness of the information. Although we believe that these sources are reliable, we have not independently verified the information contained in such publications. Data in the McKinsey study is set forth in Euros and converted into U.S. dollars for the purposes of this prospectus on the basis of $1.3910 per €1.00, which is the average exchange rate for 2011 (the reference year for McKinsey’s publication). On March 31, 2014, the exchange rate used for conversion of Euros into U.S. dollars was $1.3768 per €1.00.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus. It does not contain all of the information that you should consider before deciding to invest in our common shares. You should read this entire prospectus carefully, including the risks of investing in our common shares described under “Risk Factors” and the more detailed information in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” and our consolidated financial statements and related notes prepared in accordance with accounting principles generally accepted in the United States, or “U.S. GAAP,” appearing elsewhere in this prospectus. In this prospectus, unless the context otherwise requires, the term “TCP” refers to TCP International Holdings Ltd., and the terms the “Company,” “we,” “us,” and “our” refer to TCP International Holdings Ltd. together with its subsidiaries. The term “CHF” refers to Swiss francs, the terms “dollar” and “$” refer to U.S. dollars, the terms “pound sterling” and “£” refer to British pound sterling and the terms “yuan” and “¥” refer to Chinese yuan. All share and per share data relating to our common shares in this prospectus have been adjusted to reflect a 1:10 reverse stock split to be given effect prior to the effectiveness of the registration statement of which this prospectus is a part.

Overview

We are a leading global provider of energy efficient LED and CFL lighting technologies. We design, develop, manufacture and deliver high quality energy efficient lamps, fixtures and internet-based lighting control solutions. Our internally developed driver, optical system, thermal management and power management technologies deliver a high standard of efficiency and light quality. Our broad portfolio of advanced LED and CFL lamps and fixtures enables us to address a wide range of applications required by our retail and commercial and industrial, or C&I, customers. We have established the largest number of Energy Star® compliant lighting products for LEDs and CFLs combined. The lighting market is characterized by rapid product innovation and, as a result, we have maintained integrated product design and manufacturing capabilities to allow us to quickly respond to the rapidly evolving demands of our customers. Our products are currently offered through thousands of retail outlets and C&I distributors. Since our inception in 1993, we have sold more than one billion energy efficient lighting products. We believe that the market for LED lighting solutions is at an inflection point, and that we are well positioned to capitalize on this rapidly growing opportunity, as reflected in our 2011 to 2013 LED sales compound annual growth rate, or CAGR, of 208.0%.

The general lighting market is in a state of transition from inefficient lighting technologies, primarily incandescent lamps, to efficient lighting technologies, primarily LEDs and CFLs. This transition is driven by improving light quality, appealing economics, government regulations, public awareness, and emerging connectivity and control capabilities. According to McKinsey, the global LED and CFL markets are expected to grow from $22.1 billion in 2011 to $87.4 billion in 2020 in aggregate, representing a CAGR of 16.5%.

We have a strong global customer base in North and South America, Asia and Europe, with our products primarily sold through the retail and C&I channels. Our key customers in the retail channel include The Home Depot, to which we are one of the largest energy efficient lamp suppliers in the United States, Walmart, from whom we received a Supplier Award of Excellence in 2013, and Carrefour. Our key customers in the C&I channel include HD Supply, Regency, Rexel, CED and Grainger. In recent years, we established a sales force to better serve our C&I customers and end users. We are also increasing our product sales through e-commerce retailers, including Amazon.com and HomeDepot.com.

We operate product development facilities in Aurora, Ohio and Shanghai, China focused on introducing new technologies, increasing functionality, enhancing quality, improving manufacturing processes and reducing costs that enable us to provide a wide range of advanced lighting products tailored to our customers’ needs. We have received numerous awards for our products, including being named an ENERGY STAR® Partner of the Year in 2013 and 2014. We also received the Envisioneering Innovation and Design Award at the Consumer Electronics Show in 2014 for our Connected by TCP™ internet-based lighting control solution. For our LED

 

 

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lamps, we develop our own design specifications and source components from world-class suppliers, such as Nichia, NXP Semiconductors, Texas Instruments and Seoul Semiconductor, which enables us to remain technologically agnostic with the flexibility to adopt advancements in LED technology and leverage the LED chip manufacturers’ R&D. Unlike many of our competitors, we utilize a vertically integrated, efficient and automated process to manufacture our CFL products at four facilities in China. This allows us to maintain control over product quality, react quickly to our customers’ specifications, achieve faster product introductions and maximize our margins.

Our net sales have increased from $263.8 million in 2011 to $428.9 million in 2013, representing a 27.5% CAGR. From 2011 to 2013, our LED sales increased from $11.3 million, or 4.3% of net sales, to $107.1 million, or 25.0% of net sales, representing a 208.0% CAGR. The remaining portion of our net sales largely represents CFL sales, which increased from $215.6 million, or 81.7% of net sales, in 2011 to $289.3 million, or 67.5% of net sales, in 2013, representing a 15.8% CAGR. Our net income (loss) attributable to TCP was $3.3 million in 2011, $(6.2) million in 2012 and $8.2 million in 2013. Our net sales increased from $90.3 million for the three months ended March 31, 2013 to $101.1 million for the three months ended March 31, 2014, and net income attributable to TCP increased from $0.9 million for the three months ended March 31, 2013 to $3.9 million for the three months ended March 31, 2014. CFL sales and LED sales represented 70.4% and 20.7% of net sales for the three months ended March 31, 2013, respectively, compared to 58.8% and 35.9% of net sales for the three months ended March 31, 2014, respectively.

Industry Background

We compete in the global general lighting market, which consists of lamps and fixtures used for general illumination purposes in residential and C&I applications. Based on a report by McKinsey, the global general lighting market was $75.8 billion in 2011 and is expected to grow to $114.8 billion by 2020. The global lighting market is expected to undergo significant transition in the coming years driven by the rapid adoption of energy efficient lighting products as a result of improved light quality and performance, lower total cost of ownership, greater focus on energy efficiency, increased regulatory requirements banning inefficient lamps, as well as macroeconomic trends, such as population growth and increasing urbanization. These changes are expected to accelerate the adoption of energy efficient, or non-incandescent, lighting technologies, primarily LEDs. According to McKinsey, the global LED market was $8.9 billion in 2011 and is forecasted to grow to $81.2 billion by 2020, representing a 27.9% CAGR. In the interim, we expect other energy efficient lighting technologies, such as CFLs, to aid in the transition from inefficient lighting technologies prior to the widespread adoption of LEDs. In addition, we expect that the increasing integration of control systems will also drive adoption of intelligent lighting systems that utilize advanced products, including LED and CFL lamps and fixtures, and provide for capabilities including remote monitoring and control, advanced sensing and device-level communication.

Our Competitive Strengths

Well-Positioned to Capitalize on Rapidly Growing LED Opportunity. We believe that LED lighting solutions are at an inflection point, having become the fastest growing sector of the general lighting market due to light quality, appealing economics, government regulation, public awareness, and emerging connectivity and control capabilities. Our LED product portfolio is aligned to capitalize on this growth within the retail and C&I channels. In addition, we have developed strong relationships with key customers, including Walmart. We also have secured new LED customers outside of the United States and Canada, including Homebase and Carrefour in EMEA, IRIS Ohyama, Inc. (“IRIS”) and Emart in Asia and Sodimac in Latin America. As a result of these factors, from 2011 to 2013, our LED sales grew at a 208.0% CAGR. LED products are an increasing portion of our revenues, accounting for 4.3% of net sales in 2011, 25.0% of net sales in 2013 and 35.9% of net sales for the three months ended March 31, 2014.

 

 

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Broad Portfolio of Efficient Lighting Products. Our high quality lighting solutions including lamps, indoor and outdoor fixtures and connected lighting products focus solely on the energy efficient lighting market. We have more than 750 LED SKUs and 2,500 CFL SKUs, which in 2013 together accounted for 92.4% of our net sales, as well as complementary lighting solutions that address specific customer needs. Countries around the world are increasingly adopting standards to reduce the use of inefficient lighting technologies. Our portfolio helps our end users meet these standards and reduce energy usage and costs without sacrificing light quality. Our products have received numerous awards, including ENERGY STAR® Partner of the Year awards in 2013 and 2014.

Strong Distribution Network Through Retail and C&I Channels. Our products are sold through thousands of retail outlets and C&I distributors. We have established strong relationships with key retail customers, including The Home Depot, Walmart and Carrefour. In the C&I channel, we have established deep customer relationships and a reputation for high quality products with leading distributors, including HD Supply, Regency, Rexel, CED and Grainger. In recent years, we established a sales force to better serve our C&I customers and end users such as Chipotle and Hilton.

Proprietary Technology Leads to High Quality Lighting. Our focus on product development enables us to provide a wide range of advanced lighting products to our customers in a timely fashion. We operate product development facilities in Aurora, Ohio and Shanghai, China, where we focus on new technologies, increasing functionality, enhancing quality, improving manufacturing processes and reducing costs. We believe that our rigorous product development and testing processes led to our receipt of ENERGY STAR® Partner of the Year awards in 2013 and 2014, among other awards. We have developed driver technologies for our CFL products, including our patented TruDim® and TruStart® technologies. We have leveraged these existing technologies for our LED drivers, which has helped us achieve a high standard of efficiency.

Flexible Manufacturing Capabilities. For our LED lamps, we develop our own design specifications and source components from world-class suppliers, such as Nichia, NXP Semiconductors, Texas Instruments and Seoul Semiconductor, which enables us to remain technologically agnostic with the flexibility to react to advancements in LED technology and leverage our suppliers’ R&D. We intend to develop a more automated and advanced manufacturing process for our LED products, in part through the use of the net proceeds of this offering. Unlike many of our competitors, we utilize a vertically integrated, efficient and automated process to manufacture our CFL products at four facilities in China. This allows us to maintain control over product quality, react quickly to our customers’ specifications, achieve faster product introductions and maximize our margins.

Smart Lighting Platform for the Connected World. In the fall of 2013, we launched our internet-based lighting control system called Connected by TCP™, which consists of wireless LED lamps connected to an internet-enabled gateway that can be controlled by a simple, user-friendly interface. This solution provides a user with the ability to control and customize lighting in a home or office from anywhere in the world through an Android or iOS mobile device. We believe lighting control systems will accelerate adoption of LED lighting products by providing dynamic control and functional capabilities to lighting that go beyond the simple turning off and on of light. Furthermore, the Connected by TCP™ gateway has the ability to add other smart devices in a home or office setting, including connectable sensors, smoke detectors, security systems and smart thermostats. Our Connected by TCP™ smart lighting solution received the Envisioneering Innovation and Design Award at the Consumer Electronics Show in 2014.

Experienced Management Team with Deep Lighting Expertise. We have a strong and experienced management team, led by our CEO, Ellis Yan. Ellis Yan founded and developed our company and has been instrumental in growing the business into a leading provider of energy efficient lighting solutions. Our core management team consists of nine individuals who have an average of 12 years of experience in the lighting

 

 

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industry. Members of our senior management have joined us from major lighting companies, such as General Electric and Philips, and from leading lighting retailers, including The Home Depot. We believe that we have a strong team in place to continue to build our global lighting business.

Our Growth Strategies

Our goal is to be the global market leader in energy efficient lighting solutions. Our growth strategies include:

Increase Our Sales of LED Products. Our LED portfolio consists of more than 750 SKUs that address a wide range of general lighting applications. In addition, we have a strong product roadmap to develop new LED products, including fixtures, high voltage lamps and smart lighting products, that we intend to introduce to the market in the near-term. In recent years, we have established a C&I sales force to address catalog and electrical, specialty lighting and utility distributors as well as directly marketing to large hospitality and retail store end users, including Chipotle and Hilton. We believe that these efforts will enable us to benefit from the expanding global market for LED lighting technology. We intend to use the net proceeds from this offering in part to acquire and develop advanced, automated manufacturing equipment to expand our LED manufacturing capacity, which will allow us to decrease our time-to-market and maintain our product technology and quality leadership.

Develop the TCP Brand. Our goal is for our customers and end-users to further associate the TCP brand with high quality lighting solutions that offer industry leading technology. We have built strong brand awareness and customer recognition within the C&I channel. For the retail channel, we currently sell our products primarily under private label, whereby our retail customers then re-sell these products to consumers under their own brand names. Recently, we have begun introducing TCP-branded and co-branded products into our retail channel to increase TCP brand awareness with consumers. To further promote TCP brand awareness, we intend to use a targeted media campaign to leverage directed internet advertising and social media, as well as strategically placed in-store interactive video and displays. We believe that our smart lighting platform for the connected home and office will also increase brand recognition among consumers.

Expand Our Energy Efficient Lighting and Smart Technology Portfolio. We have added numerous LED and connected lamps and fixtures, such as our next generation Elite Series of PAR, BR and A lamps, to our portfolio over the past two years. These solutions offer industry-leading technological advancements, such as a smooth heat sink base. We will continue to use our strong product development capabilities to introduce new categories, increase functionality and efficiency, enhance product design and aesthetics and lower product costs. In 2013, we also introduced our smart lighting solution Connected by TCP™. We continue to advance our home and office connectivity solutions and will introduce a number of new connected products that incorporate technologies that utilize Bluetooth and Zigbee protocols.

Continue Global Expansion. We believe there is a tremendous opportunity to increase our sales outside of the United States and Canada. Our sales outside of this region have increased from 10.2% in 2011 to 17.6% in 2013. We intend to leverage our strong, established customer relationships in the United States and Canada to expand our sales in these markets. We continue to add new retail and C&I customers, including IRIS in Asia, Carrefour in Europe and Sodimac in Latin America. We continue to open sales offices abroad, most recently in Japan and Germany, to complement our existing offices in China, the United Kingdom, France and Brazil.

 

 

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Risk Factors

There are a number of risks related to our business, our intellectual property, this offering and our common shares, our corporate structure, doing business in China and taxation, as more fully described in the section entitled “Risk Factors” immediately following this prospectus summary. Some of the principal risks include the following:

 

   

Our industry is highly competitive. If we are not able to compete effectively, including against larger lighting manufacturers with greater resources, our business, financial condition and results of operations will be adversely affected.

 

   

The loss of our relationship with The Home Depot or Walmart, or a significant decline in either of their purchases, could have a material adverse effect on our business, our ability to distribute our products, and our financial condition and results of operations.

 

   

Lighting products are subject to rapid technological changes. If we fail to accurately anticipate and adapt to these changes, the products we sell could become obsolete, and our business, financial condition and results of operations would be adversely affected.

 

   

If we are unable to increase production capacity for our products in a cost effective and timely manner or manage our operations and supply chain, we may incur delays in shipment and our sales and reputation in the marketplace could be harmed.

 

   

The suspension of, repeal of or amendments to current requirements to phase-out energy inefficient lamp technologies by governments or the provision of government sponsored subsidies in our target geographies could impair our sales of energy efficient lamps in our markets.

 

   

If we are unable to obtain and adequately protect our intellectual property rights, our competitive position could be harmed.

 

   

Assertions by third parties of intellectual property infringement could result in significant costs and cause our operating results to suffer.

 

   

There may be circumstances in which the interests of our major shareholders could be in conflict with your interests as a shareholder.

These and other risks are more fully described in the section entitled “Risk Factors” in this prospectus. If any of these risks actually occurs, they could adversely affect our business, financial condition and results of operations.

Corporate Information

Our principal executive offices are located at Alte Steinhauserstrasse 1, 6330 Cham, Switzerland, where our phone number is (330) 995-6111. Our website address is www.tcpi.com. The information on, or accessible through, our website does not constitute part of this prospectus.

Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in annual gross revenues during our last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company need not comply with any new or

 

 

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revised financial accounting standard until such date that a non-reporting company is required to comply with such new or revised accounting standard. However, we have not elected to avail ourselves of this exemption and, therefore, we will comply with new or revised financial accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies.

We will remain an emerging growth company until the earliest of (a) the last day of our fiscal year during which we have total annual gross revenues of at least $1.0 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the previous three year period, issued more than $1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act. When we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

 

 

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THE OFFERING

 

Common shares offered:

7,142,858 common shares

 

Option to purchase additional shares:

We have granted the underwriters a 30-day option to purchase up to an additional 1,071,428 common shares from us, to cover over-allotments, at the initial public offering price less underwriting discounts and commissions on the same terms as set forth in this prospectus.

 

Common shares to be outstanding immediately after the offering:

27,696,288 common shares (or 28,767,716 common shares if the underwriters exercise in full their option to purchase additional shares).

 

Use of proceeds:

We intend to use the net proceeds from this offering to acquire and develop advanced, automated manufacturing equipment to expand our LED manufacturing capacity, for the repayment of indebtedness outstanding and for general corporate purposes. See “Use of Proceeds.”

 

Dividend policy:

We currently do not intend to pay cash dividends after the completion of this offering, subject to the discretion of our board of directors. We currently intend to reinvest any future earnings in developing and expanding our business. See “Dividend Policy.”

 

Lock-up agreements:

We have agreed with the underwriters, subject to certain exceptions, not to sell or dispose of any common shares or any securities convertible into or exchangeable for any common shares during the period commencing on the date of this prospectus until 180 days after the date of this prospectus. All of our directors, executive officers and all of our shareholders have agreed to similar lockup restrictions for a period of 180 days. See “Underwriting.”

 

Directed share program:

At our request, the underwriters have reserved for sale, at the initial public offering price, up to five percent of the common shares offered by this prospectus for sale to some of our directors, officers and certain other persons. If these persons purchase reserved shares, this will reduce the number of shares available for sale to the public. Any reserved shares that are not so purchased will be offered by the underwriters to the public on the same terms as the other shares offered by this prospectus.

 

NYSE symbol:

“TCPI”

 

Risk factors:

Investing in our common shares involves a high degree of risk and purchasers of our common shares may lose part or all of their investment. See “Risk Factors” and the other information included elsewhere in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common shares.

 

 

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Unless otherwise indicated, the information in this prospectus:

 

   

assumes a 1:10 reverse stock split to be given effect prior to the effectiveness of the registration statement of which this prospectus is a part;

 

   

assumes no exercise of the underwriters’ option to purchase up to 1,071,428 common shares from us at the initial public offering price less underwriting discounts and commissions;

 

   

assumes an initial public offering price of $14.00 per share, the midpoint range set forth on the cover of this prospectus;

 

   

does not give effect to the issuance of any shares under our proposed 2014 Omnibus Incentive Plan, including the 1,683,600 common shares to be issued upon vesting of the restricted share units granted to our employees, directors, and other eligible service providers prior to the completion of this offering, and the issuance of up to a maximum of 816,400 of our common shares following the offering, as described in “Management–2014 Omnibus Incentive Plan”; and

 

   

does not give effect to Solomon Yan’s intention to transfer 2,034,789 common shares to a trust for the benefit of his immediate family members prior to the completion of this offering.

 

 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA

The following summary consolidated statement of operations data for the years ended December 31, 2011, 2012 and 2013 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The summary consolidated statement of operations data for the three months ended March 31, 2013 and 2014 and the summary consolidated balance sheet data as of March 31, 2014 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. In our opinion, these unaudited condensed consolidated financial statements have been prepared on a basis consistent with our audited consolidated financial statements and contain all normal and recurring adjustments necessary for a fair presentation of such consolidated financial data. Our historical results are not necessarily indicative of results to be expected in any future periods. You should read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended December 31,      Three Months Ended
March 31,
 
     2011     2012     2013      2013      2014  
     (in thousands, except per share data)  

Statement of Operations Data:

            

Net sales

   $ 263,846      $ 359,355      $ 428,925       $ 90,294       $ 101,117   

Cost of goods sold

     208,098        275,109        336,819         69,459         76,330   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Gross profit

     55,748        84,246        92,106         20,835         24,787   

Selling, general and administrative expenses

     39,590        60,128        64,252         14,570         16,963   

Litigation settlements1

     —          27,550        3,032         —           100   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Operating income (loss)

     16,158        (3,432     24,822         6,265         7,724   

Interest expense, net

     3,949        5,260        6,059         1,295         2,280   

Foreign exchange losses (gains), net

     4,752        249        5,929         2,406         (674
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Income (loss) from continuing operations before income taxes

     7,457        (8,941     12,834         2,564         6,118   

Income tax expense (benefit) from continuing operations

     3,796        (2,738     4,662         1,623         2,197   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) from continuing operations

     3,661        (6,203     8,172         941         3,921   

Net loss from discontinued operations2

     (249     —          —           —           —     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss)

     3,412        (6,203     8,172         941         3,921   

Net income attributable to noncontrolling interests

     149        —          —           —           —     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to TCP

   $ 3,263      $ (6,203   $ 8,172       $ 941         3,921   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) per share attributable to TCP, basic and diluted3

   $ 0.16      $ (0.30   $ 0.40       $ 0.05       $ 0.19   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Weighted average number of shares outstanding, basic and diluted3

     20,553        20,553        20,553         20,553         20,553   

Dividends per share3

   $ 0.05      $ 0.87      $ —         $ —         $ —     

Other Financial Data:

            

Adjusted EBITDA (unaudited)4

   $ 24,152      $ 35,714      $ 35,996       $ 8,217       $ 10,014   

 

 

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     As of March 31, 2014  
     Actual     As Adjusted5  
     (in thousands)  

Balance Sheet Data:

    

Cash and cash equivalents6

   $ 23,021      $ 112,825   

Working capital7

     (56,419     33,385   

Property, plant and equipment, net

     72,955        72,955   

Total assets

     334,659        424,463   

Total debt

     146,790        146,790   

Total liabilities

     327,214        327,214   

Total shareholders’ equity

     7,445        97,249   

 

1 Represents the settlement of various litigation matters, as detailed in Note 14 to our consolidated financial statements and Note 7 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Business—Legal Proceedings.”
2 In August 2011, we sold the stock of one of our Chinese subsidiaries to an entity owned and controlled by our majority shareholders. We have no continuing activity with this entity and, accordingly, it has been reflected as discontinued operations in the accompanying consolidated financial statements.
3 All share and per share data relating to our common shares in this prospectus have been adjusted to reflect a 1:10 reverse stock split to be given effect prior to the effectiveness of the registration statement of which this prospectus is a part.
4 We present the non-GAAP financial measure “Adjusted EBITDA” as a supplemental measure of our performance. This non-GAAP financial measure is not a measure of financial performance or liquidity calculated in accordance with U.S. GAAP, and should be viewed as a supplement to, not a substitute for, our results of operations and balance sheet information presented on the basis of U.S. GAAP.

We define EBITDA as net income (loss) attributable to TCP before interest expense, income taxes, depreciation and amortization, and Adjusted EBITDA as EBITDA before net foreign currency losses (gains), litigation settlements and costs related to our withdrawn initial public offering. Adjusted EBITDA is not necessarily comparable to similarly titled measures reported by other companies. Adjusted EBITDA may exclude certain financial information that some may consider important in evaluating our financial performance. Adjusted EBITDA may not be indicative of historical operating results, and we do not intend for it to be predictive of future results of operations. We believe the use of Adjusted EBITDA as a metric assists our board, management and investors in comparing our operating performance on a consistent basis because it removes the impact of our capital structure (such as interest expense), asset base (such as depreciation and amortization) and tax structure, as well as certain items that affect inter-period comparability.

 

 

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The following table presents a reconciliation of EBITDA and Adjusted EBITDA to net income (loss) attributable to TCP, which is the most directly comparable U.S. GAAP measure, for the periods presented.

 

     Year Ended December 31,      Three Months Ended March 31,  
     2011      2012     2013      2013      2014  
     (in thousands)  

Net income (loss) attributable to TCP

   $ 3,263       $ (6,203   $ 8,172       $ 941       $ 3,921   

Adjustments:

             

Interest expense, net

     3,949         5,260        6,059         1,295         2,280   

Income tax expense (benefit)

     3,796         (2,738     4,662         1,623         2,197   

Depreciation and amortization

     6,739         7,154        8,142         1,952         2,190   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

EBITDA

     17,747         3,473        27,035         5,811         10,588   

Adjustments:

             

Foreign exchange losses (gains), net

     4,752         249        5,929         2,406         (674

Litigation settlements

     —           27,550        3,032         —           100   

Cost related to withdrawn initial public offeringa

     1,653         4,442        —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Adjusted EBITDA (unaudited)

   $ 24,152       $ 35,714      $ 35,996       $ 8,217       $ 10,014   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

  a 

Represents legal, accounting and professional fees incurred in connection with our proposed initial public offering in 2012, which was withdrawn.

5 The “as adjusted” data gives effect to the issuance of 7,142,858 common shares in this offering at an assumed offering price of $14.00 per common share, which is the midpoint of the range set forth on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
6 Excludes restricted cash of $5,421.
7 Total current assets minus total current liabilities.

 

 

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RISK FACTORS

Investing in our common shares involves a high degree of risk. You should carefully consider the following risk factors, as well as the financial and other information in this prospectus, before deciding to invest in our common shares. If any of the following risks actually occurs, our business, financial condition and results of operations could be materially adversely affected. In such case, the trading price of our common shares could decline and you may lose all or part of your investment in our common shares.

Risks Related to Our Business

Our industry is highly competitive. If we are not able to compete effectively, including against larger lighting manufacturers with greater resources, our business, financial condition and results of operations will be adversely affected.

Our industry is highly competitive. We face competition from vendors of traditional lighting technologies and from vendors of newer innovative products. The lighting industry is characterized by rapid technological change, short product lifecycles, frequent new product introductions and a competitive pricing environment. These characteristics increase the need for continual innovation and, as new technologies evolve, provide entry points for new competitors as well as opportunities for rapid share shifts. Our products compete with a number of existing products and our success depends on our ability to effectively compete in this global market. Many of our competitors, such as Philips, General Electric, OSRAM, Cree, and Acuity Brands are large, well-capitalized companies with significantly more resources than ours and they are able to spend more aggressively on product development, marketing, sales and other product initiatives.

Our ability to compete effectively in our markets depends upon our ability to distinguish our company and our products from our competitors and their products based on various factors, including, among others:

 

   

breadth and quality of product offering;

 

   

product pricing and cost competitiveness;

 

   

access to distribution channels globally;

 

   

customer orientation and strong customer relationships; and

 

   

the success and timing of new product development.

To the extent we are unable to distinguish our products, our larger competitors and any other more innovative competitors may be able to capture our customers and reduce our opportunities for success, which will adversely affect our business, financial condition and results of operations.

The loss of our relationship with The Home Depot or Walmart, or a significant decline in either of their purchases, could have a material adverse effect on our business, our ability to distribute our products, and our financial condition and results of operations.

Net sales to The Home Depot accounted for 34.8%, 28.8% and 31.4% of our net sales in 2011, 2012 and 2013, respectively, and net sales to Walmart accounted for 10.3% and 13.0% of our net sales in 2012 and 2013, respectively. Net sales to The Home Depot and Walmart accounted for 18.3% and 26.4%, respectively, of our net sales for the three months ended March 31, 2014. We do not have a long-term contract with, or any volume commitments from, The Home Depot or Walmart. Our sales have been and may continue to be materially affected by fluctuations in the buying patterns of The Home Depot and Walmart, and such fluctuations may result from general economic conditions, higher than anticipated inventory positions or other factors. A loss of The Home Depot or Walmart as a customer, or a significant decline in either of their purchases from us, could have a material adverse effect on our business, financial condition and results of operations and our ability to distribute our products.

 

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Each such company may make decisions regarding its business undertakings with us that may be contrary to our interests, or may terminate its relationship with us altogether, which it may do at any time. In addition, if either company changes its business strategy, we may fail to maintain our relationship with such company. Furthermore, should either company face changes that decrease its customer base due to the economy or for any other reason, our sales could be materially and adversely affected.

Lighting products are subject to rapid technological changes. If we fail to accurately anticipate and adapt to these changes, the products we sell will become obsolete, and our business, financial condition and results of operations will be adversely affected.

Lighting products are subject to rapid technological changes and short product life cycles that often lead to price erosion and cause product obsolescence. Companies within the lighting industry are continuously developing new products with heightened performance and functionality, which puts pricing pressure on existing products and constantly threatens to make them, or causes them to be, obsolete. These trends are especially relevant for our LED lamp products, which have experienced, and are expected to continue to experience, very rapid technological improvement and cost declines compared to other current lamp technologies. Our typical product’s life cycle is relatively short, generating lower average selling prices as the cycle matures. If we fail to accurately anticipate the introduction of new technologies, we may possess significant amounts of obsolete inventory that can only be sold at substantially lower prices and profit margins than we anticipated, which in turn may cause the stated value of our inventory to decline. In addition, if we fail to accurately anticipate the introduction of new technologies or are unable to develop the planned new technologies, we may be unable to compete effectively due to our failure to offer products most demanded by the marketplace. If any of these failures occurs, our business, financial condition and results of operations will be adversely affected.

If we are unable to increase production capacity for our products in a cost effective and timely manner or manage our operations and supply chain, we may incur delays in shipment and our sales and reputation in the marketplace could be harmed.

An important part of our business plan is the expansion of production capacity for our products. In order to fulfill anticipated demand for our products, we invest in capacity in advance of actual customer orders, typically based on preliminary, non-binding indications of future demand. As customer demand for our products changes, we must be able to adjust our production capacity, and manage our operations and supply chain, to meet demand while keeping costs down. Uncertainty is inherent within our facility and capacity expansion, and unforeseen circumstances could offset the anticipated benefits, disrupt our ability to provide products to our customers and impact product quality. Our ability to provide products to our customers in a cost effective and timely manner depends on a number of factors, including the following:

 

   

our ability to effectively increase the automation of the manufacturing processes for our LED and CFL product lines;

 

   

our ability to transition production among manufacturing facilities;

 

   

our ability to properly and quickly anticipate customer preferences among lighting products;

 

   

our ability to repurpose equipment from the production of one product to another;

 

   

the availability of critical components and raw materials used in the manufacture of our products;

 

   

the reliability of our inventory management systems and supply chain visibility tools;

 

   

our ability to effectively establish and use adequate management information systems, financial controls and quality control procedures; and

 

   

equipment failures, power outages, environmental risks or variations in the manufacturing process.

 

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If we are unable to increase production capacity for our products in a cost effective and timely manner while maintaining adequate quality, we may incur delays in shipment or be unable to meet increased demand for our products, which could harm our sales and operating margins and damage our reputation and our relationships with current and prospective customers. In addition, even if we are able to increase production capacity in a cost-effective and timely manner while maintaining adequate quality, if we are not able to effectively manage our inventory, supply chain and our operations, there may be delays in the delivery of our products that could also result in the loss of customers. From time to time, in part due to the growth of our business, we have experienced some delays in delivering products demanded by certain of our customers. Finally, if demand does not increase at the rate forecast, we may not be able to reduce manufacturing expenses or overhead costs at the same rate as demand decreases, which could also result in lower margins and adversely affect our business, financial condition and results of operations.

The reduction or elimination of investments in, or incentives to adopt, LED, CFL and other energy efficient lighting or the elimination of, or changes in, policies, incentives or rebates in certain states or countries that encourage the use of LEDs, CFLs and other energy efficient lighting solutions over some traditional lighting technologies could cause the growing demand for our products to slow, which could materially and adversely affect our business, financial condition and results of operations.

Today, the upfront cost to consumers of LEDs, CFLs and other forms of lighting solutions exceeds the upfront cost for some traditional lighting technologies that provide similar lumen output in many applications. Some governments around the world, including the United States, China, the European Union, and Canada, have used policy initiatives and other regulations, including financial incentives and rebates to consumers from which we benefit, to accelerate the development and adoption of LEDs, CFLs and other forms of lighting solutions and other non-traditional lighting technologies that are seen as more environmentally friendly compared to some traditional lighting technologies. Reductions in (including as a result of any budgetary constraints), or the elimination of, government investment and favorable energy policies could result in decreased demand for our products and decrease our sales, profits and margins. Further, if our products fail to qualify for any financial incentives or rebates or if restrictions by regulation of competitive products are removed, demand for our products may decrease, and our sales and profits may decrease.

The suspension of, repeal of or amendments to current requirements to phase-out energy inefficient lamp technologies by governments or the provision of government sponsored subsidies in our target geographies could impair our sales of energy efficient lamps in international markets.

Effective legislation in many countries that mandates energy efficiency standards for lamps represents an important driver to the growth in adoption of the energy efficient lamp technologies that we offer. The suspension of, repeal of or amendments to current laws or regulations banning inefficient lamp technologies in the United States and Canada, EMEA, Asia or Latin America could materially and adversely affect our business, financial condition and results of operations.

Any increase in the cost or disruption in the availability of the raw materials or key components utilized in our lighting products may adversely affect our business, financial condition and results of operations.

The lighting industry is subject to significant fluctuations in the cost and availability of raw materials and components. We rely on a number of third-party suppliers to provide certain raw materials and to manufacture certain of the components of our products and expect to continue to rely on such suppliers.

Our results of operations are directly affected by the cost of our raw materials, which could be affected by, among other things, general shortages in the marketplace and high price volatility. Our principal raw materials and components are phosphor, LED chips, plastic and aluminum. As a result of the significant portion of our cost of goods sold represented by these raw materials, our gross profit and margins could be adversely affected by changes in the cost of these raw materials if we are unable to pass the increases on to our customers. In recent

 

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years, the price of phosphor has experienced extreme volatility due to changes in the global supply of rare earth elements, the main raw material inputs for phosphor, particularly in China. More than 95% of the world’s current supply of rare earth elements comes from China, which has enacted a policy to reduce its exports because of its rising domestic demand and new environmental restrictions. Given the volatility in the cost of phosphorous elements, there can be no assurance that prices will not increase in the future, potentially at significant rates. Such increases may adversely affect our business, financial condition and results of operations.

We depend on a limited number of suppliers for these and other raw materials. We do not have guaranteed supply arrangements with our suppliers and few alternative sources exist. Substitution of alternate raw materials could significantly change the performance of the lighting products that we manufacture. If the availability of any of these raw materials is limited, we may be unable to produce some of our products in the quantities demanded by our customers, which could have an adverse effect on plant utilization and our sales of products requiring such raw materials.

We depend on certain key suppliers for components that we require for our lighting products, and the loss of any of these suppliers could have an adverse effect on our business, financial condition and results of operations.

We depend on certain key suppliers for certain key components that we require for our lighting products, including the LEDs for our LED-based lighting products. We do not have long-term contracts with these suppliers or any volume commitments from them. Our third-party suppliers may encounter problems obtaining materials required during their manufacturing processes due to a variety of reasons, any of which could delay or impede their ability to meet our demand for components. Our reliance on third-party suppliers also subjects us to additional risks that could harm our business, including, among others:

 

   

we may not be able to obtain an adequate supply of our components in a timely manner or on commercially reasonable terms;

 

   

our suppliers may be accused of infringing the intellectual property of third parties which, if upheld, could alter or inhibit their ability to fulfill our orders and meet our requirements; and

 

   

our suppliers may encounter financial or other hardships unrelated to our demand, which could inhibit their ability to fulfill our orders and meet our requirements.

Finding a suitable alternate supply of required raw materials and components that meet our strict specifications and obtaining them in needed quantities may be a time-consuming process, and we may not be able to find an adequate alternative source of supply at an acceptable cost. Any significant interruption in the supply of these raw materials or components could have a material adverse effect on our business, financial condition and results of operations.

We occasionally experience component quality problems with suppliers, and our current suppliers may not deliver satisfactory components in the future.

We occasionally experience component quality problems with suppliers. We may experience quality problems with suppliers in the future, which could decrease our gross margin and profitability, lengthen our sales cycles, adversely affect our customer relations and future sales prospects and subject our business to negative publicity. Our suppliers, especially new suppliers, may make manufacturing errors that may not be detected by our quality assurance testing, which could negatively affect the efficacy or safety of our products or cause shipment delays due to such errors. Additionally, we sometimes satisfy warranty claims even if they are not covered by our general warranty policy as a customer accommodation. If we were to experience quality problems with certain components purchased from our key suppliers, these adverse consequences could be magnified, and our business, financial condition and results of operations could be materially adversely affected.

 

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Our success is largely dependent upon the skills, experience and efforts of our senior management and the loss of their services could have a material adverse effect on our business, financial condition and results of operations.

Our continued success depends upon the continued availability, contributions, skills, experience and efforts of our senior management. We are particularly dependent on the services of Ellis Yan, our Chief Executive Officer. Ellis Yan has major responsibilities with respect to sales, product development and overall corporate administration. We do not have a formal succession plan in place for Ellis Yan. Our employment agreement with Ellis Yan does not guarantee his services for a specified period of time. All of the employment agreements with our senior management team may be terminated by the employee at any time. While all such agreements include non-competition and confidentiality covenants, there can be no assurance that such provisions will be enforceable or adequately protect us. The loss of the services of any of these persons might impede our operations or the achievement of our strategic and financial objectives, and we may not be able to attract and retain individuals with the same or similar levels of experience or expertise. Additionally, while we have key man insurance on the life of Ellis Yan, such insurance may not adequately compensate us for the loss of Ellis Yan. The loss or interruption of the service of members of our senior management, particularly Ellis Yan, or our inability to attract or retain other qualified personnel could have a material adverse effect on our business, financial condition and results of operations.

If we are unable to execute our business strategy to expand the marketing, distribution and sale of our products, and if we are unable to effectively manage the associated risks, our ability to expand our business abroad could be impaired.

We commenced sales activities in China in 2004, EMEA in 2010 and Latin America in 2011, and we expect to continue to expand our sales outside of the United States and Canada as part of our core business strategy. The marketing, distribution and sale of our products in these markets may expose us to a number of risks, including:

 

   

fluctuations in currency exchange rates;

 

   

increased costs associated with maintaining the ability to understand the local markets and follow their trends;

 

   

failure to develop products that work under the various voltage standards that can differ from region to region;

 

   

failure to maintain effective marketing and distributing presence in various countries;

 

   

failure to provide adequate customer service and support in these markets;

 

   

failure to develop appropriate risk management and internal control structures tailored to overseas operations;

 

   

difficulty and cost relating to compliance with the different commercial and legal requirements of the markets in which we offer or plan to offer our products;

 

   

failure to obtain or maintain certifications for our products in these markets;

 

   

inability to obtain, maintain or enforce intellectual property rights;

 

   

unanticipated changes in prevailing economic conditions and regulatory requirements;

 

   

difficulty in employing and retaining sales personnel who are knowledgeable about, and can function effectively in, export markets; and

 

   

trade barriers such as export requirements, tariffs and taxes.

 

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Our multi-national sales, manufacturing and operations subjects us to risks associated with operating in global markets.

We are a global business. For 2011, 2012 and 2013, 10.2%, 11.6% and 17.6%, respectively, of our net sales were outside of the United States and Canada. We are incorporated in Switzerland. Most of our manufacturing facilities are located in China. We also maintain offices in the United States, United Kingdom, Canada, Brazil, France, Germany and Japan. Global business operations are subject to inherent risks, including, among others:

 

   

unexpected changes in regulatory requirements, tariffs and other trade barriers or restrictions;

 

   

longer accounts receivable payment cycles and the difficulty of enforcing contracts and collecting receivables through certain non-U.S. legal systems;

 

   

difficulties in managing and staffing operations;

 

   

potentially adverse tax consequences;

 

   

the burdens of compliance with the laws and regulations of a number of jurisdictions;

 

   

import and export license requirements and restrictions of China, the United States and each other country in which we operate;

 

   

exposure to different legal standards and reduced protection for intellectual property rights in some countries;

 

   

currency fluctuations and restrictions;

 

   

political, social and economic instability, including war and the threat of war, acts of terrorism, pandemics, boycotts, curtailment of trade or other business restrictions;

 

   

periodic economic downturns in the markets in which we operate;

 

   

customs clearance and transportation delays; and

 

   

sales variability as a result of translating our non-U.S. sales into U.S. dollars.

Any of these factors may adversely affect our future sales outside the United States and, consequently, our business, financial condition and results of operations.

Fluctuations in currency exchange rates may significantly impact our results of operations and may significantly affect the comparability of our results between financial periods.

Our operations are conducted by subsidiaries in many countries. The results of operations and the financial position of these subsidiaries are reported in the relevant foreign currencies and then translated into U.S. dollars at the applicable exchange rates for inclusion in our consolidated financial statements. The main currencies to which we are exposed are the Euro, British pound sterling, Chinese yuan, Brazilian real and Swiss franc. The exchange rates between these currencies and the U.S. dollar in recent years have fluctuated significantly and may continue to do so in the future. A depreciation of these currencies against the U.S. dollar will decrease the U.S. dollar equivalent of the amounts derived from these operations reported in our consolidated financial statements and an appreciation of these currencies will result in a corresponding increase in such amounts. To the extent that we are required to pay for goods or services in foreign currencies, the appreciation of such currencies against the U.S. dollar will tend to negatively impact our results of operations. The steady appreciation of the Chinese currency versus the U.S. dollar over the past four years has increased the relative cost of our manufacturing to the extent we have used U.S. dollars or other currencies generated from our sales outside of China to purchase goods and services in China. In addition, currency fluctuations may affect the comparability of our results of operations between financial periods.

We do not hedge our currency exposure and, therefore, we incur currency transaction risk whenever we enter into either a purchase or sale transaction using a currency other than the local currency of the transacting

 

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entity. Given the volatility of exchange rates, there can be no assurance that we will be able to effectively manage our currency transaction risks or that any volatility in currency exchange rates will not have a material adverse effect on our business, financial condition or results of operations.

We may be exposed to fines, penalties or other sanctions if we do not comply with laws and regulations designed to combat government corruption in countries in which we sell our products, and any determination that we violated such laws and regulations could have a material adverse effect on our business, financial condition and results of operations.

We operate in some countries that have experienced significant levels of governmental corruption. Our employees, agents and contractors may take actions in violation of our policies and applicable laws and regulations that generally prohibit the making of improper payments to foreign government officials for the purpose of obtaining or keeping business, including the U.S. Foreign Corrupt Practices Act of 1977, as amended, or the FCPA. Such violations, if they occur, could have an adverse effect on our business, financial condition and results of operations and reputation. Any failure by us to ensure that our employees and agents comply with the FCPA and other applicable laws and regulations in non-U.S. jurisdictions could result in substantial civil and criminal penalties or restrictions on our ability to conduct business in certain non-U.S. jurisdictions, and our business, financial condition and results of operations could be materially and adversely affected.

We generally do not enter into long-term contracts with our customers, which could result in a disconnect between our production and sales.

We generally do not enter into long-term contracts with our customers. Rather, we sell our products to customers through purchase orders based on their current needs, which could result in a disconnect between our production and sales. As a result, we could experience periods during which our production exceeds the orders for our products, resulting in higher levels of inventory and of working capital employed in our business than would otherwise be required. We will also have to pay our fixed costs during such periods. We may not be able to timely find new customers, or increase orders from existing customers, in order to absorb our excess production and supplement our sales during these periods and we may not be able to recover our fixed costs as a result. Periods of no or limited purchase orders for our products could have a material adverse effect on our business, financial condition and results of operations.

Certification and compliance are important to adoption of our lighting products, and failure to obtain such certification or compliance may have an adverse effect on our business, financial condition and results of operations.

We are required to comply with certain legal requirements governing the materials used in our products and we submit to voluntary registration for the certification of some of our products. Certifications and compliance standards that we follow include UL, an independent organization that provides a UL mark on products that have passed testing and safety certification, and the efficiency requirements of ENERGY STAR®. The United States Environmental Protection Agency has announced that it intends to make its ENERGY STAR® rating standards more rigorous in the second half of 2014. If our products do not meet the new standards, our sales of any non-compliant products could decrease, which could have a material impact on our business. Any other amendments to existing requirements, or new requirements with which we cannot comply, may materially harm our sales. In addition, we cannot be certain that we will be able to obtain any such certifications for our new products or that, if certification standards are amended, we will be able to maintain certifications for our existing products. The failure to obtain such certifications or compliance may adversely affect our business, financial condition and results of operations.

 

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We are subject to the SEC’s new rules regarding the use and disclosure of “conflict minerals,” which we expect will increase our operating and compliance costs. Our products may contain conflict minerals, which could harm our reputation and cause sales of our products to decline.

The SEC adopted its final rule implementing Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act concerning conflict minerals in August 2012. This rule requires us to: (1) determine whether conflict minerals (tin, tantalum, tungsten, gold or similar derivatives) are used in our products and, if so, determine if the minerals originated from the Democratic Republic of Congo (“DRC”) or its immediately adjoining countries; and (2) if so, to conduct due diligence regarding the source and chain of custody of these conflict minerals to determine whether the conflict minerals financed or benefitted armed groups. The rule will require us to submit forms and reports to the SEC by 2016 and annually thereafter that disclose our determinations and due diligence measures. We are currently conducting conflict minerals due diligence and are working toward the required deadline. Presently, we have not determined how many or if any of our supply chain partners use conflict minerals or how much expense our due diligence exercise will add to our operational cost. If we do not properly assess supply chain partners and appropriately control costs and budget for conflict minerals compliance, our results of operations and profitability in the future could suffer. In addition, if our products contain conflict minerals, sales of our products could suffer due to adverse public reaction, resulting in a decline in revenue and profitability.

Our products may contain defects or otherwise not perform as expected, which could reduce sales, result in costs associated with warranty or product liability claims or recall of those items, all of which could materially adversely affect our business, financial condition and results of operations.

The manufacturing of our products involves complex processes and defects have been, and could be, found in our existing or future products. These defects may cause us to incur significant warranty, support and replacement costs, and costs associated with recall may divert the attention of our engineering personnel from our product development efforts and harm our relationships with customers and our reputation in the marketplace. We generally provide limited warranties ranging from one to nine years on our products, and such warranties may require us to repair, replace or reimburse the end user for the purchase price of the product. Moreover, even if our products meet standard specifications, end users may attempt to use our products in applications they were not designed for or in products that were not designed or manufactured properly, resulting in product failures and creating customer dissatisfaction. Since the majority of our products use electricity, and our CFL lamps contain a small amount of mercury, it is possible that our products could result in injury or increased health risks, including the health risks associated with exposure to ultraviolet light generated by mercury vapors, whether by product malfunctions, defects, improper installation or other causes. Particularly because our products often incorporate new technologies or designs, we cannot predict whether or not product liability claims will be brought against us. We may not have adequate resources in the event of a successful claim against us or a recall of a product. A successful product liability claim against us or a significant recall of a product that is not covered by insurance or is in excess of our available insurance limits could require us to make significant payments of damages and could materially adversely affect our results of operations and financial condition. These problems could result in, among other things, a delay in the recognition or loss of sales, loss of market share or failure to achieve market acceptance. A significant product recall or product liability litigation could also result in adverse publicity, damage to our reputation and a loss of confidence in our products and adversely affect our business, financial condition and results of operations.

If we are unable to manage our anticipated sales growth effectively, our business, financial condition and results of operations could be adversely affected.

We intend to undertake a number of strategies in an effort to grow our sales. If we are successful, our sales growth may place significant strain on our limited resources, including our research and development, sales and marketing, operational and administrative resources. To properly manage any future sales growth, we must continue to improve our management, operational, administrative, accounting and financial reporting systems and expand, train and manage our employee base, which may involve significant expenditures and increased

 

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operating costs. We may not be able to effectively manage the expansion of our operations or recruit and adequately train additional qualified personnel. If we are unable to manage our anticipated sales growth effectively, the quality of our customer care may suffer, we may experience customer dissatisfaction, reduced future sales or increased warranty claims, and our expenses could substantially and disproportionately increase. Any of these circumstances could adversely affect our business, financial condition and results of operations.

We may engage in future acquisitions that could disrupt our business, divert management attention, increase our expenses or otherwise adversely affect our business, financial condition and results of operations.

In the future, we may acquire complementary businesses, products, technologies or other assets. If we engage in future acquisitions, we may not strengthen our competitive position or achieve any of our intended goals or synergies with respect to any such acquisition. In addition, any such acquisition may be viewed negatively by our customers, financial markets or investors. Furthermore, any such acquisition could pose challenges with respect to the integration of personnel, technologies and operations from the acquired businesses and in the retention and motivation of key personnel from such businesses. Acquisitions may also disrupt our ongoing operations, divert management’s attention from day-to-day responsibilities, increase our expenses and otherwise adversely affect our business, financial condition and results of operations.

The marketing and distribution efforts of our third-party distributors may not be effective, which could negatively affect our ability to expand our business, particularly in the C&I channel.

We market and sell some of our products to third-party distributors in all of our sales regions, especially in the United States. We rely on these distributors to service end users, and our failure to maintain strong working relationships with such distributors could have a material adverse impact on our operating results and damage our brand reputation, particularly in the C&I channel. For 2011, 2012 and 2013, sales to our C&I customers were $102.6 million, $152.5 million and $165.8 million, respectively, or 38.9%, 42.4% and 38.7% of our net sales, respectively. For the three months ended March 31, 2014, sales to our C&I customers were $46.1 million, or 45.6% of our net sales.

We do not control the activities of our distributors with respect to the marketing and sales of and customer service support for our products. Therefore, the reputation and performance of our distributors, the willingness of our distributors to sell our products and their ability to expand their businesses are essential to the future growth of our sales in the C&I channel and has a direct and material impact on our sales and profitability. Also, as with our retail customers, we do not have long-term purchase commitments from our distributor customers, and they can therefore generally cancel, modify or reduce orders with little or no notice to us. As a result, any reductions or delays in, or cancellations of, orders from any of our distributors may have a negative impact on our sales and budgeting process. Moreover, we may not be able to compete successfully against those of our competitors that have greater financial resources and are able to provide better incentives to distributors, which may result in reduced sales of our products or the loss of our distributors. The loss of any key distributor may force us to seek replacement distributors, and any resulting delay may be disruptive and costly.

If we are unable to obtain additional capital as needed in the future, our ability to grow our sales could be limited and we may be unable to pursue our current and future business strategies.

Our future capital requirements will depend on many factors, including the rate of our sales growth, our introduction of new products and services and enhancements to existing products and services, and our expansion of sales, marketing and product development activities. In addition, we may consider acquisitions of product lines, businesses or technologies in an attempt to grow our business, which could require significant capital and could increase our capital expenditures related to future operation of the acquired business or technology. We may not be able to obtain additional financing on terms favorable to us, if at all, and, as a result, we may be unable to expand our business or continue to pursue our current and future business strategies. Additionally, if we raise funds through debt financing, we may become subject to additional covenant restrictions and we will incur increased interest expense and principal payments.

 

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As a manufacturer or importer of goods containing mercury, we are subject to requirements in certain jurisdictions that we take back, recycle or otherwise manage lamps returned by our customers or that we pay for the costs of meeting such requirements.

Our CFL lamps contain a small amount of mercury. In the United States, certain states assess all manufacturers of mercury-containing lights that sell those lights into that state to pay costs incurred by the state to fund its program to collect, transport, process and recycle those lights. In certain instances, we have been unable to effectively recover this additional cost from our customers. It is possible that other states or jurisdictions into which we sell our CFLs will enact similar, or even more onerous, legislation. If such legislation becomes more widespread, our financial obligations under these programs could adversely affect our business, financial condition and results of operations. In addition, consumer resistance to the use of CFL lamps due to their mercury content may reduce our sales.

We own land use rights for industrial property in China, and if any environmental contamination is discovered, we could be responsible for remediation of the property.

We own our manufacturing and distribution facilities located in China. We purchased the land use rights for these properties from the Chinese government beginning in 2001. If environmental contamination is discovered at any of our facilities and we are required to remediate the property, our recourse against the prior owners may be limited. Any such potential remediation could be costly and could adversely affect our business, financial condition and results of operations.

The cost of compliance with environmental laws and regulations and any related environmental liabilities could adversely affect our business, financial condition and results of operations.

We are subject to laws and regulations governing, among other things, the use of chemicals, emissions to air, discharges to water, the remediation of contaminated properties and the generation, handling, collection, recycling, use, storage, transportation, treatment and disposal of and exposure to, waste and other materials, as well as laws and regulations relating to occupational health and safety and the content and manufacturing of our products. These laws and regulations are subject to change and becoming increasingly more stringent, and also vary depending on the jurisdictions in which our products are manufactured, transported, marketed and placed. The costs to comply with these laws or regulations can be substantial and any violation thereof can lead to substantial fines, penalties and other liabilities, which could adversely affect our business, financial condition and results of operations.

If our information technology systems fail, or if we experience an interruption in their operation or we are unable to protect them against cyber-based attacks or network security breaches, then our business, financial condition and results of operations could be materially adversely affected.

The efficient operation of our business is dependent on our information technology systems. We rely on those systems generally to manage the day-to-day operation of our business, manage relationships with our customers, maintain our research and development data and maintain our financial and accounting records. The failure of our information technology systems, our inability to successfully maintain and enhance our information technology systems or any compromise of the integrity or security of the data we generate from our information technology systems could adversely affect our results of operations, disrupt our business and product development and make us unable or severely limit our ability to respond to customer demands. In addition, our information technology systems are vulnerable to damage or interruption from:

 

   

earthquake, fire, flood and other natural disasters;

 

   

employee or other theft;

 

   

attacks by computer viruses or hackers;

 

   

power outages;

 

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cyber-based attacks or network security breaches; and

 

   

computer systems, internet, telecommunications or data network failure.

Any interruption of our information technology systems, including security breaches, could result in decreased sales, increased expenses, increased capital expenditures, negative publicity, customer dissatisfaction and potential lawsuits or liability claims, any of which could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Intellectual Property

If we are unable to obtain and adequately protect our intellectual property rights, our competitive position could be harmed.

We consider certain aspects of our technology and processes proprietary. If we are not able to adequately protect or enforce the proprietary aspects of our technology, competitors may utilize our proprietary technology and our business, financial condition and results of operations could be harmed. We currently attempt to protect our technology through a combination of patent, copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements and similar means. Despite our efforts, other parties may attempt to disclose, obtain or use our technologies. Our competitors may also be able to independently develop products that are substantially equivalent or superior to our products or design around our patents. In addition, the laws of some countries do not protect our proprietary rights as fully as do the laws of the United States. As a result, we may not be able to protect our proprietary rights adequately in the United States or abroad.

We own United States and non-U.S. patents and patent applications that relate to some of our products, systems, business methods and technologies. We offer no assurance about the degree of protection which existing or future patents may afford us. Likewise, we offer no assurance that our patent applications will result in issued patents, that our patents will be upheld if challenged, that competitors will not develop similar or superior business methods or products outside the protection of our patents, that competitors will not infringe on our patents or that we will have adequate resources to enforce our patents.

We also rely on unpatented proprietary technology. It is possible that others will independently develop the same or similar technology or otherwise learn of our unpatented technology. To protect our trade secrets and other proprietary information, we generally require employees, consultants, advisors and collaborators to enter into confidentiality agreements. We cannot assure you that these agreements will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. If we are unable to maintain the proprietary nature of our technologies, our business could be materially adversely affected.

Assertions by third parties of intellectual property infringement could result in significant costs and cause our operating results to suffer.

The markets in which we compete or plan to compete are characterized by rapidly changing products and technologies and there is intense competition to establish intellectual property protection and proprietary rights related to these products and technologies. The markets for LED, CFL and halogen lamps, in particular, are characterized by vigorous protection and pursuit of intellectual property rights and positions, which has resulted in protracted and expensive litigation for many companies, including us.

We may be required to obtain licenses for such third-party intellectual property. If we need to license any third-party intellectual property or other technology, we could be required to pay royalties on certain of our products. In addition, there can be no assurance that we will be able to obtain such licenses on commercially reasonable terms or at all. Our inability to obtain third-party intellectual property licenses on commercially reasonable terms or at all could harm our business, results of operations, financial condition and/or prospects.

 

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We have in the past received, and may receive, notices that claim we have infringed upon the intellectual property of others. Even if these claims are not valid, they could subject us to significant costs. We have engaged in litigation and litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation may also be necessary to defend against claims of infringement or invalidity by others. An adverse outcome in litigation or any similar proceedings could subject us to significant liabilities to third-parties, require us to license disputed rights from others or require us to cease marketing, selling or using certain products or technologies. For instance, in 2013 we entered into a settlement agreement with Koninklijke Philips N.V. (“Philips”) relating to a lawsuit alleging infringement of certain LED lighting-related patents pursuant to which we agreed to make certain scheduled payments to Philips over time in exchange for a license to use certain of Philips’ LED patents until the earlier of their respective expirations or December 31, 2028. We are also a defendant in a patent infringement lawsuit brought against us by GE Lighting Solutions, LLC. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources,” “Business—Legal Proceedings,” Note 14 to our consolidated financial statements and Note 7 to our unaudited condensed consolidated financial statements, included elsewhere in this prospectus. We may not be able to obtain licenses on acceptable terms, if at all. We also may have to indemnify certain customers if it is determined that we have infringed upon or misappropriated another party’s intellectual property. Any of these results could adversely affect our business, financial condition and results of operations. In addition, the cost of addressing any intellectual property litigation claim, both in legal fees and expenses, and the diversion of management resources, regardless of whether the claim is valid, could be significant and could materially harm our business, financial condition and results of operations.

Our efforts to protect our intellectual property may be less effective in some countries where intellectual property rights are not as well protected as in the United States.

The laws of some countries do not protect proprietary rights to the same degree as the laws of the United States and there is a risk that our ability to protect our proprietary rights may not be adequate in these countries. Many companies have encountered significant problems in protecting their proprietary rights against copying or infringement in such countries, some of which are countries in which we intend to sell our products. In particular, the application of laws governing intellectual property rights in China is uncertain and evolving and could involve substantial risks to us. If we are unable to adequately protect our intellectual property rights in China, our attempts to penetrate the Chinese market may be harmed. In addition, our competitors in China and these other countries may independently develop similar technology or duplicate our products, even if unauthorized, which could potentially reduce our sales in these countries and harm our business, financial condition and results of operations.

The steps we have taken to protect our intellectual property may not be adequate, which could have a material adverse effect on our ability to compete in the market.

In addition to patents, we rely on confidentiality, non-compete, non-disclosure and assignment of inventions provisions, as appropriate, with our employees and consultants, to protect and otherwise seek to control access to, and distribution of, our proprietary information. These measures may not be adequate to protect our intellectual property from unauthorized disclosure, third-party infringement or misappropriation, for the following reasons:

 

   

the agreements may be breached, may not provide the scope of protection we believe they provide or may be determined to be unenforceable;

 

   

we may have inadequate remedies for any breach;

 

   

trade secrets and other proprietary information could be disclosed to our competitors; or

 

   

others may independently develop substantially equivalent or superior proprietary information and techniques or otherwise gain access to our trade secrets or disclose such technologies.

 

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Specifically with respect to non-compete agreements, under current U.S. law, we may be unable to enforce these agreements, in whole or in part, and it may be difficult for us to restrict our competitors from gaining the expertise that our former employees gained while working for us.

If, for any of the above reasons, our intellectual property is disclosed or misappropriated, it could harm our ability to protect our rights and could have a material adverse effect on our business, financial condition and results of operations.

We may need to initiate lawsuits to protect or enforce our patents and other intellectual property rights, which could be expensive and, if we lose, could cause us to lose some of our intellectual property rights, which would harm our ability to compete in the market.

We rely on patents to protect a portion of our intellectual property and our competitive position. In order to protect or enforce our patent rights, we may initiate patent litigation against third-parties, such as infringement suits or interference proceedings. Any lawsuits that we initiate could be expensive, take significant time and divert management’s attention from other business concerns, and the outcome of litigation to enforce our intellectual property rights in patents, copyrights, trade secrets or trademarks is highly unpredictable. Litigation also puts our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing. In addition, we may provoke third-parties to assert claims against us. We may not prevail in any lawsuits that we initiate and the damages or other remedies awarded, including attorney fees, if any, may not be commercially valuable. The occurrence of any of these events could harm our business, financial condition and results of operations.

Risks Related to This Offering and Our Common Shares

There may be circumstances in which the interests of our major shareholders could be in conflict with your interests as a shareholder.

As of the date of this prospectus, Ellis Yan and Solomon Yan beneficially own 56.1% and 33.0% of our common shares, respectively. Upon completion of this offering, Ellis Yan and Solomon Yan will beneficially own 41.6% and 24.5% of our common shares, respectively, or 40.1% and 23.6% of our common shares, respectively, if the underwriters exercise their option to purchase additional shares in full. Solomon Yan has indicated his intention to transfer 2,034,789 common shares to a trust for the benefit of his immediate family members prior to the completion of this offering. As a result of this ownership, Ellis Yan and Solomon Yan will have a controlling influence on our affairs and their voting power will constitute a quorum of our shareholders voting on any matter requiring the approval of our shareholders. Such matters include the nomination and election of directors, the issuance of additional shares of our capital stock or payment of dividends, the adoption of amendments to our articles of association and organizational regulations and approval of mergers or sales of substantially all of our assets. In addition, Ellis Yan, Solomon Yan and The Lillian Yan Irrevocable Stock Trust, our principal shareholders, have entered into a shareholders’ agreement that provides for, among other things, these shareholders to vote their common shares in favor of certain board nominees designated by Ellis Yan and Solomon Yan.

Accordingly, this concentration of ownership may harm the market price of our common shares by, among other things:

 

   

delaying, defending, or preventing a change of control, even at a per share price that is in excess of the then current price of our common shares;

 

   

impeding a merger, consolidation, takeover, or other business combination involving us, even at a per share price that is in excess of the then current price of our common shares; or

 

   

discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, even at a per share price that is in excess of the then current price of our common shares.

Ellis Yan and Solomon Yan may also cause corporate actions to be taken that conflict with the interests of our other shareholders.

 

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If we fail to develop or maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, the Sarbanes-Oxley Act of 2002 and the listing standards of the NYSE. We expect that the requirements of these rules and regulations will continue to increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and place significant strain on our personnel, systems and resources.

The Sarbanes-Oxley Act of 2002 requires, among other things, that, as a public company, our principal executive officer and principal financial officer certify the effectiveness of our disclosure controls and procedures and, beginning with our second annual report as a public company, our internal controls over financial reporting. As an emerging growth company, we will not be required to comply with the provision of the Sarbanes-Oxley Act of 2002 that requires our independent registered public accounting firm to attest to management’s assessment of our internal control over financial reporting, once such assessment would otherwise be required, for so long as we remain an emerging growth company.

We continue to develop and refine our disclosure controls and procedures and our internal control over financial reporting; however, we have not yet assessed our internal control over financial reporting. Material weaknesses in our disclosure controls or our internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls, or any difficulties encountered in their implementation or improvement, could harm our operating results or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of management evaluations and independent registered public accounting firm audits of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures or ineffective internal control over financial reporting could also cause investors to lose confidence in our reported financial information, which may have a negative effect on the trading price of our common shares.

Because there is no existing market for our common shares, our initial public offering price may not be indicative of the market price of our common shares after this offering, an active trading market in our common shares may not develop or be sustained and the market price of our common shares could fluctuate significantly, and you could lose all or part of your investment.

There is currently no public market for our common shares, and an active trading market may not develop or be sustained after this offering. Our initial public offering price has been determined through negotiation between us and the underwriters and may not be indicative of the market price for our common shares after this offering. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the NYSE. The lack of an active market may reduce the value of your shares and impair your ability to sell your shares at the time or price at which you wish to sell them. An inactive market may also impair our ability to raise capital by selling our common shares and may impair our ability to acquire or invest in other companies, products or technologies by using our common shares as consideration.

The lack of a trading market in the United States may result in the loss of research coverage by any securities analysts that may cover our company in the future. Moreover, we cannot assure you that any securities analysts will initiate or maintain research coverage of our company and our common shares in the United States.

In addition, the market price of our common shares could fluctuate significantly as a result of a number of factors, including:

 

   

fluctuations in our financial performance;

 

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economic and stock market conditions generally and specifically as they may impact us, participants in our industry or comparable companies;

 

   

changes in financial estimates and recommendations by securities analysts following our common shares or comparable companies;

 

   

earnings and other announcements by, and changes in market evaluations of, us, participants in our industry or comparable companies;

 

   

our ability to meet or exceed any future earnings guidance we may issue;

 

   

changes in business or regulatory conditions affecting us, participants in our industry or comparable companies;

 

   

changes in accounting standards, policies, guidance, interpretations or principles;

 

   

announcements or implementation by our competitors or us of acquisitions, technological innovations or new products, or other strategic actions by our competitors; or

 

   

trading volume of our common shares or the sale of stock by our management team, directors or principal shareholders.

These and other factors could limit or prevent investors from readily selling their common shares or otherwise negatively affect the liquidity of our common shares, and you could lose all or part of your investment.

We will incur increased costs as a result of becoming a public company.

As a public company, we will incur legal, accounting, insurance and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act of 2002 and the Dodd Frank Wall Street Reform and Consumer Protection Act and related rules implemented by the SEC. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our senior management. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common shares, fines, sanctions and other regulatory action and potentially civil litigation.

Our management will have broad discretion over the use of the net proceeds from this offering and may not obtain a favorable return on the use of these proceeds.

Our management will have broad discretion in determining how to apply the net proceeds from this offering and may spend the proceeds in a manner that our shareholders may not deem desirable. We currently intend to use the net proceeds from this offering to acquire and develop advanced, automated manufacturing equipment to expand our LED manufacturing, for repayment of indebtedness and for general corporate purposes. We cannot assure you that these uses or any other use of the net proceeds of this offering will yield favorable returns or results. See “Use of Proceeds” for additional information.

We do not anticipate paying cash dividends on our common shares after the completion of this offering and any return on investment may be limited to the value of our common shares.

We do not anticipate paying cash dividends on our common shares after the completion of this offering. Under Swiss law, dividends may be paid out only if we have sufficient distributable profits from the previous

 

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fiscal year, or if we have freely distributable reserves, each as will be presented within our audited annual stand-alone statutory financial statements. Dividend payments out of current year earnings or the share capital are not allowed. The affirmative vote at a shareholders’ meeting of a majority of the votes represented (excluding unmarked, invalid and non-exercisable votes, which includes broker non-votes) must approve distributions of dividends. Our board of directors may propose at the shareholders’ meeting that a dividend be paid, but cannot itself authorize the dividend. In addition, there are legal restrictions on the payment of dividends from our Bermuda and Chinese subsidiaries to pay dividends to us, and our revolving line of credit restricts the ability of our U.S. and Canadian subsidiaries from paying dividends to us. These restrictions affect our ability, as a holding company, to pay dividends to our shareholders. See “Dividend Policy” for additional information. Since we do not plan to pay dividends after the completion of this offering, our common shares may be less valuable than if we planned to do so, because a return on your investment will only be based upon the price at which you sell our common shares.

Purchasers in this offering will experience immediate and substantial dilution in net tangible book value, and any additional financing may result in additional dilution to our shareholders.

The assumed initial public offering price will be higher than the pro forma net tangible book value per common share of our outstanding common shares as of March 31, 2014. As a result, investors purchasing common shares in this offering will incur immediate dilution of $10.60 per common share, based on an assumed initial public offering price of $14.00 per common share. This dilution is due in large part to earlier investors having generally paid substantially less than the assumed initial public offering price when they purchased their common shares. Investors purchasing common shares in this offering will pay a price per common share that exceeds the book value of our assets after subtracting our liabilities. As a result of this dilution, investors purchasing common shares from us will have contributed 81% of the total amount of our total net funding to date but will own only 26% of our equity. In addition, the exercise of outstanding options and warrants will, and future equity issuances may, result in further dilution to investors. See “Dilution.” In addition, if we raise additional funds by issuing equity securities in the future, you may experience significant dilution of your ownership interest and the newly issued securities may have rights senior to those of the holders of our common shares.

The market price of our common shares could be adversely affected by future sales of our common shares.

Sales of a substantial number of our common shares following this offering or the perception that such sales might occur, could cause a decline in the market price of our common shares or could impair our ability to obtain capital through a subsequent offering of our equity securities or securities convertible into equity securities. Under our articles of association that will be in effect upon closing of our initial public offering, we are authorized to issue up to 41,106,860 common shares, of which 27,696,288 common shares will be outstanding upon the closing of this offering (or 28,767,716 common shares if the underwriters’ option to purchase additional shares is exercised in full). Of these shares, the common shares sold in this offering will be freely transferable without restriction or further registration under the Securities Act of 1933, or the Securities Act. In addition 20,553,430 common shares may be sold upon the expiration of the 180-day lock-up period under the lock-up agreements described below.

We, our directors and executive officers and all of our shareholders have agreed that, subject to certain exceptions, without the prior written consent of each of the representatives, we and they will not (1) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, make any short sale or otherwise transfer or dispose of, directly or indirectly, any common shares or any securities convertible into, exercisable or exchangeable for or that represent the right to receive common shares (including without limitation, common shares which may be deemed to be beneficially owned by them in accordance with the rules and regulations of the SEC and securities which may be issued upon exercise of a share option or warrant) whether now owned or hereafter acquired, (2) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of the common shares, whether any such transaction is to be settled by delivery of common shares or such other securities, in cash or otherwise, (3) make any demand for or exercise

 

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any right with respect to, the registration of any common shares or any security convertible into or exercisable or exchangeable for common shares, or (4) publicly disclose the intention to do any of the foregoing, for a period of 180 days after the date of this prospectus.

Risks Related to Our Corporate Structure

We are incorporated in Switzerland and Swiss law governs our corporate affairs.

We are a corporation incorporated under the laws of Switzerland. Our place of incorporation is Cham, in the canton of Zug, Switzerland. The rights of holders of our common shares are governed by Swiss corporate law and by our articles of association. In particular, Swiss corporate law limits the ability of a shareholder to challenge resolutions or actions of our board of directors in court. Shareholders generally are not permitted to file a suit to reverse a decision or action by directors but are permitted to seek damages for breaches of fiduciary duty. Shareholder claims against a director for breach of fiduciary duty would, as a matter of Swiss law, have to be brought at our place of incorporation in Cham, Switzerland, or at the domicile of the involved director. Shareholders filing a suit in a Swiss court will be required to post a bond to cover court costs and, where the plaintiff is not domiciled in Switzerland or is insolvent, may also be required to include in the bond additional amounts for party indemnification. Under Swiss law the losing party pays court costs. The amounts of these bonds will depend upon the value in litigation and may be substantial, therefore preventing or discouraging a shareholder from bringing a suit against the company or the directors in Switzerland. In addition, under Swiss law, any claims by shareholders against us must be brought exclusively at our place of incorporation. See “Comparison of Swiss Law and Delaware Law—Directors’ fiduciary duties.”

Swiss law contains provisions that could prevent or delay an acquisition of our company by means of a tender offer, a proxy contest or otherwise.

Swiss law contains provisions that could prevent or delay an acquisition of us by means of a tender offer, a proxy contest or otherwise. These provisions may also adversely affect prevailing market prices for the shares. These provisions, among other things:

 

   

provide that a merger or demerger transaction requires the affirmative vote of the holders of at least two-thirds of the shares represented at the meeting and the majority of the par value of the shares represented and, if the merger contract provides for the possibility of a so-called “cashout” or “squeeze-out” merger, the merger resolution requires the consent of at least 90% of the outstanding shares entitled to vote at the meeting;

 

   

provide that any action required or permitted to be taken by the holders of shares must be taken at a duly called annual or extraordinary general meeting of shareholders; and

 

   

limit the ability of our shareholders to amend or repeal some provisions of our articles of association.

Our status as a Swiss corporation means shareholders enjoy certain rights that may limit our flexibility to raise capital, issue dividends and otherwise manage ongoing capital needs.

Swiss law requires our shareholders to authorize increases in our share capital, and such authorizations are of limited duration. Additionally, subject to specified exceptions, Swiss law grants preemptive rights to existing shareholders to subscribe for new issuances of shares. Prior to the consummation of this offering, we expect that our shareholders will waive their preemptive rights to shares they already own, and that our Board of Directors will withdraw any preemptive rights for any shares in this offering to which they would otherwise be entitled. Swiss law also does not provide as much flexibility in the various terms that can attach to different classes of shares as do the laws of some other jurisdictions. Swiss law requires shareholder approval for many corporate actions over which a board of directors would have authority in some other jurisdictions. For example, dividends must be approved by shareholders. These Swiss law requirements relating to our capital management may limit our flexibility, and situations may arise where greater flexibility would have provided benefits to our shareholders.

 

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We are a Swiss company and it may be difficult for you to obtain or enforce judgments against us or our senior management and directors in the United States.

We are organized under the laws of Switzerland. Our place of incorporation is Cham in the canton of Zug, Switzerland. Most of our assets are located outside the United States. Furthermore, a number of our directors and executive officers reside outside the United States and a portion of their assets are located outside the United States. Ellis Yan, our Chief Executive Officer, resides in the United States while Solomon Yan, our President, resides in China. As a result, investors may find it difficult to effect service of process within the United States upon us or these persons or to enforce outside the United States judgments obtained against us or these persons in U.S. courts, including judgments in actions predicated upon the civil liability provisions of the U.S. federal securities laws. Likewise, it may also be difficult for an investor to enforce in U.S. courts judgments obtained against us or these persons in courts located in jurisdictions outside the United States, including actions predicated upon the civil liability provisions of the U.S. federal securities laws. It may also be difficult for an investor to bring an original action in a Swiss court predicated upon the civil liability provisions of the U.S. federal securities laws against us or these persons.

Our organizational regulations will provide that directors and officers, past and present, are entitled to indemnification from us arising in connection with the performance of their duties and permit us to advance the expenses of defending any act, suit or proceeding to our directors and officers. Although there is doubt as to whether U.S. courts would enforce such a provision in an action brought in the United States under U.S. securities laws, such provision could make enforcing judgments obtained outside Switzerland more difficult to enforce against our assets in Switzerland or in jurisdictions that would apply Swiss law. See “Description of Share Capital” for additional information.

Risks Related to Doing Business in China

Changes in China’s economic, political and social conditions could have a material adverse effect on our business, financial condition and results of operations.

We conduct our manufacturing operations in China. Accordingly, our business, financial condition, results of operations and prospects are significantly dependent on the economic, political and social conditions in China. The Chinese economy differs from the economies of developed countries in many respects, including the degree of government involvement, level of development, growth rate, control over foreign exchange, access to financing and allocation of resources. While China’s economy has experienced significant growth over the past 30 years, the growth has been uneven across different regions and periods and among various economic sectors in China. Moreover, sustained economic growth in China over the past few years has resulted in a general increase in labor costs, and the inflationary environment that has led to employee discontent, which could result in materially higher compensation costs being paid to employees. We cannot assure you that the ongoing evolution of economic, political and social conditions in China would not lead to events which may materially reduce our sales and profitability.

The Chinese economy has been transitioning from a planned economy to a more market-oriented economy. Nonetheless, a substantial portion of the productive assets in China continues to be owned by the Chinese government. The Chinese government’s control of these assets and other aspects of the national economy could materially and adversely affect our business. The Chinese government exercises significant control over China’s economic growth through the allocation of resources, control over payment of foreign currency-denominated obligations, implementation of monetary policy and provision of preferential treatment to particular industries or companies. In recent years, the Chinese government has implemented a number of measures, such as raising required bank reserves against deposit rates, which have placed additional limitations on the ability of commercial banks to make loans, and raising interest rates in order to decrease the growth rate of specific sectors of China’s economy that the government believed to be overheating. Such actions, as well as other Chinese policies, may materially and adversely affect our liquidity and access to capital as well as our ability to operate our business.

 

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Fluctuations in the value of the yuan against the U.S. dollar may adversely affect our business, financial condition and results of operations.

The value of the yuan against the U.S. dollar and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. The conversion of the yuan into foreign currencies, including the U.S. dollar, has historically been based on exchange rates set by the People’s Bank of China. Since 2005, China started to allow its currency to fluctuate within a managed margin. On June 20, 2010, the People’s Bank of China announced that the Chinese government would further reform the yuan exchange rate regime and increase the flexibility of the exchange rate. In March 2011, in a statement about the central bank’s plan for China’s five-year plan running from 2011 to 2015, the People’s Bank of China reiterated a long-standing description of exchange policy to keep the yuan basically stable while strengthening its flexibility. In 2014, China further liberalized the margin by which it allows the yuan exchange rate to fluctuate.

Currency exchange gains (losses) result from fluctuations in foreign currency exchange rates for financial assets and liabilities that are denominated in a currency other than the local currency in the region in which a transaction occurs. Currency exchange gains (losses) arise from the monthly revaluation of these assets (cash and accounts receivable) and liabilities (accounts payable) from the date acquired or incurred through the final settlement date. Substantially all of our currency exchange losses are related to the settlement of intercompany inventory sales from our Chinese subsidiaries, which are denominated in U.S. dollars. Fluctuations in foreign currency exchange rates between the U.S. dollar and Chinese yuan will result in the recognition of currency exchange gains or losses, as the case may be, depending on the movement of foreign exchange rates from the date of inventory purchase to the settlement date.

We do not hedge our exposure to fluctuations in exchange rates, including the exchange rate between the U.S. dollar and the yuan. Appreciation or depreciation in the value of the yuan relative to the U.S. dollar would affect our financial results, which are reported in U.S. dollars, without reflecting any underlying change in our business or results of operations. Fluctuations in the exchange rate will also affect the relative value of earnings from and the value of any U.S. dollar-denominated investments that we may make in the future. Fluctuations in the exchange rate will also affect the relative purchasing power of the proceeds of this offering.

A disruption at our manufacturing facilities could materially adversely affect our business, financial condition and results of operations.

Our manufacturing operations for our products are based in Zhenjiang, China, Shanghai, China, Huaian, China and Yangzhou, China. The operation of these facilities involves many risks, including equipment failures, natural disasters, industrial accidents, power outages and other business interruptions. Our existing business interruption insurance and third-party liability insurance to cover claims in respect of personal injury or property or environmental damage arising from accidents on our properties or relating to our operations may not be sufficient to cover all risks associated with our business. As a result, we may be required to pay for financial and other losses, damages and liabilities, including those caused by natural disasters and other events beyond our control, out of our own funds, which could have a material adverse effect on our business, financial condition and results of operations.

In recent years, certain regions of China have been experiencing a labor shortage as migrant workers and middle level management seek better wages and working conditions elsewhere. This trend of labor shortages is expected to continue and will likely result in increasing wages as companies seek to keep their existing work forces. In addition, substantial competition in China for qualified and capable personnel, particularly experienced engineers and technical personnel, may make it difficult for us to recruit and retain qualified employees at our China facilities, which would adversely affect our profitability as well as our reported net income. No assurance can be given that we, or any of our customers in China, will not experience labor disturbances related to working conditions, wages or other reasons. Any labor shortages, strikes and other disturbances may adversely affect our future operating results and result in negative publicity and reputational harm. Any interruption in our ability to manufacture or distribute our products could result in lost sales, limited sales growth and damage to our reputation in the market, all of which would adversely affect our business, financial condition and results of operations.

 

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The enforcement of the Labor Contract Law, the Social Insurance Law and other labor-related regulations in China may increase our costs and decrease our net income.

China adopted the Labor Contract Law, effective January 1, 2008, and issued its implementation rules, effective September 18, 2008. The Labor Contract Law and related rules and regulations impose more stringent requirements on employers with regard to, among other things, minimum wages, severance payments, non-fixed term employment contracts, time limits for probation periods, as well as the duration and the times that an employee can be placed on a fixed term employment contract. Compliance with the Labor Contract Law and its rules and regulations has resulted in an increase in our operating expenses, particularly our labor costs, and we expect that continued compliance with the Labor Contract Law and its implementation rules and regulations will further increase our operating expenses. In the event that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules and regulations may limit our ability to effect those changes in a manner that we believe to be cost effective or desirable, could result in a decrease in our profitability and could adversely affect our business, financial condition and results of operations.

In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pensions, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of our employees. On October 28, 2010, China promulgated the China Social Insurance Law, which came into effect on July 1, 2011. Under the law, an employer that fails to pay a social insurance contribution in full and on time will be penalized at a rate of 0.05% of the outstanding payment per day starting from the date of default. On default of payment by the due date, an additional penalty may be charged between 100% to 300% of the late payment of the social insurance premiums. As a result, failure to make the statutorily required social insurance contribution will subject the Chinese subsidiaries to severe penalties or incur significant liabilities in connection with labor disputes or investigations, our business and results of operations may be adversely affected. We accrue expenses quarterly and have recognized a liability on our balance sheet relating to potential payments to be made under the China Social Insurance Law; our potential exposure under the China Social Insurance Law could be in excess of the amount that we have already recognized for this liability.

Uncertainties presented by the Chinese legal system could limit the legal protections available to us and subject us to legal risks, which could have a material adverse effect on our business, financial condition and results of operations.

Our operations in China are subject to applicable Chinese laws, rules and regulations. The Chinese legal system is a system based on written statutes. Prior court decisions may be cited for reference but have little value as precedents. Additionally, Chinese statutes are often principle-oriented and require detailed interpretations by the enforcement bodies to further apply and enforce such laws. Since 1979, the Chinese government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade.

However, China has not developed a fully integrated legal system, and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because some of these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the Chinese legal system is based in part on government policies and internal rules, some of which may not be published on a timely basis or at all, and some of which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since Chinese administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to predict the outcome of

 

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administrative and court proceedings and the level of legal protection in China than in more developed legal systems. These uncertainties may also impede our ability to enforce the contracts we have entered into in China. As a result, these uncertainties could have a material adverse effect on our business, financial condition and results of operations.

We may elect to finance our operations in part from dividends and other distributions on equity paid by our subsidiaries, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our business, financial condition and results of operations.

We are a holding company and we may elect to finance our operations in part from dividends from our subsidiaries in China for our cash requirements, including any debt we may incur. Current Chinese regulations permit our Chinese subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside at least 10% of its respective after-tax profits each year, if any, to a statutory reserve account until the accumulated amount of such reserves reaches 50% of its registered capital. A PRC company is not permitted to distribute any profits until any losses from prior years have been offset. These reserves are not distributable as cash dividends. Furthermore, if our Chinese subsidiaries incur debt, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. Our Chinese subsidiaries did not distribute any dividends in 2011, 2012 or 2013.

Under the Chinese Enterprise Income Tax Law, or the EIT Law and implementation regulation issued by State Council, a Chinese income tax at the rate of 10% is applicable to dividends paid by Chinese enterprises to “non-resident enterprises” (enterprises that do not have an establishment or place of business in China, or has such establishment or place of business but the relevant income is not effectively connected with the establishment or place of business) subject to the application of any relevant income tax treaty that China has entered into. Any dividend that we or any subsidiary considered a “non-resident enterprise” receives from our China subsidiaries will be subject to Chinese taxation at the 10% rate (or lower treaty rate). As our policy generally is to indefinitely reinvest the undistributed earnings of our foreign subsidiaries, we do not currently expect our Chinese subsidiaries to distribute dividends to TCP Hong Kong Limited (“TCP HK”) in the near future. Any limitation on the ability of our subsidiaries to distribute dividends or other payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends or otherwise fund and conduct our business and could have a material adverse effect on our business, financial condition and results of operations.

Chinese regulations relating to the establishment of offshore special purpose vehicle companies by Chinese residents may subject our Chinese subsidiaries to liability or penalties, limit our ability to inject capital into our Chinese subsidiaries, limit our Chinese subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.

On October 21, 2005, the Chinese State Administration of Foreign Exchange, or SAFE, issued a “Notice on Certain Foreign Exchange Matters Concerning Fund Raising by Offshore Special Purpose Vehicle Companies of PRC Residents and Related Round-trip Investment,” or SAFE Circular No. 75. On May 27, 2011, SAFE issued the Operating Instruction on Foreign Exchange Administration for Domestic Residents Engaging in Financing and Round Trip Investment Via Overseas Special Purpose Vehicles, or Circular No. 19. Circular No. 19 came into effect on July 1, 2011. On November 19, 2012, the SAFE issued the Notice of the State Administration of Foreign Exchange on Further Improving and Adjusting the Foreign Exchange Administration Policies on Direct Investment, or Circular No. 59, with effect from December 17, 2012. SAFE Circular No. 75, Circular No. 19 and Circular No. 59 are jointly referred to as the SAFE Notice. According to the SAFE Notice, a special purpose vehicle, or SPV, is an offshore special purpose company directly established or indirectly controlled by residents of China for the purpose of offshore investment with its assets or ownership rights consisting of Chinese enterprises. Under the SAFE Notice, residents of China are required to file with the competent local SAFE branch information about offshore companies in which they have invested, directly or indirectly, and to make follow-up filings in connection with certain material transactions involving such SPVs, such as increases or

 

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decreases in investment amount, transfers or exchanges of shares, mergers or divisions, long-term equity or debt investment, or external guarantees, or other material events that do not involve return investment. Under the SAFE Notice, failure to comply with the registration procedures set forth above could result in liability under Chinese law for foreign exchange evasion and may result in penalties and legal sanctions, including fines, the imposition of restrictions on a Chinese subsidiary’s foreign exchange activities and its ability to distribute dividends to the SPV, its ability to pay the SPV proceeds from any reduction in capital, share transfer or liquidation in respect of the Chinese subsidiary and the SPV’s ability to contribute additional capital into or provide loans to the Chinese subsidiary.

Circular No. 19 removes some major obstacles to round-trip investments and provides a remedy to cure prior non-compliant round-trip investment. In contrast with Circular of the General Affairs Department of the State Administration of Foreign Exchange on Issuing the Operational Rules for the State Administration of Foreign Exchange Circular on Relevant Issues concerning Foreign Exchange Administration of Company Financings and Roundtripping Investments via Overseas Special Purpose Companies [Huizongfa (2007) No. 106], or Circular No. 106, Circular No. 19 removes the deadline for outbound investment registration and allows registration for special purpose vehicles, or SPVs, after the establishment of SPVs and before carrying out round-trip investments. One of our founders, Solomon Yan, is a Chinese citizen. In 2007 and 2008, he exchanged his ownership in entities that are now our subsidiaries in China for ownership in TCP HK. If Solomon Yan’s investment in the Chinese subsidiaries is deemed to be a round-trip investment pursuant to Circular No. 75 and Circular No. 19, Solomon Yan would be required to register with SAFE according to SAFE Circulars No. 75 and No. 19.

Many of the terms and provisions in the SAFE Notice remain unclear and implementation by central SAFE and local SAFE branches of the SAFE Notice have been inconsistent since their adoption. Therefore, the corresponding local counterparts of SAFE in different areas may have different opinions on whether Solomon Yan’s investment in the Chinese subsidiaries through TCP HK is subject to the SAFE Notice. However, we have requested Solomon Yan to make the necessary applications and filings as required under the SAFE Notice with competent SAFE bureau in the PRC. Solomon Yan is preparing the application documents for the purpose of registration and filings with competent SAFE bureau. However, we cannot provide any assurances that Solomon Yan will be able to obtain such applicable registration required by the SAFE Notice or that, if challenged by government agencies, the structure of our organization fully complies with all applicable registrations or approvals required by the SAFE Notice. Moreover, because of uncertainty over how the SAFE Notice will be interpreted and implemented, and how or whether SAFE will apply it to us, we cannot predict how it will affect our business operations or future strategies. A failure by such PRC resident shareholder or future PRC resident shareholders to comply with the SAFE Notice or other related rules, if SAFE requires it, could restrict our overseas or cross-border investment activities, limit our subsidiaries’ ability to make distributions or pay dividends or affect our ownership structure, which could adversely affect our business and prospects.

We do not have valid title certificates to use certain properties occupied by us in China, which may adversely affect our operations.

Properties occupied by our China subsidiaries in China primarily consist of factory buildings, warehouses, ancillary buildings and offices. Any dispute or claim in relation to the title to the properties occupied by us, including any litigation involving allegations of illegal or unauthorized use of these properties, may result in us having to relocate our business operations and may materially and adversely affect our operations, financial condition, reputation and future growth. In addition, there can be no assurance that the Chinese government will not amend or revise existing property laws, rules or regulations to require additional approvals, licenses or permits, or to implement stricter requirements to obtain or maintain the title certificates required for the properties occupied by our China subsidiaries.

We own certain buildings in China, with an aggregate gross floor area of approximately 665,000 square feet, for which we have not obtained title ownership certificates. As to the buildings without title certificates, among which: (i) we have obtained construction approvals and certificates for approximately 215,000 square feet,

 

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accounting for approximately 10.0% of the aggregate gross floor area of our properties, and we are not aware of any legal impediments to obtaining the title ownership certificates to such properties; (ii) approximately 30,000 square feet, accounting for approximately 1.6% of the aggregate gross floor area of our properties, are ancillary buildings which do not have a material effect on our operations; and (iii) the properties for which we have not obtained any construction approvals and certificates are approximately 420,000 square feet, accounting for approximately 19.6% of the aggregate gross floor area of our properties. We use these properties for operations as manufacturing and warehouse facilities.

The operations we conduct on these title defective properties may be adversely affected as a result of the absence of valid legal title. For example, we may be required to seek alternative premises for our business operations, which may lead to disruptions in our business operations.

Proceedings instituted by the SEC against five Chinese-based accounting firms, including an affiliate of our independent registered public accounting firm, could result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act.

In late 2012, the SEC commenced administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese affiliates of the “big four” accounting firms (including the Chinese affiliate of our auditor). The Rule 102(e) proceedings initiated by the SEC relate to these firms’ inability to produce documents, including audit work papers, in response to the request of the SEC pursuant to Section 106 of the Sarbanes-Oxley Act of 2002, as the auditors located in China are not in a position lawfully to produce documents directly to the SEC because of restrictions under Chinese law and specific directives issued by the China Securities Regulatory Commission. The issues raised by the proceedings are not specific to our auditor, their affiliate or to us, but affect equally all audit firms based in China and all businesses with significant PRC operations with securities listed in the United States. Our Chinese subsidiaries are audited by the Chinese affiliate of KPMG LLP, as part of such firm’s audit of our company.

In January 2014, the administrative judge reached an initial decision that the “big four”-affiliated accounting firms should be barred from practicing before the Commission for six months. However, it is currently impossible to determine the ultimate outcome of this matter as the accounting firms have filed a petition for review of the initial decision and, pending that review, the effect of the initial decision has been suspended. The SEC Commissioners will review the initial decision, determine whether there has been any violation and, if so, determine the appropriate remedy to be placed on these audit firms. Once such an order is made, the accounting firms would have a further right to appeal to the U.S. Federal courts, and the effect of the order might be further stayed pending the outcome of that appeal.

Depending upon the final outcome of this process, listed companies in the United States with major Chinese operations, including us, may find it difficult or impossible to retain auditors in respect of their operations in China, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about the proceedings against these audit firms may cause investor concerns regarding U.S. listed companies with major Chinese operations and the market price of our common shares may be adversely affected.

Risks Related to Taxation

We are subject to income taxes in Switzerland, China, the United States and many other jurisdictions throughout the world.

We are subject to a variety of tax laws throughout the world. While we believe we take reasonable positions on the tax returns filed throughout the world, some of these positions may be challenged during income tax audits in Switzerland, China, the United States and other jurisdictions. Consequently, significant judgment is required in evaluating our tax positions to determine our ultimate tax liability. Management records current tax liabilities based on U.S. GAAP, including the more-likely-than-not recognition and measurement standard and

 

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the assumption that all uncertain tax positions will be identified in the relevant examination. Our management believes that the estimates reflected in the consolidated financial statements accurately reflect our tax liabilities under these standards. However, our actual tax liabilities ultimately may differ from those estimates if we were to prevail in matters for which accruals have been established or if taxing authorities were to challenge successfully the tax treatment upon which our management has based its estimates. Income tax expense includes the impact of tax reserve positions and changes to tax reserves that are considered appropriate, as well as any related interest and penalties.

We may become subject to unanticipated tax liabilities.

We may be subject to income, withholding or other taxes in certain jurisdictions by reason of our activities and operations, and it is also possible that taxing authorities in any such jurisdictions could assert that we are subject to greater taxation than we currently anticipate. For example, it is possible that the U.S. Internal Revenue Service (the “IRS”) could assert that a portion of our income is effectively connected with our conduct of a trade or business in the United States and, if a treaty applies, attributable to a permanent establishment situated in the United States, which income would then be subject to U.S. federal income tax and potentially branch profits tax. If we become subject to a significant amount of unanticipated tax liabilities, our business could be adversely affected.

We will be a controlled foreign corporation, or CFC, for U.S. federal income tax purposes.

We will be treated as a CFC for U.S. federal income tax purposes for the 2014 tax year, and we may be treated as a CFC in subsequent years. Treatment as a CFC will result in adverse U.S. federal income tax consequences for a U.S. Holder who directly or indirectly owns at least 10 % of the total combined voting power of our voting stock. See “Taxation—Material United States Federal Income Tax Considerations—Controlled Foreign Corporation Status.”

We may be or become a passive foreign investment company, or PFIC, for U.S. federal income tax purposes.

Although we were not a PFIC for the taxable year 2013 and do not anticipate being treated as a PFIC for U.S. federal income tax purposes for the 2014 tax year or the foreseeable future, no assurances can be given in this regard. Because PFIC status is determined on an annual basis, we may or may not be treated as a PFIC in subsequent years due to changes in our assets or business operations. If we are a PFIC for any year, such characterization could result in adverse U.S. federal income tax consequences to investors who are U.S. persons. See “Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”

We may be required to make certain cash payments to the former shareholders of Technical Consumer Products Inc. (“TCP US”) pursuant to a Tax Indemnity Agreement between TCP US and such shareholders.

On November 30, 2011, TCP US entered into a Tax Indemnity Agreement with Ellis Yan and the Lillian Yan Irrevocable Stock Trust, the former shareholders of TCP US, pursuant to which it agreed to make cash payments to each of them in the event that they incur additional U.S. federal, state or local income taxes as the result of a tax audit or other administrative or judicial proceeding affecting TCP US with respect to a taxable year in which TCP US was treated as an S corporation for U.S. federal or applicable state or local income tax purposes. The current tax years remaining subject to audit that are covered by this agreement are 2009 (for state tax purposes) and 2010 (for state and federal tax purposes). Such payments would be made within 120 days after a determination relating to such tax audit or other administrative or judicial proceeding, and shall be in such amounts as are necessary for Ellis Yan and the Lillian Yan Irrevocable Stock Trust to receive, on an after-tax basis, an amount equal to any additional federal, state and local income taxes payable by them as a result of such determination, including interest, penalties and additions to tax, less any related estimated reduction in federal, state and local income taxes payable by them for a subsequent taxable year in which TCP US was classified as an S corporation.

 

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There is a risk that we could be treated as a U.S. domestic corporation for U.S. federal income tax purposes, which could result in a significantly greater U.S. federal income tax liability.

Section 7874(b) of the Internal Revenue Code of 1986, as amended (the “Code”), generally provides that a corporation organized outside the United States that acquires, directly or indirectly, pursuant to a plan or series of related transactions, substantially all of the assets of a corporation organized in the United States will be treated as a domestic corporation for U.S. federal income tax purposes if shareholders of the acquired corporation, by reason of owning shares of the acquired corporation, own at least 80% of (either the voting power or the value of) the stock of the acquiring corporation after the acquisition. If Section 7874(b) were to apply to us as a result of the transfer of TCP US to us on December 30, 2010, then, among other things, we, as the acquiring corporation, would be subject to U.S. federal income tax on our worldwide taxable income as if we were a domestic corporation. However, Ellis Yan and the Lillian Yan Irrevocable Stock Trust owned less than 60% of our stock after the transfer of TCP US, and a substantial portion of the stock was acquired for consideration other than their ownership interests in TCP US. We have received an opinion from one of our tax advisers, a nationally recognized accounting firm, that Section 7874(b) of the Code should not apply to treat us as a domestic corporation as a result of the transfer of TCP US to us. There can be no assurance that the Internal Revenue Service would agree with this conclusion, however, and we have not sought a ruling from the Internal Revenue Service on this issue. The discussion under “Taxation—United States Federal Income Tax Considerations” assumes that we will be treated as a foreign corporation for U.S. federal income tax purposes.

Future changes to tax laws could adversely affect us.

The Company is subject to the risk that changes to tax laws or changes to the treaties between Switzerland and other jurisdictions in which we operate, such as the United States-Switzerland tax treaty, may adversely affect the U.S. federal, state, local and/or non-U.S. income tax consequences of the Company’s investments and activities. Changes in existing tax laws, regulations, tax treaties and their interpretation may be enacted and made after the date of this offering, possibly on a retroactive basis, and could alter the U.S. federal, state, local and/or non-U.S. income tax consequences of the Company, its subsidiaries, their investments and/or activities. For example, recent legislative proposals would expand the scope of U.S. corporate tax residence. In addition, the U.S. Congress, the Organization for Economic Co-operation and Development, and other government agencies in jurisdictions where we do business have had an extended focus on issues related to the taxation of multinational corporations, and there are several current legislative proposals that, if enacted, would substantially change the U.S. federal income tax system as it relates to the taxation of multinational corporations. As a result, the tax laws in the U.S. and other countries in which we do business could change on a prospective or retroactive basis, and any such changes could materially and adversely affect us.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains estimates and forward-looking statements that involve risks and uncertainties. Some of the matters discussed concerning our operations and financial performance include estimated forward-looking statements. These estimates and forward-looking statements are subject to known and unknown risks, uncertainties, assumptions and other factors that could cause our actual results of operations, financial condition, liquidity, performance, prospects, opportunities, achievements or industry results, as well as those of the markets we serve or intend to serve, to differ materially from those expressed in or suggested by these estimates or forward-looking statements. These estimates and forward-looking statements are based on assumptions regarding our present and future business strategies and the environment in which we expect to operate in the future. Important factors that could cause those differences include, but are not limited to:

 

   

changes in the competitive and technological environment in our industry, particularly with respect to LED and CFL technologies;

 

   

changes in legislation that phases out inefficient lamp technologies;

 

   

our relationship with retail and third-party distributors;

 

   

the cost and availability of raw materials, including phosphor, and components for our lighting products;

 

   

regulatory requirements and approvals for our current and future lighting products;

 

   

global economic conditions, which affect end user demand for our lighting products;

 

   

changes in China’s economic, political and social conditions, Chinese labor supply and Chinese labor regulations;

 

   

fluctuations in the value of the foreign currencies in countries in which we have operations, including China (yuan), Canada (Canadian dollar), the Netherlands (Euro), United Kingdom (pound sterling), Brazil (Real) and Switzerland (Swiss franc) versus the U.S. dollar;

 

   

our ability to protect our intellectual property and avoid infringing on others’ intellectual property; and

 

   

our expected treatment under Swiss and U.S. federal tax legislation and the impact that Swiss tax and corporate legislation may have on our operations.

These factors are not exhaustive. Additional factors that could cause our actual results, financial condition, liquidity, performance, prospects, opportunities, achievements or industry results to differ materially from these estimates or forward-looking statements include statements that contain information obtained from independent industry sources. Moreover, we operate in an evolving technological environment and new risk factors emerge from time to time. It is not possible for management to predict all risk factors that may affect our business, nor can we assess the impact of all identified risk factors on our business or the extent to which any such risk factor, or combination of risk factors, may cause our actual results to differ materially from those contained in any forward-looking statement.

In addition, statements that use the terms “believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate,” “may,” “might,” “will,” “should,” “potential,” “continue” and similar expressions are intended to identify forward-looking statements. All forward-looking statements in this prospectus reflect our current expectations and views of future events and are based on assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from future results expressed or implied by these forward-looking statements. Many of these factors are beyond our ability to control or predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable, actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including all the risks discussed in “Risk Factors” and elsewhere in this prospectus. Accordingly, you should not place undue reliance on any forward-looking statements.

 

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You should read this prospectus and the documents that we reference in this prospectus and the exhibits to the registration statement on Form S-1, of which this prospectus forms a part, that we have filed with the SEC completely and with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from the expectations set forth herein. We qualify all of our forward-looking statements by these cautionary statements. All forward-looking statements speak as of the date of this prospectus and, unless we are required to do so under U.S. federal securities laws or other applicable laws, we do not intend to update or revise any such forward-looking statements.

 

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USE OF PROCEEDS

We estimate that the net proceeds from this offering will be approximately $89.8 million (or $103.8 million if the underwriters exercise their option to purchase additional shares in full), at an assumed public offering price of $14.00 per common share, the midpoint of the range set forth on the cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use the net proceeds from this offering to acquire and develop advanced, automated manufacturing equipment to expand our LED manufacturing capacity, for the repayment of indebtedness outstanding and for general corporate purposes. The indebtedness to be repaid will be a portion of our outstanding short-term bank loans and revolving line of credit. The short-term bank loans each have a maturity of less than one year. The weighted average interest rate on these loans as of March 31, 2014 was 4.21%. The short-term bank loans outstanding as of March 31, 2014 include $30.2 million of loans from the Communication Bank of China that are guaranteed by Solomon Yan, one of our shareholders, some or all of which we expect to repay. The revolving line of credit has a maturity date of July 25, 2018. The interest rates on our LIBOR rate loans and prime rate loans under the revolving line of credit as of March 31, 2014 were 3.40% and 5.50%, respectively. The borrowings that we intend to repay under our outstanding short-term bank loans and revolving line of credit were used for working capital and capital expenditures.

Each $1.00 increase or decrease in the assumed public offering price of $14.00 per common share, the midpoint of the range shown on the cover of this prospectus, would increase or decrease, as applicable, the net proceeds to us by approximately $6.6 million, assuming the number of common shares offered by us as set forth on the cover of this prospectus remains the same and after deducting estimated underwriting discounts and commissions payable by us.

 

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DIVIDEND POLICY

We currently do not intend to pay cash dividends after the completion of this offering, subject to the discretion of our board of directors. We currently intend to reinvest any future earnings in developing and expanding our business.

Our ability to distribute dividends also may be limited by future contractual obligations and by Swiss law, which permits the distribution of dividends only out of net profit after establishment of reserves. Under Swiss law, dividends may be paid out only if we have sufficient distributable profits from the previous fiscal year or if we have freely distributable reserves, each as will be presented within our audited annual stand-alone statutory financial statements. Dividend payments out of current year earnings or share capital are not allowed. The affirmative vote at a shareholders’ meeting of a majority of the votes represented (excluding unmarked, invalid and non-exercisable votes, which may include broker non-votes) must approve distributions of dividends. See “Description of Share Capital—Dividends and Other Distributions.” In addition, the payment of dividends may be subject to Swiss withholding taxes. See “Taxation—Swiss Taxation—Swiss Withholding Tax on Dividends and Similar Distributions.”

In June 2012, our board of directors approved a cash dividend of $3.0 million to our shareholders that was paid in July 2012. In September 2012, our board of directors approved a cash dividend of $14.9 million to our shareholders that was paid in October 2012.

Under our revolving line of credit, our subsidiaries in the United States and Canada are prohibited from paying dividends to TCP without the consent of our lender.

Under Bermuda law, there are restrictions on dividends that can be paid by TCP Bermuda Limited, a wholly-owned subsidiary of TCP. Bermuda law prohibits a Bermuda company from declaring and paying a dividend or distribution out of contributed surplus if there are reasonable grounds for believing that (i) the company is, or would after the payment be, unable to pay its liabilities as they become due, or (ii) the realizable value of the company’s assets would thereby be less than its liabilities.

Under Chinese law, in order for any of our Chinese subsidiaries to pay dividends, the Chinese subsidiary must have fulfilled its statutory reserve requirements. Each of our Chinese subsidiaries is required to set aside at least 10% of its after tax profit, if any, to a statutory reserve account until the accumulated amount of such reserves reaches 50% of its registered capital. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2014 on:

 

   

an actual basis; and

 

   

an as adjusted basis to reflect the issuance of 7,142,858 common shares in this offering at an assumed initial public offering price of $14.00 per share, the midpoint of the range set forth on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

In addition, the following table gives effect to the 1:10 reverse stock split to be completed prior to the effectiveness of the registration statement of which this prospectus is a part.

You should read this table in conjunction with our unaudited condensed consolidated financial statements and related notes and “Selected Historical Consolidated Financial and Other Data,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus. There has been no material change in our capitalization between March 31, 2014 and the date of this prospectus.

 

     As of March 31, 2014  
     Actual     As Adjusted1  
     (in thousands, except
per share data)
 

Cash and cash equivalents2

   $ 23,021      $ 112,825   
  

 

 

   

 

 

 

Debt:

    

Short-term bank loans3

   $ 105,381      $ 105,381   

Revolving line of credit3

     33,508        33,508   

Long-term debt

     7,901        7,901   
  

 

 

   

 

 

 

Total debt

   $ 146,790      $ 146,790   

Shareholders’ equity:

    

Common shares, CHF 1.00 par value: 20,553 shares authorized, issued and outstanding, actual; 41,107 shares authorized and 27,696 shares issued and outstanding, as adjusted

   $ 22,048      $ 30,102   

Additional paid-in capital

     901        82,651   

Accumulated other comprehensive income

     13,065        13,065   

Retained deficit

     (28,569     (28,569
  

 

 

   

 

 

 

Total shareholders’ equity

   $ 7,445      $ 97,249   
  

 

 

   

 

 

 

Total capitalization

   $ 154,235      $ 244,039   
  

 

 

   

 

 

 

 

1 Each $1.00 increase or decrease in the public offering price of $14.00 per common share, the midpoint of the range set forth on the cover of this prospectus, would increase or decrease, as applicable, the as adjusted amount of total shareholders’ equity and total capitalization by approximately $6,643, after deducting estimated underwriting discounts and commissions payable by us.
2 Excludes restricted cash of $5,421.
3 We expect to use a portion of the net proceeds from this offering for the repayment of a portion of our short-term bank loans outstanding, including some or all of the $30.2 million of loans from the Communication Bank of China outstanding at March 31, 2014 that are guaranteed by Solomon Yan, one of our shareholders, and a portion of our revolving line of credit. We have the capacity to re-draw our revolving line of credit following any repayment in connection with this offering.

 

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DILUTION

Purchasers of our common shares in this offering will suffer an immediate dilution in net tangible book value per share to the extent of the difference between the initial public offering price per share and the net tangible book value per share immediately after this offering. Net tangible book value per common share represents the amount of our total tangible assets less our total liabilities, divided by the number of common shares outstanding prior to the sale of common shares in this offering. Our net tangible book value as of March 31, 2014, before giving effect to the sale of common shares in this offering, but after giving effect to the 1:10 reverse stock split to be completed prior to the effectiveness of the registration statement of which this prospectus is a part, was $0.21 per common share.

After giving effect to the sale of 7,142,858 common shares in this offering at an assumed initial public offering price of $14.00 per common share, the midpoint of the range set forth on the cover of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our adjusted net tangible book value would have been $94.2 million, or $3.40 per common share. This represents an immediate increase in net tangible book value of $3.19 per common share to existing shareholders and an immediate dilution of $10.60 per common share to new investors in this offering. The following table illustrates this per share dilution:

 

Public offering price per common share

      $ 14.00   

Historical net tangible book value per common share as of March 31, 2014

   $ 0.21      

Increase in net tangible book value per common share attributable to this offering

   $ 3.19      
  

 

 

    

Adjusted net tangible book value per common share after giving effect to this offering

      $ 3.40   
     

 

 

 

Dilution per common share to investors in this offering

      $ 10.60   
     

 

 

 

If the underwriters were to exercise their option to purchase additional shares in full in this offering, our adjusted net tangible book value per share attributable to this offering will be $3.76, representing an immediate increase in net tangible book value per share attributable to this offering of $3.55 per share to our existing investors and an immediate dilution per share to new investors in this offering of $10.24 per common share.

The following table summarizes the differences as of March 31, 2014 between our existing shareholders and the new investors with respect to the number of common shares purchased from us, the total consideration paid and the average price per common share paid. The total number of our common shares does not include common shares issuable pursuant to the exercise of the option to purchase additional shares granted to the underwriters.

 

     Common Shares
Purchased
    Total Consideration        
     Number
(in  thousands)
     Percent     Amount
(in  thousands)
     Percent     Average Price Per
Common Share
 

Existing shareholders

     20,553         74   $ 22,702         19   $ 1.10   

New investors

     7,143         26   $ 100,000         81   $ 14.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     27,696         100   $ 122,702         100   $ 4.43   
  

 

 

    

 

 

   

 

 

    

 

 

   

If the underwriters exercise their option to purchase additional shares in full, our existing shareholders would own approximately 71% and our new investors would own approximately 29% of the total number of our common shares outstanding after this offering.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

The following selected consolidated statement of operations data for the years ended December 31, 2011, 2012 and 2013 and the consolidated balance sheet data as of December 31, 2012 and 2013 have been derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the three months ended March 31, 2013 and 2014, and the consolidated balance sheet data as of March 31, 2014 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus. In our opinion, these unaudited condensed consolidated financial statements have been prepared on a basis consistent with our audited consolidated financial statements and contain all normal and recurring adjustments necessary for a fair presentation of such consolidated financial data. Our historical results are not necessarily indicative of results to be expected in any future periods. You should read this information together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Year Ended December 31,      Three Months Ended
March 31,
 
     2011     2012     2013      2013      2014  
    

(in thousands, except per share data)

 

Statement of Operations Data:

            

Net sales

   $ 263,846      $ 359,355      $ 428,925       $ 90,294       $ 101,117   

Cost of goods sold

     208,098        275,109        336,819         69,459         76,330   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Gross profit

     55,748        84,246        92,106         20,835         24,787   

Selling, general and administrative expenses

     39,590        60,128        64,252         14,570         16,963   

Litigation settlements1

     —          27,550        3,032         —           100   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Operating income (loss)

     16,158        (3,432     24,822         6,265         7,724   

Interest expense, net

     3,949        5,260        6,059         1,295         2,280   

Foreign exchange losses (gains), net

     4,752        249        5,929         2,406         (674
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Income (loss) from continuing operations before income taxes

     7,457        (8,941     12,834         2,564         6,118   

Income tax expense (benefit) from continuing operations

     3,796        (2,738     4,662         1,623         2,197   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) from continuing operations

     3,661        (6,203     8,172         941         3,921   

Net loss from discontinued operations2

     (249     —          —           —           —     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss)

     3,412        (6,203     8,172         941         3,921   

Net income attributable to noncontrolling interests

     149        —          —           —           —     
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to TCP

   $ 3,263      $ (6,203   $ 8,172       $ 941       $ 3,921   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) per share attributable to TCP, basic and diluted3

   $ 0.16      $ (0.30   $ 0.40       $ 0.05       $ 0.19   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Weighted average number of shares outstanding, basic and diluted3

     20,553        20,553        20,553         20,553         20,553   

Dividends per share3

   $ 0.05      $ 0.87      $ —         $ —         $ —     

Other Financial Data:

            

Adjusted EBITDA (unaudited)4

   $ 24,152      $ 35,714      $ 35,996       $ 8,217       $ 10,014   

 

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     As of December 31,     As of March  31,
2014
 
     2012     2013    
     (in thousands)  

Balance Sheet Data:

      

Cash and cash equivalents5

   $ 38,680      $ 21,903      $ 23,021   

Working capital6

     (60,531     (61,797     (56,419

Property, plant and equipment, net

     70,092        74,558        72,955   

Total assets

     282,244        341,265        334,659   

Short-term loans and long-term debt

     80,988        130,393        146,790   

Total liabilities

     287,819        337,085        327,214   

Total shareholders’ equity (deficit)

     (5,575     4,180        7,445   

 

1 Represents the settlement of various litigation matters, as detailed in Note 14 to our consolidated financial statements and Note 7 to our unaudited condensed consolidated financial statements included elsewhere in this prospectus. See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and “Business—Legal Proceedings.”
2 In August 2011, we sold the stock of one of our Chinese subsidiaries to an entity owned and controlled by our majority shareholders. We have no continuing activity with this entity and, accordingly, it has been reflected as discontinued operations in the accompanying consolidated financial statements.
3 All share and per share data relating to our common shares in this prospectus have been adjusted to reflect a 1:10 reverse stock split to be given effect prior to the effectiveness of the registration statement of which this prospectus is a part.
4 We present the non-GAAP financial measure “Adjusted EBITDA” as a supplemental measure of our performance. This non-GAAP financial measure is not a measure of financial performance or liquidity calculated in accordance with accounting principles generally accepted in the United States, referred to herein as U.S. GAAP, and should be viewed as a supplement to, not a substitute for, our results of operations and balance sheet information presented on the basis of U.S. GAAP.

We define EBITDA as net income (loss) attributable to TCP before interest expense, income taxes, depreciation and amortization, and Adjusted EBITDA as EBITDA before net foreign currency losses (gains), litigation settlements and costs related to our withdrawn initial public offering. Adjusted EBITDA is not necessarily comparable to similarly titled measures reported by other companies. Adjusted EBITDA may exclude certain financial information that some may consider important in evaluating our financial performance. Adjusted EBITDA may not be indicative of historical operating results, and we do not intend for it to be predictive of future results of operations. We believe the use of Adjusted EBITDA as a metric assists our board, management and investors in comparing our operating performance on a consistent basis because it removes the impact of our capital structure (such as interest expense), asset base (such as depreciation and amortization) and tax structure, as well as certain items that affect inter-period comparability.

 

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The following table presents a reconciliation of EBITDA and Adjusted EBITDA to net income (loss) attributable to TCP, which is the most directly comparable U.S. GAAP measure, for the periods presented.

 

     Year Ended December 31,      Three Months Ended
March 31,
 
     2011      2012     2013      2013      2014  
     (in thousands)  

Net income (loss) attributable to TCP

   $ 3,263       $ (6,203   $ 8,172       $ 941       $ 3,921   

Adjustments:

             

Interest expense, net

     3,949         5,260        6,059         1,295         2,280   

Income tax expense (benefit)

     3,796         (2,738     4,662         1,623         2,197   

Depreciation and amortization

     6,739         7,154        8,142         1,952         2,190   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

EBITDA

     17,747         3,473        27,035         5,811         10,588   

Adjustments:

             

Foreign exchange losses (gains), net

     4,752         249        5,929         2,406         (674

Litigation settlements

     —           27,550        3,032         —           100   

Cost related to withdrawn initial public offeringa

     1,653         4,442        —           —           —     
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 24,152       $ 35,714      $ 35,996       $ 8,217       $ 10,014   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

  a 

Represents legal, accounting and professional fees incurred in connection with our proposed initial public offering in 2012, which was withdrawn.

5 Excludes restricted cash of $4,365, $3,404 and $5,421 as of December 31, 2012 and 2013 and March 31, 2014, respectively.
6 Total current assets minus total current liabilities.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with “Selected Historical Consolidated Financial and Other Data” and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and opinions, all of which involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences or cause our actual results or the timing of selected events to differ materially from those anticipated in these forward-looking statements include those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We are a leading global provider of energy efficient LED and CFL lighting technologies. We design, develop, manufacture and deliver high quality energy efficient lamps, fixtures and internet-based lighting control solutions. Our internally developed driver, optical system, thermal management and power management technologies deliver a high standard of efficiency and light quality. Our broad portfolio of advanced LED and CFL lamps and fixtures enables us to address a wide range of applications required by our retail and C&I customers. We have established the largest number of Energy Star® compliant lighting products for LEDs and CFLs combined. The lighting market is characterized by rapid product innovation and, as a result, we have maintained integrated product design and manufacturing capabilities to allow us to quickly respond to the rapidly evolving demands of our customers. Our products are currently offered through thousands of retail and C&I distributors. Since our inception in 1993, we have sold more than one billion energy efficient lighting products. We believe that the market for LED lighting solutions is at an inflection point that will drive increased adoption, and that we are well positioned to capitalize on this rapidly growing opportunity, as reflected in our 2011 to 2013 LED sales CAGR of 208.0%.

Currently, we sell the majority of our products in the United States and Canada, accounting for 82.4% of our net sales in 2013. Our net sales in the United States and Canada are principally made through our retail channel, most notably through The Home Depot and Walmart, as well as through various C&I distributors. In addition, we have significant sales, marketing and distribution infrastructure outside of the United States and Canada, especially in EMEA, Asia and Latin America, which represented 7.7%, 5.1% and 4.9%, respectively, of our net sales in 2013. In the first half of 2014, we opened our newest sales offices in Japan and Germany. Our largest Asian customers include IRIS, a C&I distributor in Japan, and Emart, a retailer in South Korea. In 2012, we acquired our distributors in Europe and Latin America. We believe that these acquisitions have provided us with the ability to expand in markets that are transitioning to energy efficient lighting.

Our net sales have increased from $263.8 million in 2011 to $428.9 million in 2013, representing a 27.5% CAGR. From 2011 to 2013, our LED sales increased from $11.3 million, or 4.3% of net sales, to $107.1 million, or 25.0% of net sales, representing a 208.0% CAGR. The remaining portion of our net sales largely represents CFL sales, which increased from $215.6 million, or 81.7% of net sales, in 2011 to $289.3 million, or 67.5% of net sales, in 2013, representing a 15.8% CAGR. Our net income (loss) attributable to TCP was $3.3 million in 2011, $(6.2) million in 2012 and $8.2 million in 2013. Our net sales increased from $90.3 million for the three months ended March 31, 2013 to $101.1 million for the three months ended March 31, 2014, and net income attributable to TCP increased from $0.9 million for the three months ended March 31, 2013 to $3.9 million for the three months ended March 31, 2014. CFL sales and LED sales represented 70.4% and 20.7% of net sales for the three months ended March 31, 2013, respectively, compared to 58.8% and 35.9% of net sales for the three months ended March 31, 2014, respectively.

 

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Key Metrics and Factors Affecting Our Results of Operations

Our results of operations have been, and we expect will continue to be, affected by the following key factors:

Rate and extent of adoption of energy efficient lighting products. The United States, EMEA, China, and other countries and regions in which we operate, have already instituted, or have announced plans to institute, government regulations and programs designed to encourage or mandate increased energy efficiency in lighting. We believe our extensive portfolio of energy efficient lighting products is well positioned to capitalize on this transition. In particular, the rate and extent of adoption of higher margin LED lamps within the general lighting market will impact our future growth rates. The rate and extent of adoption of LED lamps will depend upon, among other things, end users’ desire and ability to pay higher up-front costs for LED lamps compared to other alternative energy efficient lighting products. Innovations and advancements in LED lamp manufacturing technology that reduce up-front costs and improve performance will reduce the operating cost of the lamps, further enhancing the value proposition of these LED lamps compared to other alternative energy efficient lighting products. In addition, many utilities and governmental agencies provide financial incentives to reduce the growing demand for electricity, such as rebates for energy efficient lighting products that further reduce up-front costs to end-users and may accelerate the rate of adoption.

Impact of seasonal buying practices of our customers. Purchases by our retail customers are driven by their internal buying practices and sales programs that typically reflect a seasonal buying pattern, which may result in fluctuations in our period-to-period net sales. Historically, we have experienced lower retail sales in the first calendar quarter. The impact of these seasonal buying patterns, however, may be mitigated by utility and government incentives and programs, for which we have no control over the timing or extent of the programs, as well as the rate of new customer sales growth, the introduction of new product offerings and C&I customer buying practices, which follow no particular seasonal pattern. Therefore, seasonal factors and historical patterns should not be considered a reliable indicator of our future sales activity or performance.

Foreign currency exchange risk. We conduct transactions in various currencies that can increase our exposure to fluctuations in foreign currency rates relative to the U.S. dollar. In 2013, our product margins contracted, in part due to the strengthening of the Chinese yuan that increased the cost of our manufacturing operations in China. In addition, due to our vertically integrated operating structure, our Asian subsidiaries can hold various U.S. dollar denominated receivables with third-party customers and other TCP subsidiaries that can be devalued by a strengthening Chinese yuan, resulting in foreign currency losses.

Impact of our changing product mix. For the last several years CFL lamp sales have represented the majority of our overall sales mix, comprising 81.7%, 72.6% and 67.5% of our 2011, 2012 and 2013 net sales, respectively and 58.8% of net sales for the three months ended March 31, 2014. The decline in CFL sales as a percentage of our net sales principally is the result of the successful introduction and expansion of our new LED products, which grew from 4.3% of our net sales in 2011 to 15.7% of our net sales in 2012, 25.0% of our net sales in 2013 and 35.9% of our net sales for the three months ended March 31, 2014. While we expect CFL lamps to continue to represent the majority of our product sales in the near future, we are expanding our product offering of LED products, which we expect to constitute a growing portion of our net sales in the future. LED products traditionally have had higher margins than our CFL products and, we believe as our product mix shifts, it will result in higher gross margins than we historically have recognized. We expect that the selling prices of LED products will decline over time, but by controlling our manufacturing processes, we may be able to drive cost-saving innovations to allow us to provide high quality products with superior functionality at lower cost.

Components of Results of Operations

Net sales. Our sales are generated primarily through the sale of energy efficient LED and CFL lighting technologies, and are recorded net of provisions for returns, customer programs, incentive offerings and value-added taxes that we collect.

 

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We sell principally through two channels: retail and C&I. Through a strong focus on customer service, we believe we have differentiated ourselves in the market and, combined with our distribution capabilities, have established a strong reputation within the retail and C&I markets. Sales through the retail channel represent the largest portion of our business, accounting for 52.1%, 49.1%, and 54.8% of our net sales in 2011, 2012, and 2013, respectively and 51.4% of net sales for the three months ended March 31, 2014. We are actively engaged in expanding our C&I channel, which resulted in a net sales increase in this channel of 61.5% from 2011 to 2013.

Our net sales are principally made through our distribution channels in the United States and Canada, which represented 89.8%, 88.4% and 82.4% of our net sales in 2011, 2012 and 2013, respectively and 84.3% of our net sales for the three months ended March 31, 2014. We are actively expanding our global operations. In 2012, we acquired TCP B.V., a former distributor, which generated net sales of $8.7 million and $32.9 million in EMEA, in 2012 and 2013, respectively and $5.9 million for the three months ended March 31, 2014. We continue to open sales offices abroad, mostly recently in Japan and Germany, to complement our existing offices in China, the United Kingdom, France and Brazil.

Cost of goods sold and gross profit. Substantially all of our products are manufactured in our four facilities in China. Cost of goods sold includes the actual costs incurred in the manufacturing of our products, including factory labor, raw materials and components, depreciation and amortization, freight and duty, warehouse labor and overhead charges, product testing, packaging material and outbound freight. The primary factors that drive our cost of goods sold are the cost of raw materials and components, our direct cost of labor, and the efficiency at which we operate our manufacturing facilities. Direct labor costs consist of salary, wages, bonus, and employee benefit and other costs related to our employees engaged in the manufacture and distribution of our products.

As we have more than 300 suppliers, we are not committed to, and do not favor, a single source for any of our raw materials and supply needs. Rare earth metals, principally phosphors, are a critical raw material input in the manufacture of CFLs, and are sourced from two major suppliers. Prices of rare earth minerals, including those found in our sourced components, can fluctuate significantly based on supply and demand, including government intervention. We currently purchase these components and raw materials on the spot market and do not have any long term purchase contracts or engage in any hedging activities. To offset increases in rare earth metal costs, we have in the past been able to pass through certain of these increased costs to our customers. Gross profit, however, may be impacted by the time lag between the increase in costs and the implementation of the price adjustments with our customers.

Our gross margins also fluctuate based on product and channel mix. The expansion of our product mix to include increased percentages of LED products has had and is expected to continue to have a positive effect on our gross margin, as LED products generally have higher gross margins than CFLs. From a channel perspective, our C&I customers generally require a more specialized product offering and purchase in much smaller volumes than do our retail customers. Accordingly, we typically are able to obtain higher gross margins for comparable lighting products sold in our C&I channel compared to our retail channel.

Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of costs related to our sales and advertising activities, our research and development, administrative, legal and finance functions and other corporate expenses.

Sales and advertising expenses primarily include sales related payroll and benefit costs, sales commissions, travel, advertising programs and related overhead expenses. Sales and advertising expenses are affected by whether we use external sales representatives or our internal sales employees. During 2012, we implemented our strategy to expand our C&I sales channel by replacing underperforming external sales representatives with our internal sales employees, resulting in increased payroll, benefits, and travel expenses. This change has allowed us to more closely control and focus the identification and development of our existing customer base and potential sales opportunities.

 

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Administrative expenses consist primarily of salary and benefit costs for executive, research and development and administrative employees, the use and maintenance of administrative offices (including depreciation expense), information systems and legal and accounting services. Our research and development costs are expensed as incurred and include the costs of personnel, materials and facilities related to the development of new efficient lighting technologies and the enhancement of our existing product lines. We expect our research and development costs to increase, principally through increased employee headcount and related expenses, as we continue to expand our product lines and research activities.

We expect our overall selling, general and administrative expenses to increase as we continue global expansion of our sales and marketing activities and manufacturing capabilities. In addition, we will incur a higher level of administrative costs as we increase our administrative, legal and accounting staff, as well as incur additional outside professional costs in order to meet our public company reporting and corporate governance requirements subsequent to this offering.

Litigation settlements. Litigation settlements are comprised of expenses associated with the resolution of legal disputes. See Note 14 to our consolidated financial statements and Note 7 to our unaudited condensed consolidated financial statements, included elsewhere in this prospectus.

Other expense. Other expense is comprised of interest expense on our outstanding indebtedness, interest income and foreign currency exchange losses (gains).

Interest expense consists primarily of interest on indebtedness under our revolving line of credit, notes payable and foreign short-term bank loans. Interest income represents earnings on our short-term investments of cash and cash equivalents, including restricted cash.

Foreign exchange losses (gains) result from fluctuations in exchange rates for monetary assets and liabilities that are denominated in a currency other than the functional currency of the entity in which a transaction occurs. Foreign exchange losses (gains) arise from the monthly revaluation of these assets and liabilities from the date acquired or incurred through the final settlement date. Substantially all of our foreign exchange losses (gains) are related to the settlement of intercompany sales of inventory, which are denominated in U.S. dollars. As a result, fluctuations in exchange rates between the U.S. dollar and Chinese yuan will result in the recognition of foreign exchange gains or losses depending on the movement of foreign exchange rates from the date of inventory purchase to the settlement date.

Income tax expense. We are subject to income tax in a number of jurisdictions or countries in which we conduct business, including Brazil, Canada, China, Germany, Hong Kong, Japan, the Netherlands, Switzerland, the United Kingdom and the United States.

Adjusted EBITDA. We present the non-GAAP financial measure “Adjusted EBITDA” as a supplemental measure of our performance. This non-GAAP financial measure is not a measure of financial performance or liquidity calculated in accordance with accounting principles generally accepted in the United States, referred to herein as U.S. GAAP, and should be viewed as a supplement to, not a substitute for, our results of operations and balance sheet information presented on the basis of U.S. GAAP. We define EBITDA as net income (loss) attributable to TCP before interest expense, income taxes, depreciation and amortization, and Adjusted EBITDA as EBITDA before net foreign currency losses (gains), litigation settlements and costs related to our withdrawn initial public offering. Adjusted EBITDA is not necessarily comparable to similarly titled measures reported by other companies. Adjusted EBITDA may exclude certain financial information that some may consider important in evaluating our financial performance. Adjusted EBITDA may not be indicative of historical operating results, and we do not intend for it to be predictive of future results of operations. We believe the use of Adjusted EBITDA as a metric assists our board, management and investors in comparing our operating performance on a consistent basis because it removes the impact of our capital structure (such as interest expense), asset base (such as depreciation and amortization) and tax structure, as well as certain items that affect inter-period comparability.

 

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The following table presents a reconciliation of EBITDA and Adjusted EBITDA to net income (loss), which is the most directly comparable U.S. GAAP measure, for the periods presented.

 

    Year Ended December 31,     Three Months
Ended March 31,
 
        2011             2012             2013             2013             2014      
    (in thousands)  

Net income (loss) attributable to TCP

  $ 3,263      $ (6,203   $ 8,172      $ 941      $ 3,921   

Adjustments:

         

Interest expense, net

    3,949        5,260        6,059        1,295        2,280   

Income tax expense (benefit)

    3,796        (2,738     4,662        1,623        2,197   

Depreciation and amortization

    6,739        7,154        8,142        1,952        2,190   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    17,747        3,473        27,035        5,811        10,588   

Adjustments:

         

Foreign exchange losses (gains), net

    4,752        249        5,929        2,406        (674

Litigation settlements

    —          27,550        3,032        —          100   

Cost related to withdrawn initial public offeringa

    1,653        4,442        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (unaudited)

  $ 24,152      $ 35,714      $ 35,996      $ 8,217      $ 10,014   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

a 

Represents legal, accounting and professional fees incurred in connection with our proposed initial public offering in 2012, which was withdrawn.

Results of Operations

Comparison of the Three Months Ended March 31, 2013 and 2014

 

     Three Months Ended March 31,  
     2013     2014  
     (in thousands)  
     Amount      As a %  of
Sales
    Amount     As a %  of
Sales
 

Net sales

   $ 90,294         100.0   $ 101,117        100.0

Cost of goods sold

     69,459         76.9     76,330        75.5
  

 

 

    

 

 

   

 

 

   

 

 

 

Gross profit

     20,835         23.1     24,787        24.5

Selling, general and administrative expenses

     14,570         16.1     16,963        16.8

Litigation settlements

     —           —       100        0.1
  

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     6,265         7.0     7,724        7.6

Other expenses:

         

Interest expense, net

     1,295         1.4     2,280        2.3

Foreign exchange losses (gains), net

     2,406         2.7     (674     (0.7 )% 
  

 

 

    

 

 

   

 

 

   

 

 

 

Income before income taxes

     2,564         2.8     6,118        6.0
  

 

 

    

 

 

   

 

 

   

 

 

 

Income tax expense

     1,623         1.8     2,197        2.2
  

 

 

    

 

 

   

 

 

   

 

 

 

Net income attributable to TCP

   $ 941         1.0   $ 3,921        3.8
  

 

 

    

 

 

   

 

 

   

 

 

 

Other Financial Data:

         

Adjusted EBITDA (unaudited)

   $ 8,217         9.1   $ 10,014        9.9

 

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Net sales. The following table shows our net sales by region and by product line:

 

     Three Months Ended March 31,  
     2013     2014  
     (in thousands)  
     Amount      As a %  of
Sales
    Amount      As a %  of
Sales
 

United States and Canada

   $ 76,012         84.2   $ 85,271         84.3

EMEA

     3,532         3.9     5,859         5.8

Asia

     7,701         8.5     6,659         6.6

Latin America

     3,049         3.4     3,328         3.3
  

 

 

    

 

 

   

 

 

    

 

 

 

Total net sales

   $ 90,294         100.0   $ 101,117         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     Three Months Ended March 31,  
     2013     2014  
     (in thousands)  
     Amount      As a %  of
Sales
    Amount      As a %  of
Sales
 

CFL

   $ 63,580         70.4   $ 59,405         58.8

LED

     18,708         20.7     36,322         35.9

Linear and fixtures

     6,027         6.7     3,687         3.6

Other

     1,979         2.2     1,703         1.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Total net sales

   $ 90,294         100.0   $ 101,117         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Net sales of $101.1 million for the three months ended March 31, 2014 increased by $10.8 million, or 12.0%, over the three months ended March 31, 2013.

Sales of our LED product line increased $17.6 million, or 94.2%. The increase is primarily attributable to our continued business focus on growing the LED product line that resulted in higher volume with C&I distributors of $8.6 million and new LED business with Walmart of $2.6 million in the United States and Canada, as well as growth with existing retail customers in EMEA and Asia.

Sales of our CFL product line decreased by $4.2 million, or 6.6%. The decrease is mainly attributable to a decline in sales of $2.8 million in Asia, largely from a decrease in sales under the Chinese government subsidy program due to the timing of the programs among quarters, and a decrease in sales of $2.1 million in the United States and Canada, largely attributable to a decline in volume with The Home Depot, partially offset by a higher volume of sales with Walmart.

Sales of our linear, fixtures and other product lines decreased by $2.6 million. The decrease is primarily attributable to a decline in sales of $2.3 million of linear and fixtures largely with C&I distributors in the United States and Canada due to our business focus on LED products.

Gross profit. Gross profit increased by $4.0 million, or 19.0%, primarily due to the growth in net sales. Gross profit percentage increased to 24.5% from 23.1%, largely attributable to the recovery of inventory provisions from the sale of excess product. In addition, gross profit percentage benefited from favorable product mix from higher LED sales and lower freight costs, partially offset by a stronger Chinese yuan. The strengthening Chinese yuan, which appreciated 1.9% against the U.S. dollar from March 31, 2013, has reduced gross profit margins as sales are denominated primarily in U.S. dollars, and manufacturing costs in Asia are paid in the Chinese yuan.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by $2.4 million, or 16.4%, primarily due to a $1.5 million increase in payroll and benefits, a $0.5 million increase in

 

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legal, accounting and consulting fees and a $0.5 million increase in new product certification and marketing costs. The increase in payroll and benefits expenses was largely due to our continued efforts to expand our sales force principally to serve customers within the C&I channel, and to enhance our engineering and marketing functions.

Litigation settlements. Litigation settlements were comprised of additional estimated settlement costs to resolve ongoing litigation. See Note 7 to our unaudited condensed consolidated financial statements, included elsewhere in this prospectus.

Other expense. Other expense decreased by $2.1 million due to foreign exchange gains of $0.7 million compared with foreign currency losses of $2.4 million during the same period in 2013, partially offset by higher interest expense of $0.9 million. The foreign exchange gains were primarily attributable to the weakening Chinese yuan, which resulted in an appreciation of our U.S. dollar-denominated receivables in Asia from third-party customers and other TCP subsidiaries. The increase in interest expense resulted from an increase in debt to fund working capital and interest on legal settlement obligations.

Effective income tax rate. Our effective income tax rate decreased to 35.9% in the three months ended March 31, 2014 from 63.3% in the same period last year. Our effective income tax rate of 35.9% approximated the U.S. federal income tax rate as the favorable impact of earnings in lower tax rate jurisdictions was offset by non-deductible expenses in China related to certain employment costs and interest on uncertain tax positions. Our effective income tax rate of 63.3% for the three months ended March 31, 2013 was higher than the U.S. federal income tax rate primarily due to losses in Switzerland and certain Asian operating companies, for which no tax benefit was recorded, non-deductible expenses in China related to certain employment costs and interest on uncertain tax positions.

Comparison of the Years Ended December 31, 2012 and 2013

 

     Year Ended December 31,  
     2012     2013  
     (in thousands)  
     Amount     As a % of
Sales
    Amount      As a % of
Sales
 

Net sales

   $ 359,355        100.0   $ 428,925         100.0

Cost of goods sold

     275,109        76.6     336,819         78.5
  

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit

     84,246        23.4     92,106         21.5

Selling, general and administrative expenses

     60,128        16.7     64,252         15.0

Litigation settlements

     27,550        7.7     3,032         0.7
  

 

 

   

 

 

   

 

 

    

 

 

 

Operating (loss) income

     (3,432     (1.0 )%      24,822         5.8

Other expenses:

         

Interest expense, net

     5,260        1.5     6,059         1.4

Foreign exchange losses, net

     249        0.1     5,929         1.4
  

 

 

   

 

 

   

 

 

    

 

 

 

(Loss) income before income taxes

     (8,941     (2.5 )%      12,834         3.0
  

 

 

   

 

 

   

 

 

    

 

 

 

Income tax (benefit) expense

     (2,738     (0.8 )%      4,662         1.1
  

 

 

   

 

 

   

 

 

    

 

 

 

Net (loss) income attributable to TCP

   $ (6,203     (1.7 )%    $ 8,172         1.9
  

 

 

   

 

 

   

 

 

    

 

 

 

Other Financial Data:

         

Adjusted EBITDA (unaudited)

   $ 35,714        9.9   $ 35,996         8.4

 

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Net sales. The following table shows our net sales by region and by product line:

 

     Year Ended December 31,  
     2012     2013  
     (in thousands)  
     Amount      As a % of
Sales
    Amount      As a % of
Sales
 

United States and Canada

   $ 317,531         88.4   $ 353,292         82.4

EMEA

     8,653         2.4     32,856         7.7

Asia

     22,392         6.2     21,845         5.1

Latin America

     10,779         3.0     20,932         4.9
  

 

 

    

 

 

   

 

 

    

 

 

 

Total net sales

   $ 359,355         100.0   $ 428,925         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     Year Ended December 31,  
     2012     2013  
     (in thousands)  
     Amount      As a % of
Sales
    Amount      As a % of
Sales
 

CFL

   $ 260,731         72.6   $ 289,315         67.5

LED

     56,570         15.7     107,130         25.0

Linear and fixtures

     31,818         8.9     20,678         4.8

Other

     10,236         2.8     11,802         2.8
  

 

 

    

 

 

   

 

 

    

 

 

 

Total net sales

   $ 359,355         100.0   $ 428,925         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Net sales of $428.9 million for the year ended December 31, 2013 increased by $69.6 million, or 19.4%, over the year ended December 31, 2012. Net sales in 2013 include sales of $8.3 million from our acquisition of TCP B.V. in June 2012.

Sales of our LED product line increased $50.6 million, or 89.4%, including sales of $3.9 million from our 2012 acquisition of TCP B.V. The increase is primarily due to our business focus on growing the LED product line that directly resulted in higher volume with C&I distributors of $22.5 million and securing new business to be the primary supplier of private-label LED lamps for Walmart in the United States that, in part, resulted in an increase of $8.5 million in sales in our retail channel. Higher volume with Homebase and new business with Carrefour largely contributed to our $7.2 million increase in sales in EMEA. In addition, new retail business with IRIS in Japan and Emart in South Korea mainly comprised our $7.1 million increase in sales in Asia. New LED business with The Home Depot in Mexico resulted in a $1.1 million increase in sales in Latin America.

Sales of our CFL product line increased by $28.6 million, or 11.0%, including sales of $1.3 million from our 2012 acquisition of TCP B.V. The increase is mainly due to volume growth of $23.9 million in the United States and Canada, largely with The Home Depot and Walmart. Additionally, higher volume with C&I distributors in Latin America, higher retail volume with Homebase and new business with Carrefour in EMEA were the main contributors to the remainder of the increase in CFL sales.

Sales of our linear, fixtures and other product lines decreased by $9.6 million. The decrease is primarily due to lower sales of $13.3 million with C&I distributors in the United States and Canada due to our business focus on LED, along with net sales of $3.0 million from our 2012 acquisition of TCP B.V.

Gross profit. Gross profit increased by $7.9 million, or 9.3%, primarily due to the growth in sales volume. Gross profit percentage decreased to 21.5% from 23.4%, as a result of an increase in the provision for excess and obsolete inventory, the strengthening of the Chinese yuan and unfavorable channel mix due to higher retail sales, partially offset by a favorable product mix from higher LED sales. Our inventory provision increased $8.7 million primarily due to rapidly changing technological innovation, largely attributable to the industry’s

 

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shift in focus to LED that changed demand for products and resulted in higher levels of excess and obsolete inventory. The strengthening of the Chinese yuan, which appreciated 3.3% against the U.S. dollar during the year ended December 31, 2013, has reduced gross profit margins, as our sales primarily are denominated in U.S. dollars and manufacturing costs in Asia are paid in the Chinese yuan.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by $4.1 million, or 6.9%, primarily due to a $7.1 million increase in payroll and benefits, $1.9 million of expenses following the acquisition of TCP B.V. in 2012, a $0.4 million increase in amortization expense and a $0.1 million increase in travel expenses. The increase in payroll and benefits and travel expenses was largely due to our continued efforts to expand our sales force principally to serve customers within the C&I channel. These increases were partially offset by a $4.6 million decrease in professional fees, mainly from the absence of such expenses associated with our then-withdrawn initial public offering, along with lower commissions of $0.7 million from the transition to a direct sales model in our C&I channel.

Litigation settlements. In 2013, litigation settlements were primarily comprised of the settlement regarding the alleged infringement of Philips’ patents, and the estimated cost to resolve ongoing litigation. We recognized deferred costs of $18.7 million associated with our 2013 settlement agreement with Philips as a long-term asset, which will be amortized based on projected sales containing the licensed intellectual property over the term of the agreement as a component of cost of sales. In 2012, litigation settlements primarily were comprised of our settlement of the Geo Foundation matter regarding a contract dispute. See Note 14 to our consolidated financial statements, included elsewhere in this prospectus.

Other expense. Other expense increased by $6.5 million due to higher foreign exchange losses of $5.7 million and higher interest expense of $0.8 million. The foreign exchange losses were primarily attributable to the strengthening Chinese yuan, which devalued our U.S. dollar-denominated receivables in Asia from third-party customers and other TCP subsidiaries. The increase in interest expense resulted from an increase in debt to fund working capital.

Effective income tax rate. Our effective income tax rate increased to 36.3% in 2013 from 30.6% in 2012. Our effective income tax rate of 36.3% approximated the U.S. federal income tax rate as the favorable impact of earnings in lower tax rate jurisdictions was offset by non-deductible expenses in China related to certain employment costs along with interest on uncertain tax positions. Our effective income tax rate of 30.6% in 2012 was lower than the U.S. federal income tax rate due to the tax benefit associated with the legal settlements in a higher tax jurisdiction coupled with the favorable impact of earnings in lower tax rate jurisdictions, which was partially offset by non-deductible expenses associated with our withdrawn initial public offering, losses in certain Asian and European operating companies for which we recorded no benefit, and interest on uncertain tax positions.

 

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Comparison of the Years Ended December 31, 2011 and 2012

 

    Year Ended December 31,  
    2011     2012  
    (in thousands)  
    Amount     As a %  of
Sales
    Amount     As a %  of
Sales
 

Net sales

  $ 263,846        100.0  %    $ 359,355        100.0  % 

Cost of goods sold

    208,098        78.9  %      275,109        76.6  % 
 

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    55,748        21.1  %      84,246        23.4  % 

Selling, general and administrative expenses

    39,590        15.0  %      60,128        16.7  % 

Litigation settlements

    —          —    %      27,550        7.7  % 
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    16,158        6.1  %      (3,432     (1.0 )% 

Other expenses:

       

Interest expense, net

    3,949        1.5  %      5,260        1.5  % 

Foreign exchange losses, net

    4,752        1.8  %      249        0.1  % 
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    7,457        2.8  %      (8,941     (2.5 )% 

Income tax expense (benefit) from continuing operations

    3,796        1.4  %      (2,738     (0.8 )% 
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    3,661        1.4  %      (6,203     (1.7 )% 

Net loss from discontinued operations

    (249     (0.1 )%      —           % 
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    3,412        1.3  %      (6,203     (1.7 )% 

Net income attributable to noncontrolling interests

    149        0.1  %      —          —    % 
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to TCP

  $ 3,263        1.2  %    $ (6,203     (1.7 )% 
 

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Data:

       

Adjusted EBITDA (unaudited)

  $ 24,152        9.2  %    $ 35,714        9.9  % 

Net sales. The following table shows our net sales by region and by product line:

 

     Year Ended December 31,  
     2011     2012  
     (in thousands)  
     Amount      As a % of
Sales
    Amount      As a % of
Sales
 

United States and Canada

   $ 236,948         89.8   $ 317,531         88.4

EMEA

     —           —       8,653         2.4

Asia

     24,181         9.2     22,392         6.2

Latin America

     2,717         1.0     10,779         3.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total net sales

   $ 263,846         100.0   $ 359,355         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     Year Ended December 31,  
     2011     2012  
     (in thousands)  
     Amount      As a % of
Sales
    Amount      As a % of
Sales
 

CFL

   $ 215,605         81.7   $ 260,731         72.6

LED

     11,294         4.3     56,570         15.7

Linear and fixtures

     31,414         11.9     31,818         8.9

Other

     5,533         2.1     10,236         2.8
  

 

 

    

 

 

   

 

 

    

 

 

 

Total net sales

   $ 263,846         100.0   $ 359,355         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Net sales of $359.4 million for the year ended December 31, 2012 increased by $95.5 million, or 36.2%, over the prior year. Net sales include incremental net sales of $8.6 million from our acquisition of TCP B.V. in June 2012.

Sales of our LED product line increased by $45.3 million, or 400.9%, including incremental sales of $3.1 million from our acquisition of TCP B.V. The increase in LEDs was primarily due to an expanded product offering and a stronger demand for our LED products that directly resulted in higher volume with C&I distributors of $35.3 million in sales in the United States and Canada, as well as new business with IRIS, a C&I distributor in Japan, that largely contributed to our $4.6 million increase in Asia.

Sales of our CFL product line increased by $45.1 million, or 20.9%, including incremental sales of $2.5 million from our acquisition of TCP B.V. The increase mainly is due to a higher sales of $41.1 million in the United States and Canada, largely from securing new business with Walmart and growing volume with our existing customers, most notably with The Home Depot. Additionally, higher volume with The Home Depot in Mexico resulted in an increase of $8.1 million in sales in Latin America. These increases were partially offset by a decrease in sales under the Chinese government subsidy program of $3.3 million compared to the same period in 2011, largely due to the timing of the programs among years.

Sales of our linear, fixtures and other product lines increased $5.1 million, primarily attributable to incremental sales of $3.0 million from our acquisition of TCP B.V. The remainder of the increase was due to higher halogen and linear volume of $2.7 million in sales in the United States and Canada, partially offset by a decrease in sales of our other complementary product lines.

Gross profit. Gross profit increased $28.5 million, or 51.1%, primarily due to the growth in sales volume. Gross profit percentage increased to 23.4% from 21.1%. Our gross profit percentage benefited from the expansion of our LED product line and a higher mix of sales from our C&I channel. Our gross profit also benefited from improved production yields and more efficient use of raw material inputs through the automation of production processes.

Selling, general and administrative expenses. Selling, general and administrative expenses increased by $20.5 million, or 51.9%, including $3.8 million of incremental expenses following our acquisitions of TCP B.V. in 2012. The increase was primarily due to a $7.8 million increase in professional fees, a $4.5 million increase payroll and benefits and a $2.8 million increase selling and marketing related expenses. The increase in professional fees was due to $4.4 million of fees associated with our proposed initial public offering in 2012, which was withdrawn , as well as expenses for litigation defense costs, most notably related to the Geo Foundation matter. Payroll and benefits, along with selling and marketing expenses, increased principally as a result of our efforts to grow our sales force to serve our C&I customers.

Litigation settlements. Litigation settlements were primarily comprised of our settlement of the Geo Foundation matter recognized in 2012. See Note 14 to our consolidated financial statements, included elsewhere in this prospectus.

Other expenses. Other expenses decreased by $3.2 million primarily from lower foreign currency losses of $4.5 million, which was partially offset by a $1.3 million increase in interest expense due to higher average bank borrowings. During 2012, the foreign currency exchange rates for the U.S. dollar versus the Chinese yuan remained relatively constant resulting in lower foreign currency losses in 2012, compared to the strengthening of the Chinese yuan experienced in 2011. The increase in interest expense was the result of higher average debt balances to fund our increased working capital requirements as a result of our efforts to grow our LED product line.

Effective income tax rate. Our effective income tax rate decreased to 30.6% in 2012 from 50.9% in 2011. Our effective income tax rate of 30.6% was lower than the U.S. federal income tax rate due to the tax benefit

 

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associated with the legal settlements in a higher tax jurisdiction coupled with the favorable impact of earnings in lower tax rate jurisdictions, which was partially offset by non-deductible expenses associated with our withdrawn initial public offering, losses in certain Asian and European operating companies for which we recorded no benefit, and interest on uncertain tax positions. Our effective income tax rate of 50.9% in 2011 was higher than the U.S. federal income tax rate due to non-deductible expenses associated with our withdrawn initial public offering and certain employment costs in China along with interest on uncertain tax positions, which was partially offset by the favorable impact of earnings in lower tax rate jurisdictions.

Quarterly Results of Operations

The following table sets forth our unaudited consolidated statement of operations data for each of the nine quarters in the period ended March 31, 2014. This unaudited quarterly information has been prepared on the same basis as our audited financial statements and includes all normal and recurring adjustments necessary for the fair presentation of the results of our operations for the periods presented. Our historical results are not necessarily indicative of the results that may be expected in the future. The following quarterly financial data should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

    For the Three Months Ended  
    Mar. 31,
2012
    Jun. 30,
2012
    Sep. 30,
2012
    Dec. 31,
2012
    Mar. 31,
2013
    Jun. 30,
2013
    Sep. 30,
2013
    Dec. 31,
2013
    Mar. 31,
2014
 
    (Amounts in thousands, except per share data)  

Statement of Operations Data:

                 

Net sales

  $ 73,540     $ 78,076     $ 99,275     $ 108,464     $ 90,294     $ 111,157     $ 113,022     $ 114,452     $ 101,117  

Cost of goods sold

    53,830       58,886       76,565       85,828       69,459       84,150       89,519       93,691       76,330  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    19,710       19,190       22,710       22,636       20,835       27,007       23,503       20,761       24,787  

Percentage of net sales

    26.8     24.6     22.9     20.9     23.1     24.3     20.8     18.1     24.5

Selling, general, and administrative expenses

    12,021       13,510       14,840       19,757       14,570       16,609       15,761       17,312       16,963  

Litigation settlements

    —         —         75       27,475       —         —         —         3,032       100  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    7,689       5,680       7,795       (24,596     6,265       10,398       7,742       417       7,724  

Interest expense, net

    1,250       1,267       1,443       1,300       1,295       1,432       1,568       1,764       2,280  

Foreign exchange losses (gains), net

    45       (262     (562     1,028       2,406       2,231       (1     1,293       (674
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations before income taxes

    6,394       4,675       6,914       (26,924     2,564       6,735       6,175       (2,640     6,118  

Income tax expense (benefit)

    1,968       1,699       2,216       (8,621     1,623       2,184       1,883       (1,028     2,197  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to TCP

  $ 4,426     $ 2,976     $ 4,698     $ (18,303   $ 941     $ 4,551     $ 4,292     $ (1,612   $ 3,921  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to TCP shareholders-basic and diluted1

  $ 0.22      $ 0.14      $ 0.23      $ (0.89   $ 0.05      $ 0.22      $ 0.21      $ (0.08   $ 0.19   

Weighted average number of shares outstanding-basic and diluted1

    20,553       20,553       20,553       20,553       20,553       20,553       20,553       20,553       20,553  

Other Financial Data:

                 

Adjusted EBITDA2

  $ 9,659     $ 7,824     $ 10,417     $ 7,814     $ 8,217     $ 12,401     $ 9,815     $ 5,563     $ 10,014  

 

1 All share and per share data relating to our common shares in this prospectus have been adjusted to reflect a 1:10 reverse stock split to be given effect prior to the effectiveness of the registration statement of which this prospectus is a part.
2 We define EBITDA as net income (loss) attributable to TCP before interest expense, income taxes, depreciation and amortization, and Adjusted EBITDA as EBITDA before net foreign currency losses (gains), litigation settlements and costs related to our proposed initial public offering in 2012, which was withdrawn. Please see the “Components of Results of Operations” sub-section for more information.

 

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     The following table presents a reconciliation of EBITDA and Adjusted EBITDA to net income (loss) attributable to TCP, which is the most directly comparable U.S. GAAP measure, for the periods presented.

 

    For the Three Months Ended  
    Mar. 31,
2012
    Jun. 30,
2012
    Sep. 30,
2012
    Dec. 31,
2012
    Mar. 31,
2013
    Jun. 30,
2013
    Sep. 30,
2013
    Dec. 31,
2013
    Mar. 31,
2014
 
    (in thousands)  

Net income (loss) attributable to TCP

  $ 4,426     $ 2,976     $ 4,698     $ (18,303   $ 941     $ 4,551     $ 4,292     $ (1,612   $ 3,921  

Adjustments:

                 

Interest expense, net

    1,250       1,267       1,443       1,300       1,295       1,432       1,568       1,764       2,280  

Income tax expense (benefit)

    1,968       1,699       2,216       (8,621 )     1,623       2,184       1,883       (1,028 )     2,197  

Depreciation and amortization

    1,661       1,710       1,815       1,968       1,952       2,003       2,073       2,114       2,190  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

    9,305       7,652       10,172       (23,656 )     5,811       10,170       9,816       1,238       10,588  

Adjustments:

                 

Foreign exchange losses (gains), net

    45       (262 )     (562 )     1,028       2,406       2,231       (1 )     1,293       (674 )

Litigation settlements

    —         —         75       27,475       —         —         —         3,032       100  

Cost related to withdrawn initial public offering

    309       434       732       2,967       —         —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 9,659     $ 7,824     $ 10,417     $ 7,814     $ 8,217     $ 12,401     $ 9,815     $ 5,563     $ 10,014  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Quarterly Net Sales Trends

Purchases by our retail customers are driven by their internal buying practices and sales programs that typically reflect a seasonal buying pattern, which may result in fluctuations in our period-to-period net sales. Historically, we have experienced lower retail sales in the first calendar quarter. The impact of these seasonal buying patterns, however, may be mitigated by utility and government incentives and programs, for which we have no control over the timing or extent of the programs, as well as the rate of new customer sales growth, the introduction of new product offerings and C&I customer buying practices, which follow no particular seasonal pattern. Therefore, seasonal factors and historical patterns should not be considered a reliable indicator of our future sales activity or performance.

Net sales increased for each quarter presented compared to the corresponding quarter in the preceding year due to the addition of new customers, volume growth with existing customers and our expansion within geographic regions outside of the United States and Canada. In 2012, our net sales grew due to our expansion into EMEA in the second quarter, the securing of new CFL business with Walmart in the United States and Canada during the third quarter, and securing new LED business with IRIS in Asia in the fourth quarter. In 2013, our net sales grew due to volume growth with The Home Depot and C&I distributors in the United States and Canada, the expansion of our product offerings with Walmart in the United States and Canada to include LED lamps in the second quarter, and new business with Carrefour in EMEA and Emart in Asia in the fourth quarter. The sequential decline in net sales in the first quarter of 2014 from the fourth quarter of 2013 was due to weaker retail sales from seasonal buying practices that were offset partially by higher volume with C&I distributors in the United States and Canada.

Quarterly Gross Profit Trends

Our gross profit percentage fluctuates based on a number of factors including channel mix, product mix, the time lag between the decrease in raw material costs and the implementation of price reductions with our customers, the impact of fluctuations in foreign currencies on our manufacturing costs in Asia, and product innovation within our industry that has resulted in increased product obsolescence. Historically, our gross profit percentage is the highest in the first quarter as the result of favorable channel mix, with C&I sales comprising a higher proportion of our net sales. Therefore, seasonal factors and historical patterns should not be considered a reliable indicator of our future gross profit percentage performance.

 

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In 2012, our first and second quarter gross profit percentage benefited from a decrease in the cost of raw materials, principally phosphors. Price reductions to our customers that took effect in the third and fourth quarters of 2012 lowered our gross profit percentage. In 2013, our first and second quarter gross profit percentage benefited from favorable product mix due to LED sales growth. In the third and fourth quarters of 2013, our gross profit percentage declined due to increased provisions for excess and obsolete inventory and the strengthening of the Chinese yuan relative to the U.S dollar. In the first quarter of 2014, our gross margin percentage benefited from the recovery of inventory provisions from the sale of excess products, favorable product mix from higher LED sales and a weakening of the Chinese yuan compared to the fourth quarter of 2013.

Quarterly Selling, General and Administrative Expenses Trends

Selling, general and administrative expenses have increased as a result of the investment in our sales, research and development, and marketing capabilities to support our growth. This quarterly trend was impacted by non-recurring expenses during 2012 totaling $4.4 million for professional fees associated with our proposed initial public offering, which was withdrawn.

Liquidity and Capital Resources

Our primary uses of cash have been for the expansion of our inventory and our purchase of property, plant and equipment to expand our LED and CFL production capacity, as well as the settlement of litigation. Historically, we have financed our operations primarily through cash generated from operations and borrowings under our bank credit facilities and notes payable. As of December 31, 2012 and 2013 and March 31, 2014, we had $38.7 million, $21.9 million and $23.0 million, respectively, in cash and cash equivalents excluding restricted cash.

In 2013, due to the rapid expansion of our LED product line, we increased our debt borrowing and lengthened payment terms with our vendors to finance our increase in inventory to expand our LED product offerings. LED products generally are comprised of higher priced components compared to our other product lines. We expect that our inventory will continue to increase our working capital requirements as our product mix shifts to LED. During the three months ended March 31, 2014, we increased our debt borrowings to finance the payment of accounts payable, customer rebates and income taxes.

As of December 31, 2012 and 2013 and March 31, 2014, short-term loans and long-term debt consisted of the following:

 

     As of December 31,      As of March 31,  
     2012      2013      2014  
     (in thousands)  

Short-term bank loans

   $ 49,638       $ 95,215       $ 105,381   

Revolving line of credit

     22,827         27,136         33,508   

Long-term debt

     8,523         8,042         7,901   
  

 

 

    

 

 

    

 

 

 

Total

   $ 80,988       $ 130,393       $ 146,790   
  

 

 

    

 

 

    

 

 

 

The short-term bank loans primarily consisted of separate loans with six Chinese banks, all with maturities of one year or less at December 31, 2013 and March 31, 2014. The number and amount of outstanding bank loans varies depending on the working capital needs of our Chinese subsidiaries. Since our operations began, we have successfully rolled over these loans for additional 12 month periods upon the maturity of outstanding loans. For the years ended December 31, 2012 and 2013, our average short-term bank loan balance was $56.6 million and $66.4 million, respectively, with the highest month-end balance of $95.2 million as of December 31, 2013. For the three months ended March 31, 2014, our average short-term bank loan balance was $104.8 million, with

 

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the highest month-end balance of $105.8 million as of February 28, 2014. The weighted average interest rate on these loans as of December 31, 2012 and 2013 and March 31, 2014 was 6.5%, 3.6% and 4.2%, respectively. In addition, as of December 31, 2012 and 2013 and March 31, 2014, $13.9 million, $20.5 million and $23.6 million, respectively, of accounts receivable were pledged as collateral against certain short-term bank loans with various Chinese financial institutions. We believe that cash flows from our Asian operating activities, available collateral based in China, and the guarantee provided by our shareholder will allow us to roll over our existing Chinese debt obligations as needed, allowing us to fund anticipated business operations in Asia for at least the next 12 months. There can be no assurance that we will be able to continue to roll over our existing Chinese debt obligations on commercially reasonable terms or at all.

The following is a summary of the short-term bank loans outstanding in China as of March 31, 2014 and December 31, 2013 and 2012 (dollars in thousands):

 

     As of March 31, 2014  

Lender

   Amount      Number of
Loans
Outstanding
     Average
Interest
Rate
    Amount
Collateralized
by Accounts
Receivable
     Amount
Cross
Collateralized
between
Chinese
Entities
     Amount
Collateralized
by
Shareholder
 

Agricultural Bank of China

   $ 19,328         8         5.1   $ 1,544       $ 17,784       $ —     

Communication Bank of China

     46,156         11         3.6     —           16,004         30,152   

Bank of China

     23,138         8         4.8     15,036         8,102         —     

China Construction Bank

     3,739         1         4.6     3,739         —           —     

Industrial and Commercial Bank of China

     8,127         5         6.2     3,250         4,876         —     

China Merchants Bank

     4,876         2         6.6     —           4,876         —     
  

 

 

    

 

 

      

 

 

    

 

 

    

 

 

 

Total

   $ 105,364         35         $ 23,569       $ 51,642       $ 30,152   
  

 

 

    

 

 

      

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2013  

Lender

   Amount      Number of
Loans
Outstanding
     Average
Interest
Rate
    Amount
Collateralized
by Accounts
Receivable
     Amount
Cross
Collateralized
Between
Chinese
Entities
     Amount
Collateralized
by
Shareholder
 

Agricultural Bank of China

   $ 15,467         7         5.9   $ 1,558       $ 13,909       $ —     

Communication Bank of China

     49,286         12         3.4     —           19,134         30,152   

Bank of China

     18,470         6         4.3     11,910         6,561         —     

China Construction Bank

     3,772         1         6.4     3,772         —           —     

Industrial and Commercial Bank of China

     3,280         1         6.2     3,280         —           —     

China Merchants Bank

     4,921         2         6.6     —           4,921         —     
  

 

 

    

 

 

      

 

 

    

 

 

    

 

 

 

Total

   $ 95,196         29         $ 20,520       $ 44,525       $ 30,152   
  

 

 

    

 

 

      

 

 

    

 

 

    

 

 

 

 

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     As of December 31, 2012  

Lender

   Amount      Number of
Loans
Outstanding
     Average
Interest
Rate
    Amount
Collateralized
by Accounts
Receivable
     Amount
Cross
Collateralized
between
Chinese
Entities
 

Agricultural Bank of China

   $ 16,641         8         6.4   $ —         $ 16,641   

Communication Bank of China

     11,137         5         7.4     —           11,137   

Bank of China

     13,428         4         4.8     8,655         4,773   

China Construction Bank

     3,659         1         5.6     3,659         —     

Industrial and Commercial Bank of China

     4,773         2         6.7     1,591         3,182   
  

 

 

    

 

 

      

 

 

    

 

 

 

Total

   $ 49,638         20         $ 13,905       $ 35,733   
  

 

 

    

 

 

      

 

 

    

 

 

 

Our revolving line of credit agreement provides for borrowings up to $40.0 million, which is limited based on certain percentages of eligible accounts receivable and inventory, and is collateralized by substantially all of the assets of our U.S. and Canadian subsidiaries. There was no limitation in effect at December 31, 2012, December 31, 2013 or March 31, 2014 based on outstanding collateral. Borrowings under the revolving line of credit agreement are subject to an interest rate matrix based on the Borrowers’ fixed-charge coverage ratio. At March 31, 2014, our interest rates for borrowings under this agreement were, at our option, either LIBOR rate loans, with interest due at LIBOR plus 3.25%, or prime rate loans with interest due at the bank’s prime rate plus 2.25%. The interest rates on our LIBOR rate loans and prime rate loans were 3.40% and 5.50%, respectively, at March 31, 2014.

The revolving line of credit agreement also contains certain restrictive covenants that, among other things, limit additional indebtedness, restrict non-tax related distributions, and requires us to maintain a minimum fixed charge coverage ratio of 1.15 to 1.0. Our fixed charge coverage ratio was 1.25 at March 31, 2014, and is defined in the revolving line of credit agreement as the ratio of our U.S. and Canadian subsidiaries’ EBITDA, plus expenses relating to the Geo Foundation litigation, less unfunded capital expenditures, tax distributions to shareholders, and cash taxes paid, to their fixed charges, including interest and fees paid under the revolving line of credit, and payments under capital lease obligations and other indebtedness. In addition, the revolving line of credit agreement requires that the aggregate intercompany payable from our U.S. and Canadian subsidiaries to our Chinese subsidiaries be no less than $33.0 million. As of March 31, 2014, we had $33.5 million of borrowings under our revolving line of credit and were in compliance with the financial and other covenants in our debt agreements.

The outstanding borrowings under our revolving line of credit agreement have been reported as a current liability since we are required to maintain a lockbox for the collection of our accounts receivable and the proceeds of which may be applied against borrowings outstanding at the discretion of the lender. Although the full amount of borrowings under our revolving line of credit is presented as a current liability, we intend to utilize our ability to borrow, up to the maximum amounts allowed under the terms of the revolving line of credit agreement, through the maturity date of July 25, 2018.

In an effort to obtain extended payment terms, we complement the financing arrangements discussed above by maintaining restricted cash balances that relate to bankers’ acceptances issued by our banks as a form of payment to certain of our suppliers. Under the terms of the bankers’ acceptances, the supplier may either redeem the bankers’ acceptance upon maturity, which generally is six months from the date of issuance, or redeem the bankers’ acceptance directly with the bank prior to maturity, accepting a discounted payment amount. The banks require us to keep a certain amount of cash on hand to cover payments to suppliers based on a percentage of the total amount owed. We had $16.2 million, $11.7 million and $16.6 million of bankers’ acceptances outstanding with our suppliers and maintain restricted cash balances of $4.3 million, $3.3 million and $5.4 million as collateral for these bankers’ acceptances at December 31, 2012 and 2013 and March 31, 2014, respectively.

 

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In addition to bank debt, we are also obligated to make aggregate payments of $8.2 million in 2014, $8.2 million in 2015, $6.8 million in 2016, $7.2 million in 2017, $3.7 million in each year from 2018 through 2020, and $1.8 million in 2021 in connection with the Geo Foundation and Philips litigation settlements. We are also involved in ongoing litigation with GE Lighting Solutions, LLC and, based on recent negotiations, have recorded a liability of $1.3 million as of March 31, 2014 for the probable resolution of the litigation. We believe it is reasonably possible that the settlement of the GE Lighting Solutions, LLC matter may exceed the recorded liability as GE has taken a position, during early, informal settlement discussions that could lead to a claim for royalties up to $10.2 million. Although we believe we have substantial defenses in this matter, litigation is inherently unpredictable, and excessive verdicts do occur. We could incur judgments or enter into settlements of claims in the future that could have a material adverse effect on our ability to sufficiently fund anticipated business operations. See Note 14 to our consolidated financial statements and Note 7 to our unaudited condensed consolidated financial statements, included elsewhere in this prospectus.

Cash and cash equivalents, excluding restricted cash, held outside of the United States was of $37.3 million, $21.6 million and $21.6 million as of December 31, 2012 and 2013 and March 31, 2014, respectively, and primarily are used to fund our manufacturing operations in China. Generally, our policy is to indefinitely reinvest the undistributed earnings of our foreign subsidiaries. We regularly assess our cash needs and the available sources to fund these needs, and we believe that local operating activities will be sufficient to fund local obligations through at least the next 12 months. However, if future events necessitate the repatriation of funds from our operating subsidiaries, we believe that the repatriation of funds would not have a material effect on our financial position or results of operations. We believe that, based on our current and anticipated levels of operations, that our cash on hand, cash flow from operations and our borrowing capacity under existing bank financing arrangements, as well as the proceeds from this offering, will together be sufficient to meet our current and anticipated cash operating requirements, including working capital needs, capital expenditures and scheduled principal and interest payments, through at least the next 12 months.

At March 31, 2014, we had a non-interest bearing loan of $1.8 million due from TCP Campus Drive LLC (“TCP Campus”), an unconsolidated variable interest entity that is wholly owned by our CEO and his family. TCP Campus was formed in 2005 to purchase, construct and own the warehouse and office space in Aurora, Ohio that is currently utilized by and recorded as a capital asset of TCP US. TCP US entered into a net lease with TCP Campus on June 16, 2006, which was amended on April 12, 2007. We expect to enter into an agreement with an entity owned by Ellis Yan and his wife in June 2014 whereby we will acquire all of the membership interests of TCP Campus and eliminate the associated financing liability. In exchange, we will transfer the warehouse that we own in Aurora, Ohio to the entity owned by Ellis Yan and his wife. The net assets of TCP Campus consist of the warehouse and office space currently leased by us and the related mortgage of approximately $5.6 million. In contemplation of this transaction, we forgave the loan outstanding of $1.7 million from TCP Campus in May 2014. The impact of this exchange and loan forgiveness will be recorded to equity since the transaction will occur between entities under common control. The annual mortgage payments on the assumed TCP campus facility are $0.5 million through May 2017, with interest at 5.97% and a lump sum payment of $5.1 million due in May 2017.

Historically, our shareholders made non-interest bearing loans to finance ongoing capital needs of certain of our Chinese subsidiaries. In December 2013, the Chinese subsidiaries repaid all outstanding balances due to Solomon Yan, financed by $30.2 million of short-term bank loans that have been guaranteed by Mr. Yan through October and November 2014. We have obtained a letter from Mr. Yan confirming that he will continue to guarantee these short-term loans, as necessary, through December 31, 2014. We expect that a portion of the proceeds from this offering will be used to repay some or all of the short-term loans guaranteed by Mr. Yan.

Certain of our operating subsidiaries are restricted in their ability to pay dividends. The ability of our Chinese operating subsidiaries to pay dividends may be restricted due to foreign exchange control policies in the People’s Republic of China. The Chinese yuan is subject to exchange control regulation in China, and, as a result, we may be unable to distribute any dividends outside of China due to exchange control regulations that restrict our ability to convert Chinese yuan into U.S. dollars. Additionally, our revolving line of credit agreement

 

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contains certain restrictive covenants that, among other things, restrict non-tax related distributions. The total restricted portion of our net assets at December 31, 2013 was $18.3 million.

Cash Flows

Following is a summary of our cash flows for the years ended December 31, 2011, 2012 and 2013 and the three months ended March 31, 2013 and 2014:

 

     Year Ended December 31     Three Months Ended March 31,  
             2011                     2012                     2013                     2013                     2014          
     (in thousands)  

Net cash (used in) provided by operating activities

   $ (10,221   $ 41,397      $ (16,312   $ (10,709   $ (9,492

Net cash used in investing activities

     (13,370     (6,213     (10,632     (4,064     (6,060

Net cash provided by (used in) financing activities

     5,902        (19,259     9,300        9,843        16,864   

Effect of exchange rate changes on cash and cash equivalents

     1,356        94        867        (44     (194
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

   $ (16,333   $ 16,019      $ (16,777   $ (4,974   $ 1,118   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Cash (Used in) Provided by Operating Activities

Net cash used in operating activities was $9.5 million for the three months ended March 31, 2014 compared to $10.7 million for the three months ended March 31, 2013. This use of cash in the three months ended March 31, 2014 was due to a decrease in accounts payable of $11.9 million attributable to timing of payments and lower purchase volume, and a decrease in accrued and other liabilities of $10.1 million largely due to payment of customer rebates, employee bonuses and income taxes. These uses of cash were partially offset by earnings of $3.9 million, a decrease in inventory of $3.0 million due to our efforts to reduce inventory levels and a decrease in prepaid expense and other assets of $2.1 million mainly from the collection of VAT refunds. During the three months ended March 31, 2013, inventories increased $7.6 million due to the expansion of our LED product offerings, accrued and other liabilities decreased $4.3 million largely due to payment of customer rebates, employee bonuses and income taxes, and prepaid expenses and other assets increased $1.7 million mainly due to the timing of VAT refunds.

Net cash used in operating activities was $16.3 million in 2013 compared to net cash provided by operating activities of $41.4 million in 2012. This use of cash was largely due to the $40.7 million increase in inventory primarily attributable to the expansion of our LED product line and sales growth within our CFL product line that was financed in part through an increase of $15.4 million of accounts payable, compared to a $2.1 million decrease in inventory and a $13.0 million increase in accounts payable in 2012. Additional cash uses include the payment of $9.5 million related to litigation settlements, an increase of prepaid expenses and other assets of $2.6 million largely due to the timing of VAT recoveries in Europe and Asia and a $5.1 million increase of accounts receivable mainly due to higher sales and longer payment terms with our customers.

Net cash provided by operating activities was $41.4 million in 2012 compared to net cash used in operating activities of $10.2 million in 2011. The cash provided in 2012 was largely due to an increase of accounts payable of $13.0 million attributable to the timing of purchases and payments, an increase of $9.3 million of accrued and other liabilities (excluding $27.6 million for accrued litigation settlements) related to increased payroll and benefits, rebates and other similar liabilities. Additionally, a decrease in prepaid expenses and other assets of $3.7 million due to lower VAT recoveries in Asia and $2.1 million decrease in inventories as a result of inventory reduction efforts also provided operating cash flow in 2012, compared to a $28.5 million increase in inventories that was a cash use in 2011. These items were offset by a $4.1 million increase of accounts receivable attributable to our sales growth in 2012.

 

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Net Cash Used in Investing Activities

Net cash used in investing activities was $6.1 million for the three months ended March 31, 2014 compared to $4.1 million for the three months ended March 31, 2013, an increase of $2.0 million. The incremental cash used in investing activities in the three months ended March 31, 2014 was primarily due to an increase in our restricted cash balances of $2.1 million related to our increased use of bankers’ acceptances to pay our suppliers.

Net cash used in investing activities was $10.6 million in 2013 compared to $6.2 million in 2012, an increase of $4.4 million. The net increase in cash used in investing activities was primarily due to an increase in purchases of property, plant, and equipment of $3.0 million primarily to expand two of our manufacturing facilities in China to increase capacity within our LED and CFL product lines, as well as upgrades to our distribution facilities. Additionally, we acquired $1.6 million of cash from the acquisition of TCP B.V. in 2012 which was not repeated in 2013.

Net cash used in investing activities was $6.2 million in 2012 compared to $13.4 million in 2011, a decrease of $7.2 million. The net decrease in cash used in investing activities was due to a reduction in restricted cash balances of $6.3 million and a decrease in purchases of property, plant, and equipment of $2.3 million, partially offset by $1.6 million of cash acquired through our purchase of TCP B.V. in 2012. The restricted cash balances relate to bankers’ acceptances issued by our banks. In 2012, we reduced our bankers’ acceptances due to lower inventory purchases, resulting in the decrease of restricted cash. The purchases of property, plant and equipment in 2011 was largely due to the automation and expansion of our Chinese manufacturing operations.

Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2014 principally was due to net bank borrowings of $17.0 million to finance the payment of accounts payable, customer rebates and income taxes. Net cash provided by financing activities for the three months ended March 31, 2013 principally was due to net bank borrowings of $10.4 million to finance our increase in working capital, largely related to the growth in inventory to support the expansion of our LED offerings.

Net cash provided by financing activities in 2013 principally was due to net bank borrowings of $47.8 million to finance the repayment of related party payables of $30.2 million and to fund our increase in working capital, largely related to the expansion of our LED product offerings.

Net cash used in financing activities in 2012, principally was due to distributions to shareholders of $17.9 million and the issuance of non-interest bearing loans of $2.8 million to our shareholders, partially offset by net bank borrowings of $2.9 million to fund our working capital requirements.

Net cash provided by financing activities in 2011, principally was due to net bank borrowings of $11.8 million and borrowings from shareholders of $11.1 million to fund our working capital requirements, partially offset by the issuance of non-interest bearing loans of $15.6 million and distributions to our shareholders of $1.1 million.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, other than operating leases entered into in the ordinary course of our business, 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 may be material to investors.

Capital Expenditures

We expect to increase our capital spending as we continue to expand our production capabilities and improve our manufacturing efficiencies. Future capital requirements will depend on many factors, including our rate of sales growth, our global expansion activities, innovations within the energy efficient lighting industry,

 

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shifts in demand between energy efficient lighting products and the rate of acceptance and conversion to energy efficient lighting solutions. Our capital spending is generally used for the expansion of our Asian manufacturing operations and global warehouse and distribution facilities. Our capital investments have primarily been funded by operating cash flow and by bank borrowings under our existing credit facilities. We intend to use the net proceeds from this offering to acquire and develop advanced, automated manufacturing equipment to expand our LED manufacturing capacity, for the repayment of outstanding indebtedness and for general corporate purposes. In the event that our sales growth and global expansion does not meet our expectations, we may eliminate or curtail certain capital projects in order to mitigate the impact on our use of cash. We had no material commitments for capital expenditures as of December 31, 2013 or March 31, 2014.

Contractual Obligations

Our contractual obligations and other commitments as of December 31, 2013 were as follows:

 

    Payment Due In  
    Less Than
1 Year
    1 – 3
Years
    3 – 5
Years
    More Than
5 Years
    Total  
    (in thousands)  

Short-term and long-term debta

  $ 95,305      $ 47      $ 27,136      $ —        $ 122,488   

Fixed and estimated variable interest payments short-term and long-term debtb

    2,954        2,044        1,617        —          6,615   

Litigation settlementsc

    8,175        15,022        10,886        9,233        43,316   

Operating lease agreements

    1,416        2,611        1,980        226        6,233   

Capital lease agreements and finance lease obligation

    876        1,583        1,551        2,509        6,519   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 108,726      $ 21,307      $ 43,170      $ 11,968      $ 185,171   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

a 

Our revolving line of credit provides borrowings up to $40.0 million maturing on July 25, 2018. Due to requirements under the revolving line of credit agreement we maintain a lockbox for the collection of accounts receivable, the proceeds of which may be applied against outstanding borrowings at the discretion of the lender. Accordingly, as required by ASC 470, we classify outstanding borrowings under our revolving line of credit as short-term within our consolidated financial statements included elsewhere in this prospectus. We expect to use a portion of the net proceeds from this offering for the repayment of a portion of our outstanding short-term bank loans, including some or all of the $30.2 million short-term bank loans from the Communication Bank of China outstanding at March 31, 2014 that are guaranteed by Solomon Yan, one of our shareholders, and a portion of our revolving line of credit. We have the capacity to re-draw our short term bank loans following any repayment in connection with this offering.

b 

Rates in effect as of December 31, 2013 are used for variable rate debt.

c 

Represents contractual payments under settlement agreements related to the Geo Foundation Ltd. and Koninklijke Philips N.V. matters as detailed in Note 14 to our consolidated financial statements included elsewhere in this prospectus

We had gross unrecognized tax benefits of $7.0 million at December 31, 2013, that were not included in the contractual obligation table above. Due to uncertainty regarding the timing of such future cash outflows, if any, reasonable estimates cannot be made regarding the period of cash settlement with the applicable taxing authorities. See Note 12 to our audited consolidated financial statements included elsewhere in this prospectus.

There have been no material changes to our contractual obligations during the three months ended March 31, 2014, other than a $10.2 million increase in short-term bank loans with a maturity of one year or less, and a $6.4 million increase in the revolving line of credit maturing on July 25, 2018.

 

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Quantitative and Qualitative Disclosures about Market Risk

We are exposed to several financial risks, including, among others, market risk (changes in exchange rates, changes in interest rates and market prices), concentration risk and commodity risk. Our principal liabilities consist of bank loans and trade payables. The main purpose of these liabilities is to provide the necessary funding for our operations. We have various financial assets such as trade receivables and cash and cash equivalents. Our cash and cash equivalent instruments are held at high quality financial institutions and managed such that there is no significant concentration of credit risk in any one bank or other financial institution. Our management closely monitors the credit quality of the financial institutions in which we hold deposits.

Currency risk. Our reporting currency is the U.S. dollar. We have operations in the United States and Canada, Asia, EMEA and Latin America. As a result of our investments in entities that have functional currencies other than the U.S. dollar, we face exchange translation risk and our results can be affected by currency movements. Substantially all of our products are manufactured in China. Since our current sales mix is weighted heavily toward our market in the United States and Canada, our operating results may become subject to significant fluctuations based upon changes in currency exchange rates of the U.S. dollar principally against the Chinese yuan and to a lesser extent the U.S. dollar against the Canadian dollar and Euro. Accordingly, currency exchange rate fluctuations may adversely affect our financial results in the future. For example, a hypothetical 10% increase or decrease of the Chinese yuan against the U.S. dollar during 2013 would have impacted our operating income negatively or positively, respectively, by $2.2 million. We currently do not engage in any currency hedging activities.

Interest rate risk. We are exposed to interest rate risk related to our variable-rate debt. As of December 31, 2012 and 2013, and March 31, 2014 we had $22.8 million, $27.1 million and $33.5 million, respectively, outstanding under a revolving line of credit agreement with a U.S. bank. The interest rates for borrowings under this agreement are subject to an interest rate matrix based on the our fixed charge coverage ratio, as defined by the agreement. As of December 31, 2012, the interest rates on the LIBOR rate loans and prime rate loans were 3.21% and 5.25%, respectively. As a result of an amendment to our revolving line of credit agreement effective July 25, 2013, changes in the interest rate matrix have resulted in an adjustment to our interest rates for borrowings under this agreement to LIBOR plus 3.25% for LIBOR rate loans and the bank’s prime rate plus 2.25% for prime rate loans. As of December 31, 2013, the interest rates on the LIBOR rate loans and prime rate loans were 3.42% and 5.50%, respectively. As of March 31, 2014, the LIBOR rate loans and the prime rate loans were 3.40% and 5.50%, respectively. Potential movement of the LIBOR rate and the prime rate by +/- 1% would increase or decrease interest expense and cash paid for interest on an annualized basis by $0.3 million based on the balance outstanding under our revolving credit agreement at March 31, 2014.

We are also exposed to interest rate risk related to our fixed-rate bank debt in Asia due to their short-term maturity and our intention to refinance these borrowings. As of December 31, 2012 and 2013 and March 31, 2014, we had $49.6 million, $95.2 million and $105.4 million, respectively, of outstanding short-term bank loans with various Chinese banks. The weighted average interest rate on these loans as of December 31, 2012 and 2013 and March 31, 2014, was 6.5%, 3.6% and 4.2%, respectively. Upon our refinancing of these loans, a movement of the interest rate of plus or minus 1% would increase or decrease interest expense and cash paid for interest on an annualized basis by $1.1 million based on the balance outstanding at March 31, 2014.

Concentration risk. We are exposed to concentration risk due to our concentration of business activity with The Home Depot and Walmart, which were our only customers that individually exceeded 10% of net sales in 2011, 2012, 2013 or for the three months ended March 31, 2014. Net sales to The Home Depot accounted for 34.8%, 28.8% and 31.4% of our consolidated net sales in 2011, 2012 and 2013, respectively, and 18.3% of our consolidated net sales for the three months ended March 31, 2014 and net sales of our products to Walmart accounted for 10.3% and 13.0% of our net sales in 2012 and 2013, respectively, and 26.4% of our net sales for the three months ended March 31, 2014. We believe we will continue to expand our product offerings with The Home Depot and Walmart in the future. To manage our concentration risk we continue to expand our C&I

 

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channel and our customer base in EMEA, Asia and Latin America. In 2013, we secured new business with IRIS, Emart and Carrefour in Japan, South Korea and Europe, respectively, which we believe will reduce our concentration risk with The Home Depot and Walmart going forward.

Commodity risk. The manufacturing of our products relies heavily on the availability and price of certain commodity materials including petroleum based plastics, copper, and rare earth metals, principally phosphors. The markets for these raw materials are volatile and will continue to place pressure on our margins. While we have implemented pricing strategies in order to pass along these increased costs in the form of higher selling prices, there can be no assurance that future raw material shortages or increased prices will not negatively affect future results, including demand for our products and our profitability. Currently, the most significant pressure we face is the availability and cost of phosphors, a critical raw material input into the manufacturing of fluorescent lighting. China is currently the leader in rare earth mining, accounting for 95% for the world’s supply. Beginning in July 2007 through February of 2011, the Chinese government implemented a series of regulations to control mining practices and reduce the export levels of Chinese-produced rare earth metals, resulting in raw material shortages and increased prices. The cost of phosphors was particularly volatile during 2011. During 2011, the cost of phosphors increased from approximately ¥321/kg ($48/kg) at the beginning of the year to approximately ¥2,510/kg ($388/kg) in July 2011 before decreasing to approximately ¥1,390/kg ($219/kg) as of December 31, 2011. As of December 31, 2012 and 2013 and March 31, 2014, the cost of phosphors decreased further to approximately ¥484/kg ($77/kg), ¥408/kg ($67/kg) and ¥388/kg ($63/kg), respectively. Accordingly, where phosphors had represented approximately 5% of the material cost to manufacture fluorescent lighting prior to 2011, it represented approximately 17% of such cost during 2011. With the recent reduction of phosphors prices, phosphors represented approximately 6%, 3% and 3% of the cost to manufacture fluorescent lighting for the years ended December 31, 2012 and 2013 and for the three months ended March 31, 2014, respectively.

We purchase some of our raw materials from several small suppliers who have demonstrated consistent quality of materials and reliability of delivery as to the quantities required and delivery times. We purchase our materials at spot prices in the open market and we do not negotiate long-term supply contracts. We currently do not engage in hedging transactions for the purchase of raw materials.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events. These estimates and assumptions affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the reported consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include the valuation of inventory and deferred costs, the recoverability of long-lived assets, contingent liabilities and income taxes. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors. Management monitors and adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from management’s estimates.

The following discussion addresses our critical accounting policies and reflects the areas that require more significant judgments and use of estimates and assumptions in the preparation of our consolidated financial statements.

Principles of consolidation. The consolidated financial statements include the accounts of TCP International and its wholly owned subsidiaries. TCP International also consolidated a VIE in China, prior to its dissolution in December 2013, that it did not own but for which it was deemed to be the primary beneficiary. All intercompany transactions between TCP International and its consolidated subsidiaries and VIE have been eliminated in consolidation.

 

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We evaluate our variable interests in entities in accordance with ASC Topic 810, Consolidation, as to whether these entities are variable interest entities (VIEs) over which we have a controlling financial interest that should be consolidated in our financial statements. In our evaluation we consider all available information in determining whether we are the primary beneficiary of the VIE. Historically, we have had relationships with several VIEs for which we concluded, based on our judgment, that we did not have a controlling financial interest in the entities. In forming our judgments, we considered that the legal form of ownership granted control of the entities to their respective equity owners. We believe that our judgments were based on factors that most directly affect our ability to control the entity. Changes in one or more factors could have resulted in the consolidation of these entities that would have had a material impact our consolidated financial statements.

Revenue recognition. Our policy is to record revenue when the following recognition requirements are met; persuasive evidence of an arrangement exists; the products have been shipped or delivered to the customer and risk of loss has passed in accordance with the sales order; the sales price is fixed or determinable within the sales order; and collectability is reasonably assured. All sales are final upon shipment or delivery of product to the customer, other than for normal warranty provisions. We collect use and value-added taxes imposed by government authorities on and concurrent with sales to our customers; sales are presented net of these taxes.

Provisions for returns, customer programs, and incentive offerings, including promotions and other volume-based incentives, are recorded as deductions to sales in the same period the sales are recorded. Rebate programs provide that upon the attainment of pre-established volume or revenue milestones for a specified period, the customer receives cash or credits against purchases. Our estimates the provision for rebates based on the specific terms in each agreement at the time of shipment and an estimate of the customer’s achievement of the respective milestones. We accrue sales discounts, returns, and allowances based on historic experience.

Inventories. Inventories are stated at the lower of cost or market with cost determined on the first-in, first-out basis. To the extent the we determine we are holding excess or obsolete inventory, the inventory is written down to its net realizable value based on usage forecasts, open sales orders, and market conditions. To determine our excess or obsolete inventory provision we rely on all available information, including but not limited to: 1) usage forecasts, 2) applicable discount programs, 3) product specific life cycle and 4) historic sales patterns, which we believe are directly associated with our ability to recover our cost.

Deferred costs. In 2013, we entered into a settlement agreement with Koninklijke Philips N.V., which included a patent license agreement granting us nonexclusive, nontransferable, indivisible license on certain LED patents, effective from December 2013 through the earlier of their respective expirations or December 2028. We identified the settlement of litigation regarding the prior use of Philips’ patents and the future use of Philip’s patent license portfolio as separate elements of the settlement arrangement for accounting purposes. We valued each element of the arrangement and allocated the consideration paid to each element using relative fair values. To determine the consideration value, we discounted the contractual settlement payments using