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(Exact name of registrant as specified in its charter)
iDelaware
i94-3021850
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i32000 Aurora Road, iSuite
BiSolon, iOH
(Address of principal executive offices)
i44139
(Zip
Code)
(Registrant’s telephone number, including area code): i(440)i715-1300
None
(Former name, former address and former fiscal year, if
changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, par
value $0.0001 per share
iEFOI
iThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☑ No ☐
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
iNon-accelerated
filer
☑
Smaller reporting company
i☑
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No i☑
The
number of outstanding shares of the registrant’s common stock, $0.0001 par value, as of May 9, 2023 was i19,243,610.
Unless the context otherwise requires, all references to “Energy Focus,”“we,”“us,”“our,”“our company,” or “the Company” refer to Energy Focus, Inc., a Delaware corporation, and its consolidated subsidiary for the applicable periods, considered as a single enterprise.
This Quarterly Report on Form 10-Q (this “Quarterly Report”) includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and
therefore are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms “believes,”“estimates,”“anticipates,”“expects,”“feels,”“seeks,”“forecasts,”“projects,”“intends,”“plans,”“may,”“will,”“should,”“could” or “would” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Quarterly Report and include statements regarding our intentions, beliefs,or
current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies, capital expenditures,and the industry in which we operate.
By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Although we base these forward-looking statements on assumptions that we believe are reasonable when made in light of information currently available to us, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in this Quarterly Report. In addition, even
if our results of operations, financial condition and liquidity, and industry developments are consistent with the forward-looking statements contained in this Quarterly Report, those results or developments may not be indicative of results or developments in subsequent periods.
We believe that important factors that could cause our actual results to differ materially from forward-looking statements include, but are not limited to, the risks and uncertainties outlined under “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022 and other matters described in this Quarterly Report and our other filings with the Securities and Exchange Commission generally. Some of these factors include:
•our
need for and ability to obtain additional financing in the near term, on acceptable terms or at all, to continue our operations;
•our ability to regain and maintain compliance with the continued listing standards of The Nasdaq Stock Market LLC (“Nasdaq”);
•our ability to refinance or extend maturing debt on acceptable terms or at all;
•our ability to continue as a going concern for a reasonable period of time;
•our ability to realize synergies with our strategic investor;
•instability in the U.S. and global economies and business interruptions experienced by us, our customers and our suppliers, particularly in light of supply
chain constraints and other long-term impacts of the coronavirus (“COVID-19”) pandemic;
•the competitiveness and market acceptance of our light-emitting diode (“LED”) lighting and control technologies and products;
•our ability to compete effectively against companies with lower prices or cost structures, greater resources, or more rapid development capabilities, and new competitors in our target markets;
•our ability to extend our product portfolio into new applications and end markets;
•our ability to increase demand in our targeted markets and to manage sales cycles that are difficult to predict and may span several quarters;
•the
timing of large customer orders, significant expenses and fluctuations between demand and capacity as we manage inventory and invest in growth opportunities;
•our ability to successfully scale our network of sales representatives, agents, distributors and other channel partners to compete with the sales reach of larger, established competitors;
•our ability to implement plans to increase sales and control expenses;
•our reliance on a limited number of customers for a significant portion of our revenue, and our ability to maintain or grow such sales levels;
•our ability to add new customers to reduce customer concentration;
2
•our
ability to attract and retain a new chief financial officer;
•our ability to manage the size of our workforce while continuing to attract, develop and retain qualified personnel, and to do so in a timely manner;
•our ability to diversify our reliance on a limited number of third-party suppliers and development partners, our ability to manage third-party product development and obtain critical components and finished products on acceptable terms and of acceptable quality despite ongoing global supply chain challenges, and the impact of our fluctuating demand on the stability of such suppliers;
•our ability to timely, efficiently and cost-effectively transport products from our third-party suppliers by ocean marine and other logistics channels despite global supply
chain and logistics disruptions;
•the impact of any type of legal inquiry, claim or dispute;
•the macro-economic conditions, including rising interest rates and recessionary trends, in the United States and in other markets in which we operate or secure products, which could affect our ability to obtain raw materials, component parts, freight, energy, labor, and sourced finished goods in a timely and cost-effective manner;
•our dependence on military maritime customers and on the levels and timing of government funding available to such customers, as well as the funding resources of our other customers in the public sector and commercial markets;
•business interruptions resulting from geopolitical actions
such as war and terrorism, natural disasters, including earthquakes, typhoons, floods and fires, or from health epidemics or pandemics or other contagious outbreaks;
•our ability to respond to new lighting and control technologies and market trends;
•our ability to fulfill our warranty obligations with safe and reliable products;
•any delays we may encounter in making new products available or fulfilling customer specifications;
•any flaws or defects in our products or in the manner in which they are used or installed;
•our ability to protect our intellectual property rights and other confidential information, and manage infringement
claims by others;
•our compliance with government contracting laws and regulations, through both direct and indirect sale channels, as well as other laws, such as those relating to the environment and health and safety;
•risks inherent in international markets, such as economic and political uncertainty, changing regulatory and tax requirements and currency fluctuations, including tariffs and other potential barriers to international trade; and
•our ability to maintain effective internal controls and otherwise comply with our obligations as a public company.
In light of the foregoing, we caution you not to place undue reliance on our forward-looking statements. Any forward-looking statement that we make
in this Quarterly Report speaks only as of the date of such statement, and we undertake no obligation to update any forward-looking statement or to publicly announce the results of any revision to any of those statements to reflect future events or developments, except as required by law. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless specifically expressed as such, and should only be viewed as historical data. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us.
Energy Focus®,Intellitube®, RedCap®, and EnFocus™ are
our registered trademarks. We may also refer to trademarks of other corporations and organizations in this document.
Energy Focus, Inc. engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and controls. We develop, market and sell high quality light-emitting diode (“LED”) lighting and controls products in the commercial market and military maritime market (“MMM”), and began to expand our offerings into the consumer market in the fourth quarter of 2021. Our mission is to enable our customers to run their facilities, offices with greater energy efficiency, productivity, and human health and wellness through advanced LED retrofit solutions. Our goal is to be the human wellness lighting and LED technology and market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered paramount. We specialize in LED lighting
retrofit by replacing fluorescent, high-intensity discharge lighting and other types of lamps in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military-grade tubular LED (“TLED”) products, as well as other LED and lighting control products for commercial and consumer applications. We are also evaluating adjacent technologies, including Gallium Nitride (“GaN”) based power supplies and additional market opportunities for energy solution products that support sustainability in our existing channels.
NOTE 2.iBASIS
OF PRESENTATION ANDSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
i
Basis of presentation
The significant accounting policies of our Company, which are summarized below, are consistent with accounting principles generally accepted in the United States (“U.S. GAAP”) and reflect practices appropriate to the
business in which we operate. Unless indicated otherwise, the information in the Notes to the Consolidated Financial Statements relates to our operations.
We have prepared the accompanying financial data for the three months ended March 31, 2023 and 2022 pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The accompanying financial data and information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Annual Report”). The Condensed Consolidated Balance Sheet as of December 31,
2022 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly our Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022, Condensed Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022, Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2023 and 2022,
and Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022.
10
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Going Concern and Nasdaq Continued Listing Requirements Compliance
Due to our financial performance as of March 31, 2023 and December 31,
2022, including net losses of $i1.3 million for the three months ended March 31, 2023 and $i10.3 million for the twelve months
ended December 31, 2022, and total cash used in operating activities of $i1.2 million for the three months ended March 31, 2023 and $i6.7
million for the twelve months ended December 31, 2022, we determined that substantial doubt about our ability to continue as a going concern continues to exist at March 31, 2023. As a result of restructuring actions and initiatives, we have tailored our operating expenses to be more in line with our expected sales volumes; however, we continue to incur losses and have a substantial accumulated deficit.
Additionally, global supply chain and logistics constraints are impacting our inventory purchasing strategy, as we seek to manage both shortages of available components and longer lead times in obtaining components while balancing the development and implementation of an inventory reduction plan. Disruptions in global logistics networks are also impacting our lead times and ability to efficiently and cost-effectively transport
products from our third-party suppliers to our facility. As a result, we will continue to review and pursue selected external funding sources to ensure adequate financial resources to execute across the timelines required to achieve these objectives including, but not limited to, the following:
•obtaining financing from traditional or non-traditional investment capital organizations or individuals;
•obtaining funding from the sale of our common stock or other equity or debt instruments; and
•obtaining debt financing with lending terms that more closely match our business model and capital needs.
There can be no assurance that we will obtain funding on acceptable terms, in a timely fashion, or at all. Obtaining additional funding contains
risks, including:
•additional equity financing may not be available to us on satisfactory terms, particularly in light of the current price of our common stock, and any equity we are able to issue could lead to dilution for current stockholders and have rights, preferences and privileges senior to our common stock;
•loans or other debt instruments may have terms or conditions, such as interest rate, restrictive covenants, conversion features, refinancing demands, and control or revocation provisions, which are not acceptable to management or the Company’s Board of Directors (the “Board of Directors”); and
•the current environment in the capital markets and volatile interest rates,
combined with our capital constraints, may prevent us from being able to obtain adequate debt financing.
Along with the new additions to the Board of Directors, we hired a permanent Chief Executive Officer in September 2022, following a period of interim leadership by our current Lead Independent Director after the departure of our previous Chief Executive Officer in February 2022 and Chief Financial Officer and Chief Operating Officer in May 2022.
Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to ensure adequate external funding, timely re-organizational actions, current financial position, liquid resources, obligations due or anticipated within the next year, development and implementation of an excess inventory reduction plan, plans and initiatives in our research and development, product development and sales
and marketing, and development of potential channel partnerships, if adequately executed, could provide us with an ability to finance our operations through the next twelve months and may mitigate the substantial doubt about our ability to continue as a going concern.
Our Common Stock is listed on the Nasdaq Capital Market, which has as one of its continued listing requirements a minimum bid price of at least $i1.00 per share. Recently our Common Stock has traded significantly below $i1.00
per share. On August 23, 2022, we received a letter from the Listing Qualifications Staff (the “Staff”) of The Nasdaq Stock Market notifying us that we were no longer in compliance with the requirement to maintain a minimum closing bid price of $i1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”), because the closing bid price for our common stock was below the minimum $i1.00
per share for i30 consecutive business days. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were provided an initial period of 180 calendar days, or until February 20, 2023, to regain compliance with the Bid Price Rule. During the initial compliance period, our Common Stock continued to trade on the Nasdaq Capital Market, but did not satisfy the Bid Price Rule.
On November 16, 2022, we received a letter from the Staff
notifying us that we were no longer in compliance with Nasdaq Listing Rule 5550(b)(1), which requires listed companies to maintain stockholders’ equity of at least $i2.5 million if they do not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations (the “Minimum Stockholders’ Equity Rule”). Our Form 10-Q for the Quarterly Period Ended September 30,
11
ENERGY
FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2022 filed on November 10, 2022 reflected that our stockholders’ equity as of September 30, 2022 was $i1.5 million. Based on our timely submission of our plan to regain compliance
(the “Plan”), Nasdaq granted us an extension through May 15, 2023 to regain compliance with the Minimum Stockholders’ Equity Rule.
On February 21, 2023, we received written notification (the “Bid Price Notification”) from the Staff stating that we had not regained compliance with the Bid Price Rule and our common stock is subject to delisting from Nasdaq. On February 24, 2023, we submitted a request for a hearing before the Nasdaq Hearings Panel (the “Panel”) to appeal the delisting (the “Appeal”). Under Nasdaq rules, the delisting of the Company’s common stock was stayed during the pendency of the Appeal and, during such time, the
Company’s common stock continued to be listed on Nasdaq.
On March 28, 2023, the Company received written notification (the “Additional Staff Determination”) from the Staff stating that (i) following the Bid Price Notification, and in accordance with Listing Rule 5810(c)(2)(A), Nasdaq is no longer permitted to consider the stockholders’ equity compliance plan, (ii) the Additional Staff Determination serves as an additional basis for delisting the Company’s common stock from Nasdaq and (iii) the Panel will consider the Additional Staff Determination in rendering a determination regarding the continued listing of the Company’s
common stock on Nasdaq.
On April 6, 2023, the Company participated in the Appeal before the Panel. The Company provided an update to the Panel on the Company’s substantial progress made towards the previously submitted Stockholders’ Equity Requirement Plan during the three months ended March 31, 2023, and requested the Panel grant the Company an exception to (1) re-allow the previously granted exception until May 15, 2023 for the
Company to regain compliance with the Stockholders’ Equity Requirement and (2) grant an exception allowing the Company up to 180 days following the Bid Price Notification to regain compliance with the Bid Price Requirement by effecting a reverse stock split following stockholder approval at the Annual Meeting. On May 1, 2023, the Panel granted the Company’s request to continue the Company’s listing on Nasdaq, subject to the following conditions: (1) on or before May 15, 2023, the Company shall file with the SEC its quarterly report
for the three months ended March 31, 2023 demonstrating compliance with the Stockholders’ Equity Requirement and (2) on or before July 7, 2023, the Company shall demonstrate compliance with the Bid Price Rule.
As of the date of this Quarterly Report, the Company believes it has regained compliance with the Stockholders’ Equity Requirement for continued listing on the Nasdaq Capital Market. However, there can be no assurance that the Appeal will be successful or that the Company will be able to regain compliance with the Bid Price Rule or maintain compliance with the Stockholders’
Equity Requirement, Bid Price Rule, or other Nasdaq listing requirements. If the Company fails to regain compliance with Nasdaq’s continued listing standards in accordance with the Panel’s decision, the Company’s common stock will be subject to delisting from Nasdaq.
i
Use of estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts
reported in our financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, actual results may vary from the estimates. Estimates include, but are not limited to, the establishment of reserves for accounts receivable, sales returns, inventory obsolescence and warranty claims; the useful lives of property and equipment; valuation allowance for net deferred taxes; and stock-based compensation. The Company began using estimates for its calculation of impairment to accounts receivable under Accounting Standards Codification (“ASC”) 326 commencing in 2023. In addition, estimates and assumptions associated with the determination of the fair value of financial
instruments and evaluation of long-lived assets for impairment requires considerable judgment. Actual results could differ from those estimates and such differences could be material.
i
Revenue
Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration we expect to receive in exchange for the transferred products. We recognize revenue at the point
in time when we transfer the promised products to the customer and the customer obtains control over the products. Distributors’ obligations to us are not contingent upon the resale of our products. We recognize revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales. We provide for product returns based on historical return rates. While we incur costs for
12
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
sales commissions
to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year. We do not incur any other incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described below. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.
i
The
following table provides a disaggregation of product net sales for the periods presented (in thousands):
Our trade accounts receivable consists of amounts billed to and currently due from customers. Our customers are concentrated in the United States. In the normal course of business, we extend unsecured credit to our customers related to the sale of our products. Credit is extended to customers based on an evaluation of the customer’s financial condition and the amounts due are stated at their estimated net realizable value. We maintain allowances for sales returns and doubtful accounts receivable to provide for the estimated number of account receivables that will not be collected. The allowance is based on an assessment of forward looking customer credit-worthiness and historical payment experience, the age of outstanding receivables, and performance guarantees to the extent applicable. Past due amounts are written off when our internal collection efforts have been unsuccessful, and payments subsequently received
on such receivables are credited to the allowance for doubtful accounts. We do not generally require collateral from our customers.
Our standard payment terms with customers are net i30 days from the date of shipment, and we do not generally offer extended payment terms to our customers, but exceptions are made in some cases for major customers or with particular orders. Accordingly, we do not adjust trade accounts receivable for the effects of financing, as we expect the period between the transfer of product to the customer and the receipt of payment from the customer to be in line with
our standard payment terms.
Through November 2022, we utilized a third-party account receivable insurance program with a very high credit worthy insurance company where we had the large majority of the accounts receivable arising during the policy term insured with a portion of self-retention. This third party also provided credit-worthiness ratings and metrics that significantly assisted us in evaluating the credit-worthiness of both existing and new customers. Although the insurance policy is no longer in place, all invoices issued under the previous coverage period are still covered under the policy.
On January 1, 2023, the Company adopted ASC 326, Measurement of Credit Losses on Financial Instruments (“CECL”). The standard adds to U.S.
GAAP an impairment model known as the CECL model, which is based on expected losses rather than incurred losses. This standard only impacts the Company’s trade receivables. The Company decided to use the roll rate method of valuing its reserve for trade receivables. The reserve is based on a careful review of claims made during 2022 against unpaid invoices. This resulted in a $i2.6 thousand
adjustment to Retained Earnings as of December 31, 2022 and a charge of $i12 thousand to bad debt expense in the first quarter of 2023.
Pursuant to ASC 606, Revenue Recognition, contract assets and contract liabilities as of the beginning
and ending of the reporting periods must be disclosed. iBelow is the breakout of the Company’s contract assets for such periods:
/
13
ENERGY
FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
All of our long-lived fixed assets are located in the United States. For the three months ended March 31, 2023, i1% of sales were attributable to customers outside the United States. For the three months ended March 31, 2022, i2%
of sales were attributable to customers outside the United States. The geographic location of our net sales is derived from the destination to which we ship the product.
i
Net loss per share
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted loss per share gives effect to all dilutive potential shares of common stock outstanding during the period. Dilutive potential
shares of common stock consist of incremental shares upon the exercise of stock options, warrants and convertible securities, unless the effect would be anti-dilutive.
i
The following table presents a reconciliation of basic and diluted loss per share computations (in thousands):
Basic
and diluted weighted average shares of common stock outstanding
ii16,172/
ii6,437/
/
As
a result of the net loss we incurred for the three months ended March 31, 2023, convertible securities representing approximately i175 thousand shares of common stock were excluded from the basic loss per share calculation because their inclusion would have been anti-dilutive.
As a result of the net loss we incurred for the three months ended March
31, 2022, warrants and convertible securities representing approximately i16 thousand and i175 thousand
shares of common stock, respectively, were excluded from the basic loss per share calculation because their inclusion would have been anti-dilutive.
i
Product warranties
We warrant our commercial and MMM LED products and controls for periods generally ranging from five to iiten
years/. Warranty settlement costs consist of actual amounts expensed for warranty, which are largely a result of the cost of replacement products or rework services provided to our customers. A liability for the estimated future costs under product warranties is maintained for products under warranty based on the actual claims incurred to date and the estimated nature, frequency, and costs of future claims. As warranty coverage from prior period sales expire, previous accruals are released. These estimates are inherently uncertain and changes to our historical or projected experience may cause material changes to our warranty reserves in the future. We continuously review the assumptions related to the adequacy of our warranty reserve, including product failure rates, and make adjustments to the existing warranty liability
when there are changes to these estimates or the underlying replacement product costs, or the warranty period expires.
/
14
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below. We classify the inputs used to measure fair value into the following hierarchy:
Level 1
Unadjusted quoted prices in active markets for identical assets or liabilities.
Level
2
Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.
Level 3
Unobservable inputs for the asset or liability.
The carrying amounts of certain financial instruments including cash, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their short maturities. Based on borrowing rates currently available to us for loans with similar terms, the carrying value of borrowings under our revolving credit facilities also approximates fair value.
A financial instrument’s
level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. In determining the appropriate levels, we perform a detailed analysis of the assets and liabilities whose fair value is measured on a recurring basis. We review and reassess the fair value hierarchy classifications on a quarterly basis. Changes from one quarter to the next related to the observability of inputs in a fair value measurement may result in a reclassification between fair value hierarchy levels. There were no reclassifications for all periods presented.
i
Certain
risks and concentrations
We have certain customers whose net sales individually represented 10% or more of our total net sales, or whose net trade accounts receivable balance individually represented 10% or more of our total net trade accounts receivable; we have certain suppliers, which individually represent 10% or more of our total purchases, or whose trade accounts payable balance individually represented 10% or more of our total trade accounts payable balance, as follows:
For the three months ended March 31, 2023, sales to our primary distributor for the U.S. Navy, a U.S. Navy shipbuilder, and a distributor to the U.S. Department of Defense, accounted for approximately i22%,
i27%, and i11% of net sales, respectively. When sales for our top military customers are combined, total net sales of military products comprised approximately i49%
of net sales for the same period. For the three months ended March 31, 2022, sales to our primary distributor for the U.S. Navy, a U.S. Navy shipbuilder, and a commercial building systems provider, accounted for approximately i15%, i21%,
and i19% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately i37%
of net sales for the same period.
/
15
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A distributor for the U.S. Navy, a U.S. Navy shipbuilder, and a distributor to the U.S. Department of Defense, accounted for approximately i32%,
i22%, and i17% of net trade accounts receivable, respectively, at March 31, 2023. At December 31, 2022, a distributor to the U.S.
Department of Defense accounted for i25% of our net trade accounts receivable, and when combined with our net trade accounts receivable to shipbuilders for the U.S. Navy, total net accounts receivable related to U.S. Navy sales is i30%
of our net trade accounts receivable.
No one supplier accounted for more than i10% of our total expenditures for the three months ended March 31, 2023. For the three months ended March 31, 2022, one offshore supplier accounted for approximately i19%
of total expenditures.
At March 31, 2023 and December 31, 2022, one offshore supplier accounted for approximately ii36/%
of our trade accounts payable balance.
i
Recent adopted accounting standard
In June 2016, the Financial Accounting Standards Board issued Accounting Standard Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which significantly changes the accounting for credit losses on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain
financial instruments, including trade receivables, and requires an entity to recognize an allowance based on its estimate of expected credit losses rather than incurred losses. For smaller reporting companies, this standard became effective for interim and annual periods starting after December 15, 2022, and has been adopted by the Company. The adoption of this guidance did not have a material impact on our consolidated financial position or results of operations.
NOTE 3. iINVENTORIES
i
Inventories
are stated at the lower of standard cost (which approximates actual cost determined using the first-in, first-out cost method) or net realizable value, and consist of the following (in thousands):
iProperty
and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets and consist of the following (in thousands):
The
Company leases certain equipment, manufacturing, warehouse and office space under non-cancellable operating leases with expirations through 2027 under which it is responsible for related maintenance, taxes and insurance. The Company had one finance lease on a forklift containing a bargain purchase option, which was exercised in July 2022. As of March 25, 2022, the terms of our real estate operating lease have been modified beginning July 1, 2022 and extended through 2027. In accordance with ASC 842, Leases (“Topic 842”), the related lease liability was remeasured and the right-of-use asset was adjusted for each lease at the time of modification. The present value of the lease obligations for the lease was calculated using an incremental
borrowing rate of i16.96%, which was the Company’s blended borrowing rates (including interest, annual facility fees, collateral management fees, bank fees and other miscellaneous lender fees) on its revolving lines of credit with Crossroads Financial Group, LLC (as described below in Note 6, “Debt”) and Factors Southwest L.L.C. (as described below in Note 6, “Debt”). The present value of the other remaining lease obligations continues to be calculated using an incremental borrowing
rate of i7.25% (which excludes the annual facility fee and other lender fees), which was the Company’s borrowing rate on its former revolving line of credit with Austin Financial Services, Inc. (the “Austin Credit Facility”). The weighted average remaining lease term for operating leases is i4.2
years.
i
Components of the operating lease costs recognized in net loss were as follows (in thousands):
iFuture minimum lease payments required under operating leases for each of the 12-month rolling periods below in effect at March 31, 2023 are as follows (in thousands):
Operating
Leases
April 2023 to March 2024
$
i385
April 2024 to March 2025
i379
April
2025 to March 2026
i387
April 2026 to March 2027
i391
April
2027 to March 2028
i99
Total future undiscounted lease payments
i1,641
Less
imputed interest
(i461)
Total lease obligations
$
i1,180
/
iSupplemental
cash flow information related to leases for the three months ended March 31, 2023 and 2022, was as follows (in thousands):
On August 11, 2020, we entered into itwo
debt financing arrangements (together, the “Credit Facilities”) that allowed for expanded borrowing capacity at a lower blended borrowing cost. The first arrangement is an inventory financing facility (the “Inventory Facility”) pursuant to the Loan and Security Agreement (the “Inventory Loan Agreement”) between the Company and Crossroads Financial Group, LLC, a North Carolina limited liability company (“Crossroads”). Borrowings under the original Inventory Facility were permitted up to the lower of (i) $i3.0
million, which amount was subsequently increased to $i3.5 million in April 2021, and (ii) a borrowing base determined from time to time based on the value of the Company’s eligible inventory, valued at i75%
of inventory costs or i85% of the inventory net orderly liquidation value, less the availability reserves.
On January 18, 2023, the Company and Crossroads entered into an amendment to the Inventory Loan Agreement (the “Crossroads Amendment”) to restructure and pay down the Inventory Facility. The Crossroads Amendment provides that the
Company make payments to reduce the outstanding obligations under the Inventory Facility of $i750 thousand by January 20, 2023 and $i250
thousand by February 15, 2023 (which amounts the Company has paid). The Company also agreed to make monthly payments of approximately $i40 thousand towards the remaining outstanding obligations under the Inventory Facility, and to reduce the maximum amount that may be available to the
Company under the Inventory Facility from $i3.5 million to $i500 thousand, subject to the borrowing
base as set forth in the Inventory Loan Agreement.
Pursuant to the Crossroads Amendment, Crossroads and the Company also agreed to extend the Inventory Facility’s current term through December 31, 2023, while eliminating the minimum borrowing amount and unused line fees and reducing the monthly service fee to a lower, fixed amount. The Company also agreed to a slightly increased interest rate, which was more than offset by the reduction in the monthly service fees. Pursuant to the Crossroads Amendment, the interest rate on borrowings under the Inventory Facility is now a per annum rate equal to (i) the Three-Month LIBOR rate plus i5.5%
(currently i10.28% per annum) or (ii) at Crossroads’ discretion, an alternative reference rate, SOFR (Secured Overnight Financing Rate), plus i6% (currently i10.176%
per annum). As of March 31, 2023, the effective rate was equal to i10.44%.
The second Credit Facility was a receivables financing facility (the “Receivables Facility”) pursuant to the Loan and Security Agreement (the “Receivables Loan Agreement”) between the Company and Factors Southwest L.L.C. (d/b/a FSW Funding), an Arizona limited liability company (the “RF Lender”). Borrowings
under the Receivables Facility were permitted up to the lower of (i) $i2.5 million or (ii) a borrowing base determined from time to time based on the value of the Company’s eligible accounts receivable, valued at i90%
of the face value of such accounts receivable, less availability reserves, if any.
On February 7, 2023, the Company and the RF Lender agreed to terminate the Receivables Facility. All outstanding amounts under the Receivables Facility were repaid prior to termination, and there were no prepayment fees in connection with termination. The Receivables Facility was secured by substantially all of the present and future assets of the Company and was subject to an intercreditor agreement with the IF Lender, which intercreditor agreement was also terminated.
Borrowings under the Inventory Facility were approximately $i400
thousand and $i1.4 million at March 31, 2023 and December 31, 2022, respectively. Borrowings under the Receivables Facility were approximately $i67
thousand at December 31, 2022. These facilities are recorded in the Condensed Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022 as a current liability under the caption “Credit line borrowings.” Outstanding balances include unamortized net issuance costs totaling $i29 thousand and $i47
thousand for the Inventory Facility as of March 31, 2023 and December 31, 2022, respectively, and $i15 thousand for the Receivables Facility as of December 31, 2022.
Promissory Notes
During the third and fourth quarters of the year ended December 31, 2022, we entered into short-term unsecured
promissory notes (the “2022 Promissory Notes”) with Mei Yun (Gina) Huang, Jay Huang, and Tingyu Lin. Ms. Huang is a member of the Board of Directors and Mr. Huang became a member of the Board of Directors in January 2023 in connection with the Sander Private Placement, as described below in Note 8, “Stockholders’ Equity.” The total liability for the 2022 Promissory Notes was $i1.5 million at December 31, 2022. All of the 2022 Promissory Notes were exchanged for common stock on January
17, 2023. See Note 8, “Stockholders’ Equity.”
20
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On April 21, 2022, we entered into a note purchase agreement (the “2022 Streeterville Note Purchase Agreement”) with Streeterville Capital, LLC (“Streeterville”) pursuant to which we sold and issued to Streeterville a promissory note in the principal amount of approximately $i2.0 million (as amended, the “2022 Streeterville Note”). The 2022 Streeterville Note was issued with an original issue
discount of $i215 thousand and Streeterville paid a purchase price of approximately $i1.8 million for the 2022 Streeterville Note, from which the
Company paid $i15 thousand to Streeterville for Streeterville’s transaction expenses.
The 2022 Streeterville Note had an original maturity date of April 21, 2024, and accrues interest at i8%
per annum, compounded daily, on the outstanding balance. On January 17, 2023, we agreed with Streeterville to restructure and pay down the 2022 Streeterville Note and extend its maturity date to December 1, 2024 (the “2022 Streeterville Note Amendment”). We agreed to make payments to reduce the outstanding amounts of the 2022 Streeterville Note by $i500 thousand by January 20, 2023 (which amount has been paid) and by $i250
thousand by July 14, 2023 ($i125 thousand of which has already been satisfied pursuant to the March 2023 Exchange Agreement (as defined below)). Streeterville agreed to extend the term of the 2022 Streeterville Note through December 1, 2024, and beginning January 1, 2024, we would make twelve monthly repayments of approximately $i117
thousand each. We would have the right to prepay any of the scheduled repayments at any time or from time to time without additional penalty or fees. Provided we make all payments as scheduled or earlier, the 2022 Streeterville Note will be deemed paid in full and shall automatically be deemed canceled.
On March 31, 2023, the Company entered into an Exchange Agreement (the “March 2023 Exchange Agreement”) with Streeterville, pursuant to which we agreed to (i) partition from the 2022 Streeterville Note a new Promissory Note (the “March 2023 Partitioned Note”) in the original principal amount of $i250
thousand (the “March 2023 Exchange Amount”), (ii) cause the outstanding balance of the 2022 Streeterville Note to be reduced by an amount equal to the March 2023 Exchange Amount, and (iii) exchange (the “March 2023 Exchange”) the March 2023 Partitioned Note for i502,008 shares of the Company’s common stock.
The March 2023 Exchange was priced at-the-market under the Nasdaq rules and was effected
pursuant to one or more exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). There are no gross proceeds to the Company in respect of the March 2023 Exchange, provided that $i125 thousand of the March 2023 Exchange Amount will be applied toward the $i250
thousand payment due on or before July 14, 2023 pursuant to the 2022 Streeterville Note Amendment, $i125 thousand will be credited to satisfy the December 1, 2024 required payment and a portion of the November 1, 2024 required payment, in each case pursuant to the 2022 Streeterville Note Amendment.
The total liability for the 2022 Streeterville Note, net of discount and financing fees, was
approximately $i1.3 million and $i2.0 million at March 31, 2023 and December 31,
2022, respectively.
In the event our common stock is delisted from Nasdaq, the amount outstanding under the 2022 Streeterville Note will automatically increase by i15% as of the date of such delisting.
21
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On April 27, 2021, we entered into a note purchase agreement with Streeterville pursuant to which we sold and issued to Streeterville a promissory note in the principal amount of approximately $i1.7 million (the “2021 Streeterville Note”). The 2021 Streeterville Note was issued with an original issue discount of $i194 thousand
and Streeterville paid a purchase price of $i1.5 million for the 2021 Streeterville Note, after deduction of $i15 thousand of Streeterville’s transaction expenses. The 2021
Streeterville Note had a maturity date of April 27, 2023, and accrued interest at i8% per annum, compounded daily, on the outstanding balance.
Beginning on November 1, 2021, Streeterville could require the Company to redeem up to $i205 thousand
of the 2021 Streeterville Note in any calendar month. The Company had the right on ithree occasions to defer all redemptions that Streeterville could otherwise require the Company to make during any calendar month. Each exercise of this deferral right by the
Company increased the amount outstanding under the Streeterville Note by i1.5%. The Company exercised this right twice during the fourth quarter of 2021, once during the second quarter of 2022 and once during the third quarter of 2022. The Company and Streeterville agreed to exchange common stock, priced at-the-market, for the required redemptions in October
2022 and December 2022, totaling $i305 thousand converted to equity. These exchanges satisfied the redemption notices provided by Streeterville, and following the December 2022 exchange, the 2021 Streeterville Note was paid in full. We wrote off $i100 thousand
in remaining original issue discount costs at that time.
NOTE 7. iINCOME TAXES
As a result of the operating loss incurred during each of the three months ended March 31, 2023 and 2022, and after the application of the annual limitation set
forth under Section 382 of the Internal Revenue Code of 1986, as amended (the “IRC”), it was not necessary to record a provision for U.S. Federal income tax.
The valuation allowance was recorded due to uncertainties related to our ability to realize the deferred tax assets, primarily consisting of certain net operating loss carry-forwards. The valuation allowance is based on management’s estimates of taxable income by jurisdiction and the periods over which the deferred tax assets will be recoverable.
At December 31, 2022, we had a net operating loss carry-forward of approximately
$i132.4 million for federal income tax purposes ($i77.6 million for state and local income tax purposes).
However, due to changes in our capital structure, approximately $i71.0 million of the $i132.4
million is available to offset future taxable income after the application of the limitations found under Section 382 of the Internal Revenue Code of 1986, as amended. As a result of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income and can be carried forward indefinitely. The $i9.2 million and $i9.6
million in federal net operating losses generated in 2022 and 2021, respectively, will be subject to the new limitations under the Tax Act. If not utilized, the carry-forwards generated prior to December 31, 2017 of $i37.5 million will begin to expire in 2023 for federal purposes and have begun to expire for state and local purposes. For a full discussion of the estimated restrictions on our utilization of net operating loss carry-forwards, please
refer to Note 11, “Income Taxes,” included under Item 8, “Financial Statements and Supplementary Data,” of our 2022 Annual Report.
NOTE 8.iSTOCKHOLDERS’ EQUITY
March 2023 Private Placements
On March
28, 2023,the Company entered into a securities purchase agreement with Jay Huang, a member of the Board of Directors, pursuant to which the Company agreed to issue and sell, in a private placement (the “March 28, 2023 Private Placement”), i108,502 shares of the
Company’s common stock for a purchase price of $i0.5609 per share.
On March 30, 2023, the Company entered into a securities purchase agreement with Mei Yun (Gina) Huang, a member of the Board of Directors, pursuant to which the Company agreed to issue and sell, in a private placement (collectively with the March
28, 2023 Private Placement, the “March 2023 Private Placements”), i500,000 shares of the Company’s common stock for a purchase price of $i0.5000
per share.
22
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Aggregate gross proceeds to the Company in respect of the March 2023 Private Placements were $i305
thousand, before deducting estimated offering expenses payable by the Company. Each of the March 2023 Private Placements was priced at-the-market under the Nasdaq rules.
February 2023 Private Placement
On February 24, 2023, the Company entered into a securities purchase agreement with Mei Yun (Gina) Huang, a member of the Board of Directors, pursuant to which the Company agreed to issue and sell, in a private placement (the “February 2023 Private Placement”), i803,212
shares of the Company’s common stock, for a purchase price of $i0.4980 per share.
Gross proceeds to the Company in respect of the February 2023 Private Placement were $i400 thousand,
before deducting estimated offering expenses payable by the Company. The February 2023 Private Placement was priced at fair market value under the Nasdaq rules.
January 2023 Sander Electronics Private Placement
On January 17, 2023, the Company entered into a securities purchase agreement (the “Sander Purchase Agreement”) with certain purchasers associated with Sander Electronics, Inc., pursuant to which the Company agreed to issue and sell in a private placement (the “Sander Private Placement”) an aggregate of i5,446,252
shares of common stock for a purchase price per share of $i0.5008. Consideration for the transaction included exchange of approximately $i657 thousand in the aggregate of outstanding amounts on previous short-term bridge financings,
including the 2022 Promissory Notes issued to Mr. Huang, as described above in Note 6, “Debt”.
Aggregate gross proceeds from the Sander Private Placement were approximately $i2.1 million. The Sander Private Placement was priced at-the-market under the Nasdaq rules. Pursuant to the Sander Purchase Agreement, the Company agreed to increase the size of the Board of Directors to eight members and to appoint each
of Jay (Chiao Chieh) Huang and Wen-Jeng Chang as a director for a term expiring at the 2023 annual meeting of the Company’s stockholders or his earlier resignation, death or removal in accordance with the Company’s bylaws.
January 2023 Transactions with Mei Yun (Gina) Huang
On January 5, 2023, the Company entered into a securities purchase agreement with Mei Yun (Gina) Huang, a member of the Board of Directors, pursuant to which the
Company agreed to issue and sell, in a private placement, i257,798 shares of the Company’s common stock, for a purchase price of $i0.3879
per share. On January 10, 2023, the Company entered into a securities purchase agreement with Ms. Huang, pursuant to which the Company agreed to issue and sell, in a private placement, i325,803 shares of the Company’s
common stock for a purchase price of $i0.4604 per share.
Aggregate gross proceeds to the Company in respect of these private placements to Ms. Huang are $i250 thousand,
before deducting estimated offering expenses payable by the Company. Each of the private placements to Ms. Huang was priced at fair market value under the Nasdaq rules.
On January 17, 2023, the Company and Ms. Huang entered into exchange agreements pursuant to which the Company and Ms. Huang agreed to exchange the approximately $i809,000
aggregate outstanding amounts on previous short-term bridge financings, including the 2022 Promissory Notes issued to Ms. Huang, as described above in Note 6, “Debt”, for an aggregate of i1,436,959 shares of common stock at a price per share of $i0.5630. The
exchanges were priced at fair market value under the Nasdaq rules.
June 2022 Private Placement
In June 2022, we completed a private placement (the “June 2022 Private Placement”) with certain institutional investors for the sale of i1,313,462 shares of our common stock at a purchase price of $i1.30
per share. We also sold to the same institutional investors (i) pre-funded warrants (the “June 2022 Pre-Funded Warrants”) to purchase i1,378,848 shares of common stock at an exercise price of $i0.0001
per share and (ii) warrants (collectively with the June 2022 Pre-Funded Warrants, the “June 2022 Warrants”) to purchase up to an aggregate of i2,692,310 shares of common stock at an exercise price of $i1.30
per share. In connection with the June 2022 Private Placement, we paid the placement agent commissions of $i252 thousand, plus $i35 thousand
in expenses, and we also paid legal, accounting and other fees of $i47 thousand. Total offering costs of $i334 thousand have been presented as a reduction of additional
paid-in capital and have been netted within equity in the Condensed Consolidated Balance Sheet as of December 31, 2022. Net proceeds to us from the June 2022
23
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Private Placement were approximately $i3.2
million. We determined the exercise price of the June 2022 Pre-Funded Warrants to be nominal and, as such, have considered the i1,378,848 shares underlying them to be outstanding effective June 7, 2022, for purposes of calculating net loss per share.
In July 2022, all of the June 2022 Pre-Funded Warrants were exercised. As of March 31, 2023,
June 2022 Warrants to purchase an aggregate of i2,692,310 shares of common stock remained outstanding, with an exercise price of $i1.30
per share. The exercise of the remaining June 2022 Warrants outstanding could provide us with cash proceeds of up to $i3.5 million in the aggregate.
December 2021 Private Placement
In December 2021, we completed a private placement (the “December 2021 Private Placement”) with certain institutional investors for the sale of i1,193,185
shares of our common stock at a purchase price of $i3.52 per share. We also sold to the same institutional investors (i) pre-funded warrants (the “December 2021 Pre-Funded Warrants”) to purchase i85,228
shares of common stock at an exercise price of $i0.0001 per share and (ii) warrants (collectively with the December 2021 Pre-Funded Warrants, the “December 2021 Warrants”) to purchase up to an aggregate of i1,278,413
shares of common stock at an exercise price of $i3.52 per share. In connection with the December 2021 Private Placement, we paid the placement agent commission of $i360 thousand
plus $i42 thousand in expenses and we also paid legal, accounting and other fees of $i97 thousand.
Total offering costs of $i499 thousand have been presented as a reduction of additional paid-in capital and have been netted within equity in the Consolidated Balance Sheet as of December 31, 2021. Net proceeds from the December 2021 Private Placement were approximately $i4.0
million. We determined the exercise price of the December 2021 Pre-Funded Warrants to be nominal and, as such, considered the i85,228 shares underlying them to be outstanding effective December 16, 2021, for purposes of calculating net loss per share.
In January 2022, all of the December 2021 Pre-Funded Warrants were exercised. As of March 31, 2023, December 2021 Warrants to purchase an aggregate of i1,278,413
shares remained outstanding, with an exercise price of $i3.52 per share. The December 2021 Warrants expire on December 16, 2026. The exercise of the remaining December 2021 Warrants outstanding could provide us with cash proceeds of up to $i4.5
million in the aggregate.
Preferred Stock
On March 29, 2019, we issued $i1.7 million aggregate principal amount of subordinated convertible promissory notes (the “Convertible Notes”) to certain investors in a private placement exempt from registration requirements of the Securities Act. The Convertible Notes had a maturity date of December
31, 2021 and bore interest at a rate of i5.0% per annum until June 30, 2019 and at a rate of i10.0% thereafter.
Pursuant to the terms of the Convertible
Notes, on January 16, 2020, following approval by our stockholders of certain amendments to the Company’s Certificate of Incorporation, the principal amount of all of the Convertible Notes and the accumulated interest thereon at the date of conversion (totaling $i1.8 million)
were converted at a conversion price of $i0.67 per share into an aggregate of i2,709,018 shares of the
Company’s Series A Preferred Stock, which is convertible on a one-for-five basis into shares of our common stock. During the year ended December 31, 2020, i111,548 shares of the Series A Preferred Stock were converted into i22,310
shares of common stock. During the year ended December 31, 2021, i1,721,023 shares of Series A Preferred Stock were converted into i344,205
shares of common stock. The Series A Preferred Stock that was converted in 2021 was held by a Schedule 13D ownership group (under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended, and Rule 13d-5 promulgated thereunder) that includes Fusion Park LLC and 5 Elements Global Fund L.P. (controlled affiliates of James Tu, the Company's former Executive Chairman and Chief Executive Officer), as well as Brilliant Start Enterprise Inc. and Jag International Ltd. (controlled affiliates of Mei Yun (Gina) Huang, a member of the Company's Board of Directors).
The Series A Preferred Stock was created by the filing of a Certificate of Designation with the Secretary of State of the State of Delaware on March
29, 2019, which designated i2,000,000 shares of the Company’s preferred stock, par value $i0.0001
per share, as Series A Preferred Stock (the “Original Series A Certificate of Designation”). On January 15, 2020 with prior stockholder approval, the Company amended its Certificate of Incorporation to increase the number of authorized shares of preferred stock to i5,000,000. The Original Series A Certificate of Designation was also amended
on January 15, 2020, to increase the number of shares of preferred stock designated as Series A Preferred Stock to i3,300,000 (the Original Series A Certificate of Designation, as so amended, the “Series A Certificate of Designation”).
24
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Pursuant to the Series A Certificate of Designation, each holder of outstanding shares of Series A Preferred Stock is entitled to vote with holders of outstanding shares of common stock, voting together as a single class, with respect to any and all matters presented to the stockholders of the Company for their action or consideration, except as provided by law. In any such vote, each share of Series A Preferred Stock shall entitle its holder to a number of votes equal to i11.07%
of the number of shares of common stock into which such share of Series A Preferred Stock is convertible.
The Series A Preferred Stock (a) has a preference upon liquidation equal to $i0.67 per share and then participates on an as-converted basis with the common stock with respect to any additional distributions, (b) shall receive any dividends declared and payable on our common stock on an as-converted basis, and (c) is convertible at the option of the holder into shares of our common stock on a one-for-five basis. On March
29, 2019, the Company also filed a Certificate of Elimination with respect to its authorized, but unissued, Series A Participating Preferred Stock, to return such shares to the status of undesignated preferred stock available for designation as Series A Preferred Stock.
The purchase agreement related to the Convertible Notes contains customary representations and warranties and provides for resale registration rights with respect to the shares of our common stock issuable upon conversion of the Series A Preferred Stock.
January 2020 Equity Offering
Issuance of Common Stock and Warrants
In January 2020, we completed a registered direct offering for the sale of i688,360
shares of our common stock to certain institutional investors, at a purchase price of $i3.37 per share. We also sold, to the same institutional investors, warrants (the “January 2020 Investor Warrants”) to purchase up to i688,360
shares of common stock at an exercise price of $i3.37 per share in a concurrent private placement for a purchase price of $i0.625
per warrant. In addition, we issued to the placement agent in connection with such registered direct offering and concurrent private placement warrants (the “January 2020 Placement Agent Warrants” and, collectively with the January 2020 Investor Warrants, the “January 2020 Warrants”) to purchase up to i48,185 shares of common stock at an exercise price of $i4.99
per share.
January 2020 Warrants issued to purchase an aggregate of i229,414 shares remain outstanding at March 31, 2023 with a weighted average exercise price of $i3.67
per share. The exercise of January 2020 Warrants could provide us with cash proceeds of up to approximately $i0.8 million in the aggregate if all January 2020 Warrants are exercised. During the three months ended March 31, 2023 and March 31, 2022, iino/
January 2020 Warrants were exercised.
i
As of March 31, 2023 and 2022, we had the following outstanding January 2020 Warrants:
Stock-based compensation expense is attributable to stock options and restricted stock unit awards. For all stock-based awards, we recognize expense using a straight-line amortization method.
iThe
following table summarizes stock-based compensation expense and the impact it had on operations for the periods presented (in thousands):
Total
unearned stock-based compensation was $i144 thousand at March 31, 2023, compared to $i285
thousand at March 31, 2022. These costs will be charged to expense and amortized on a straight-line basis in future periods. The weighted average period over which the unearned compensation at March 31, 2023 is expected to be recognized is approximately i2.6 years.
Stock
options
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. iEstimates utilized in the calculation include the expected life of the option, risk-free interest rate, and expected volatility, and are further detailed below. Note that there were no grants made during the three months ended March 31, 2023.
iA summary of restricted stock unit activity under all outstanding stock incentive plans for the three months ended March 31, 2023 is presented as follows:
Restricted Stock
Units
Weighted Average Grant Date Fair Value
Weighted Average Remaining Contractual Life (in years)
As of March 31, 2023, we had approximately $i1,391 thousand
in outstanding purchase commitments for inventory. Of this amount, approximately $i1,376 thousand is expected to ship in the second quarter of 2023, and $i15 thousand
expected to ship in the third quarter of 2023 and thereafter.
NOTE 10. iOTHER INCOME
Employee Retention Tax Credit
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020, provides an Employee Retention
Tax Credit (“ERTC”) that is a refundable tax credit against certain employer taxes. The ERTC was subsequently amended by the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the Consolidated Appropriation Act of 2021, and the American Rescue Plan Act of 2021, all of which amended and extended the ERTC availability and guidelines under the CARES Act. Following these amendments, we and other businesses became retroactively eligible for the ERTC, and as a result of the foregoing legislation, are eligible to claim a refundable tax credit against the employer share of Social Security taxes equal to 70% of the qualified wages paid to employees between January 1, 2021 and September 30, 2021. Qualified wages are limited to $10,000 per employee per calendar quarter in 2021 for a maximum allowable ERTC per employee of $7,000 per calendar quarter in 2021.
For
purposes of the amended ERTC, an eligible employer is defined as having experienced a significant (20% or more) decline in gross receipts during each of the first three 2021 calendar quarters when compared with the same quarter in 2019 or the immediately preceding quarter to the corresponding calendar quarter in 2019. The credit is taken against the
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ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Company’s share of Social Security Tax when the Company’s
payroll provider files, or subsequently amends the applicable quarterly employer tax filings.
Under the amended guidelines, we are eligible to receive the ERTC for the second and third quarters of 2021. As part of the filing of our employer tax filings for the third quarter of 2021, we applied for and received a refund of $i431 thousand, and we amended our filing for the second quarter of 2021, for which we received an additional refund of approximately $i445 thousand.
These amounts are recorded as other income in the Consolidated Statements of Operations during the quarter ended December 31, 2021, and the $ii445/ thousand
as an expected receivable in the Consolidated Balance Sheet as of March 31, 2023 and December 31, 2022.
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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto included in Part I, Item 1, “Financial Statements” of this Quarterly Report, as well as Item
7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 31, 2022 (“2022 Annual Report”).
Overview
Energy Focus, Inc. engages primarily in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and controls. We develop, market and sell high quality light-emitting diode (“LED”) lighting and controls products in the commercial market and military maritime market (“MMM”), and expanded our offerings into the consumer market in the fourth quarter of 2021. Our mission is to enable our customers to run their facilities with greater energy efficiency, productivity,
and human health and wellness through advanced LED retrofit solutions. Our goal is to be the human wellness lighting and LED technology and market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered paramount. We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge lighting and other types of lamps in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military-grade tubular LED (“TLED”) products, as well as other LED and lighting control products for commercial and consumer applications. In late 2020, we announced the launch of ultraviolet-C light disinfection (“UVCD”) products. After evaluating market demand and supply chain challenges for our UVCD products, we revised our business strategy to primarily focus on our MMM and commercial and industrial lighting and control products.
The
LED lighting industry has changed dramatically over the past several years due to increasing competition and price erosion. We have been experiencing these industry forces in both our military and commercial business since 2016, where we once commanded significant price premiums for our flicker-free TLEDs with industry leading warranties. In more recent years, we have focused on redesigning our products for lower costs and consolidated our supply chain for stronger purchasing power in an effort to price our products more competitively while not impacting the performance and quality. Despite these efforts, our legacy products continue to face extreme pricing competition and a convergence of product functionality in the marketplace, and we have shifted to diversifying our supply chain in an effort to increase value and remain competitive. These trends are not unique to Energy Focus as evidenced by the increasing number of industry peers facing challenges, exiting LED lighting,
selling assets and even going out of business.
In addition to continuously pursuing cost reductions, our strategy to combat these trends is to innovate both our technology and product offerings with differentiated products and solutions that offer greater, distinct value. Specific examples of theseproducts we have developed include the RedCap®, our patented emergency backup battery integrated TLED, EnFocus™, our unique dimmable/color-tunable lighting and powerline control platform that we launched in 2020, and the second generation of EnFocus™ powerline control switches and circadian lighting system, which as a result of supply chain challenges we now plan to launch in 2023. Similarly, our plans to expand and enhance the performance of our RedCap®product line
are also now expected in 2023. We continue to evaluate our sales strategy and believe our go-to-market strategy that focuses more on direct-sales marketing, selectively expanding our channel partner network to cover territories across the country, and listening to the voice of the customer, will lead to better and more impactful product development efforts that we believe will eventually translate into larger addressable markets and greater sales growth for us.
Prior to 2019, the Company experienced significant sales declines, operating losses and increases in its inventory. Beginning in 2019, significant restructuring efforts were undertaken. As part of the initial cost savings efforts to minimize cash usage, the Company replaced the entire senior management
team, significantly reduced non-critical expenses, minimized the amount of inventory the Company was purchasing, dramatically changed the composition of its Board of Directors (the “Board of Directors”) and recruited new departmental leaders across the Company. These cost savings efforts also included the elimination of certain positions, restructuring of the sales organization and incentive plan, additional operational streamlining, management compensation reductions, and outsourcing of certain functions, including certain elements of supply chain and marketing.
During 2021 and 2022, we realized initial cost-savings benefits from these relaunch efforts, but continued to face significant operating losses. Despite these cost-cutting efforts, the
Company faced a challenging commercial market with continuing impacts from the global pandemic combined with ongoing delays in MMM projects and funding that continued to depress sales through 2021 while the Company invested in exploring additional lines of business with UVCD technology that ultimately gained little traction in the market.
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At the beginning of 2022, the Board of Directors appointed our lead independent director to serve as interim Chief Executive Officer and replace our previous chief executive officer. During 2022, the Company redoubled its cost-reduction efforts, reduced its warehouse
square footage, undertook an inventory reduction project, and dramatically reduced head count. During 2022, we also added three experienced executives to our Board of Directors with extensive lighting and consumer products industry experience, and in September 2022, we hired a permanent Chief Executive Officer. We reinvested in our MMM sales channel with a strategic hire in May 2022 and continue to pursue these sales opportunities, though the sales cycles for what are frequently made-to-order products are longer than commercial offerings.
It is our belief that the dramatic rightsizing efforts undertaken in 2022, along with ongoing development of innovative, high-value products and an expanded sales and distribution network, will over time result in improved sales and bottom-line performance for the Company.
During
2021 and into 2022, our MMM business continued to face challenges resulting from the delayed availability of government funding and the timing of U.S. Navy awards, with several anticipated projects facing repeated and ongoing delays. This sector also maintains very long sales cycles. The timeline between bid to sale can often take at least six months. We continue to pursue opportunities from the U.S. Navy and the government sector to minimize such volatility. Previously in our MMM business, significant efforts undertaken to reduce costs in our product offerings have positioned us to be more competitive along with improved production efficiencies. Such efforts allowed us to continue to win bids and proposals that helped grow our MMM sales in 2020, offsetting some of the weakness being experienced in our commercial business that year, though new MMM orders dwindled as we entered 2022. In May 2022, we reinvested in our MMM sales channel with a strategic hire to lead our
MMM sales effort. While we continue to aggressively seek to increase sales of our commercial products, the MMM business offers us continued sales opportunities, in addition to validating our product quality and strengthening our brand trust in the marketplace. However, due to product mix impacts resulting from the continued impact of the COVID-19 pandemic on commercial sales, our current financial results are in part driven by, and reflect volatility in, our MMM sales.
Meanwhile, we continue to seek additional external funding alternatives and sources to support our growth strategies, plans and initiatives. We plan to achieve profitability through developing and launching innovative products such as EnFocusTM powerline control technology and further leveraging our unique and proprietary technology such as RedCap®, as well as executing
on our multi-channel sales strategy that targets key verticals, such as government, healthcare, education and commercial and industrial, complemented by our marketing outreach campaigns and expanding channel partnerships. We also plan to continue to develop advanced lighting and lighting control applications built upon the EnFocusTM platform that aim to serve both consumer and commercial markets. We are also evaluating adjacent technologies including Gallium Nitride ( “GaN”)-based power supplies and other market opportunities in energy solutions products that support sustainability in our existing channels. In addition, we intend to continue to apply rigorous financial discipline in our organizational structure, business processes and policies, strategic sourcing activities and supply chain practices to help accelerate our path towards profitability.
We launched our patented
EnFocus™ platform during the second quarter of 2020 and, despite the ongoing, significant delay and slowdown in our customers’ lighting projects following the impacts of the COVID-19 pandemic, we continue to receive positive feedback from the market. The EnFocus™ platform offers two immediately available product lines: EnFocus™ DM, which provides a dimmable lighting solution, and EnFocus™ DCT, which provides both a dimmable and color tunable lighting solution. EnFocus™ enables buildings to have dimmable, color tunable and circadian-ready lighting using existing wiring, without requiring laying additional data cables or any wireless communication systems, through a relatively simple upgrade with EnFocus™ switches and LED lamps, a far more secure, affordable and environmentally sustainable solution compared with replacing an entire luminaire and incorporating additional wired or wireless communication.
Despite continuing progress
on cost reduction throughout 2022, the Company’s results reflect the challenges due to long and unpredictable sales cycles, unexpected delays in MMM and commercial customer retrofit budgets and project starts, and supply chain issues. There has also been continuing aggressive price competition in the lighting industry. We continued to incur losses and we have a substantial accumulated deficit, which continues to raise substantial doubt about our ability to continue as a going concern at March 31, 2023.
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Results of operations
The
following table sets forth items in our Condensed Consolidated Statements of Operations as a percentage of net sales for the periods indicated:
Net sales of $930 thousand for the first quarter of 2023 decreased $1.1 million, or 55%, compared to first quarter of 2022 net sales of $2.1 million, driven by a decrease in net MMM sales of $318 thousand due to an interrupted sales pipeline as management replaced the head of MMM sales mid-year 2022. The MMM sales cycle is prolonged and started to reverse its negative trend in the middle of the fourth quarter of 2022. Commercial net sales also decreased by $813 thousand, or 71.7%, as compared to first quarter of 2022.
Gross
Profit
Gross profit margin was $17 thousand, or 2% of net sales, for the first quarter of 2023. This compares with gross loss of $26 thousand, or negative 1% of net sales, in the first quarter of 2022. The year-over-year increase in gross margin rate was driven by a $300 thousand, or 15%, decrease in fixed costs such as production salaries. The increase in gross margin also consists of a variable component of approximately $300 thousand due primarily to lower volume. Gross margin for the first quarter of 2023 included favorable freight-in variances of $148 thousand, or 16% of net sales, favorable price and usage variances for material and labor of $236 thousand, or 26% of net sales, as well as favorable inventory reserves of $149 thousand, or 16% of net sales. Gross margin for the first quarter of 2022 included unfavorable freight-in variances of $161 thousand, or 8% of net sales, and unfavorable price and usage variances for material
and labor of $93 thousand, or 4% of net sales, as well as unfavorable inventory reserves of $129 thousand, or 6% of net sales.
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Operating expenses
Product development
Product development expenses include salaries and related expenses, contractor and consulting fees, legal fees, supplies and materials, as well as overhead, such as depreciation and facility costs. Product development costs are expensed as they are incurred.
Product development expenses were $154 thousand for the first quarter of 2023,
down 69% from the first quarter of 2022. Product development expenses relate to customization of product offerings for key customers.
Selling, general andadministrative
Selling, general and administrative expenses were $1.1 million for the first quarter of 2023, down 50% as compared to $2.1 million in the first quarter of 2022. The decrease in expenses from the first quarter of 2022 primarily relates to a reduction of $1.1 million in payroll and payroll-related expenses along with a decrease of $100 thousand in severance.
The primary drivers of the changes in expenses in the first quarter of 2023 versus the first quarter of 2022 were $0.6 million and $1.7 million, respectively, in payroll and payroll-related expenses, $0.3 million in both the first quarter of 2023 and the first quarter of 2022 in professional and
legal fees, $0.2 million and $0.1 million, respectively, in network and software expenses in the first quarter of 2023 and the first quarter of 2022.
Interest expense
Interest expense was $123 thousand for the first quarter of 2023, compared to interest expense of $184 thousand for the first quarter of 2022. The decrease in interest expense is primarily related to interest attributable to the 2021 Streeterville Note (as defined below) as well as the amortization of debt costs related to the Credit Facilities (as defined below). The actual cash interest paid in the first quarter of 2023 was $0 compared to $78 thousand in the first quarter of 2022.
Other income and expenses
Other
income of $30 thousand for the first quarter of 2022 relates to an aged customer credit balance the Company had been carrying for which the customer had not responded to various inquiries. This credit was recorded to income during the first quarter of 2022.
Other expenses were $7 thousand for the first quarter of 2023, compared to other expenses of $11 thousand for the first quarter of 2022. Other expenses are mainly comprised of bank and collateral management fees.
Provision for income taxes
Due to the operating losses incurred during the three months ended March 31,
2023 and 2022, and after application of the annual limitation set forth under Section 382 of the Internal Revenue Code of 1986, as amended, it was not necessary to record a provision for U.S. federal income tax or various state income taxes as income tax benefits are fully offset by a valuation allowance recorded.
Net loss
For the three months ended March 31, 2023, our net loss of $1.3 million decreased 53% over the net loss for the three months ended March 31, 2022 of $2.8 million. The decrease is mainly due to lower fixed costs in the first quarter of 2023.
Financial
condition
At March 31, 2023, we had $301 thousand in cash and a total of $1.7 million of debt, including $400 thousand outstanding under our Inventory Facility and $1.3 million aggregate principal amount of the 2022 Streeterville Note outstanding. We have historically incurred substantial losses, and as of March 31, 2023, we had an accumulated deficit of $150.4 million. Additionally, our sales have been concentrated among a few major customers and for the three months ended March 31, 2023, three customers accounted for approximately 60% of net sales.
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In 2022 and 2023, we recommitted
to building upon the transformation activities started during 2019 and 2020 that sought to stabilize and regrow our business. These efforts include the following key developments that occurred during 2022 and 2023:
•We hired a permanent Chief Executive Officer in September 2022, following a period of interim leadership by our Lead Independent Director after the departure of our previous Chief Executive Officer in February 2022 and Chief Financial Officer and Chief Operating Officer in May 2022.
•We continued development of the second generation of EnFocus™ powerline control switches and circadian lighting system for commercial markets, which as a result of supply chain challenges we now plan to launch in 2023. EnFocus™ powerline control enables buildings to have dimmable, color tunable and circadian-ready lighting using existing wiring,
without requiring laying additional cables or any wireless communication systems, through a relatively simple upgrade with EnFocus™ switches and EnFocus™ LED lamps. This upgrade offers a simpler, more secure, affordable and environmentally sustainable solution compared with replacing entire luminaire fixtures and incorporating additional wired or wireless communication.
•We reinvested in our MMM sales channel with a strategic hire in the second quarter of 2022 and are pursuing existing and new sales opportunities, though the sales cycles for what are frequently made-to-order products are longer than commercial offerings.
•Beginning in July 2022, we reduced our warehouse square footage, and undertook an inventory reduction project throughout 2022 focused on reducing our highly reserved commercial finished good inventory.
•The
Company has aggressively re-evaluated operating expenses, and reduced its workforce significantly throughout 2022 and the first quarter of 2023 to manage fixed costs.
•We continued to seek additional external funding alternatives and sources to support our growth strategies, plans and initiatives:
◦In April 2022, we entered into a note purchase agreement with Streeterville Capital, LLC (“Streeterville”) pursuant to which we sold and issued to Streeterville a promissory note (the “2022 Streeterville Note”) in the principal amount of approximately $2.0 million, with net proceeds of approximately $1.8 million.
◦ In June 2022, we completed a private placement (the “June 2022 Private Placement”) with certain institutional
investors pursuant to which we agreed to issue and sell (i) 1,313,462 shares of our common stock, (ii) pre-funded warrants to purchase 1,378,848 shares of common stock at an exercise price of $0.0001 per share and (iii) warrants to purchase up to an aggregate of 2,692,310 shares of common stock at an exercise price of $1.30 per share. Net proceeds from the June 2022 Private Placement were approximately $3.2 million.
◦ From September 2022 to December 2022, we secured short-term unsecured bridge financing of $800 thousand from a member of the Board of Directors and an aggregate of $650 thousand of short-term unsecured bridge financing from private parties, all of which was converted into equity in January 2023 at the time of a strategic investment by Sander Electronics, Inc.
◦ In October 2022
and December 2022, we repaid the promissory note that we issued and sold to Streeterville on April 27, 2021 by exchanging the approximately $330 thousand aggregate principal amount outstanding for common stock priced at-the-market.
◦ During January 2023, we sold an aggregate of $250 thousand of common stock to a member of the Board of Directors in private placements at fair market value, and also converted the approximately $809 thousand principal amount outstanding on previously issued short-term promissory notes issued to that director in connection with the $800 thousand short-term unsecured bridge financing, as discussed above, at fair market value.
◦ In January 2023, we sold an aggregate of $2.7 million of common stock to certain purchasers
associated with Sander Electronics, Inc., including conversion of the approximately $609 thousand principal amount outstanding on previously outstanding short-term promissory notes issued in connection with the $650 thousand short-term unsecured bridge financing, as discussed above, priced at-the-market.
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◦ In January 2023, we amended our inventory lending facility with Crossroads Financial Group, LLC (the “Inventory Facility”), reducing the maximum availability to $500 thousand, reducing monthly fees and paying down an aggregate of $1.0 million of outstanding borrowings under the Inventory Facility in January and February 2023.
◦ In
January 2023, we amended the terms of the 2022 Streeterville Note with Streeterville, agreeing to make $750 thousand in payments in 2023 and deferring other payments until 2024.
◦ In February 2023, we agreed to terminate our accounts receivable lending facility with Factors Southwest L.L.C. (d/b/a FSW Funding) (the “Receivables Facility” and, together with the Inventory Facility, the “Credit Facilities”), reducing our monthly borrowing costs.
◦ In February 2023, we sold an aggregate of $400 thousand of common stock to a member of the Board of Directors in a private placement at fair market value.
◦ In March 2023, we repaid a portion of the 2022 Streeterville Note by exchanging approximately
$500 thousand aggregate principal amount outstanding for common stock priced at-the-market.
◦ In March 2023, we entered into two private placement agreements, pursuant to which aggregate gross proceeds to the Company in respect of the private placements were $305 thousand, before deducting estimated offering expenses payable by the Company.
During 2022, we continued to broaden our product distribution network by engaging with new lighting agencies and energy service companies (“ESCOs”). We also redoubled our efforts from 2020 and 2021 to streamline our operations by closely managing all spending
done throughout the Company, while investing in new products and strategies that sought to reenergize sales.
Throughout 2022, due to lingering economic and building occupancy impacts from the COVID-19 pandemic, we experienced continuing weakness in commercial sales as our customers in the healthcare, education, and commercial and industrial sectors put lighting retrofit projects on hold or delayed order placements. We continue to monitor the long-term impact of the COVID-19 pandemic on our customers, suppliers and logistics providers, and to evaluate governmental pandemic response. Although the significance and duration of the ongoing impact on our customers and us is still uncertain, and the specific timing of business recovery from the impact of the COVID-19 pandemic is still difficult to predict, we remain optimistic that facility capital
budgets will start unfreezing, commercial building occupancy will rise, and our growth efforts will further impact our financial performance in a positive way.
We will seek to remain agile as an organization to respond to potential or continuing weakness in the macroeconomic environment and in the meantime seek to expand sales channels and enter new markets that we believe will provide additional growth opportunities. We plan to achieve profitability through developing and launching new, innovative products, such as our EnFocusTM powerline control systems, our Redcap® emergency battery backup tubular TLEDs, evaluating new growth opportunities such as GaN-based power supply circuitry and other energy solution products, as well as executing on our multi-channel sales strategy that targets key verticals, such as government, healthcare,
education and commercial and industrial, complemented by our marketing outreach campaigns and expanding channel partnerships. We also plan to continue to develop advanced lighting and lighting control applications built upon the EnFocusTM platform that aim to serve the commercial markets. In addition, we intend to continue to apply rigorous financial discipline in our organizational structure, decision-making, business processes and policies, strategic sourcing activities and supply chain practices to help accelerate our path towards profitability.
On December 21, 2021, we received a letter from the Listing Qualifications staff (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”) notifying us that, as a result of the resignation of a director, as previously disclosed, from the Board of Directors and the Audit and
Finance Committee, we were not in compliance with Nasdaq Listing Rule 5605, which requires that our Audit and Finance Committee be comprised of at least three directors, all of whom are independent pursuant to the rules of Nasdaq and applicable law. The notification letter had no immediate effect on our listing on the Nasdaq Capital Market. The letter further provided that, pursuant to Nasdaq Listing Rule 5605(c)(4), we were entitled to a cure period to regain compliance with Nasdaq Listing Rule 5605. On February 24, 2022, we announced the appointment of two additional independent directors, one of which, was appointed to fill the vacancy on the Audit and Finance Committee, bringing us into compliance with Nasdaq Listing Rule 5605.
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On
August 23, 2022, we received a letter from the Staff notifying us that we were no longer in compliance with the requirement to maintain a minimum closing bid price of $1.00 per share, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Bid Price Rule”), because the closing bid price for our common stock was below the minimum $1.00 per share for 30 consecutive business days. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), we were provided an initial period of 180 calendar days, or until February 20, 2023, to regain compliance with the Bid Price Rule. During the initial compliance period, our common stock continued to trade on the Nasdaq Capital Market, but did not satisfy the Bid Price Rule.
On November 16, 2022, we received a letter from the Staff notifying us
that we were no longer in compliance with Nasdaq Listing Rule 5550(b)(1), which requires listed companies to maintain stockholders’ equity of at least $2.5 million if they do not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations (the “Minimum Stockholders’ Equity Rule”). Our Form 10-Q for the Quarterly Period Ended September 30, 2022 filed on November 10, 2022 reflected that our stockholders’ equity as of September 30, 2022 was $1.5 million. Based on our timely submission of our plan to regain compliance (the “Stockholders’ Equity Requirement Plan”), Nasdaq granted us an extension through May 15, 2023 to regain compliance with the Minimum Stockholders’ Equity Rule.
On
February 21, 2023, we received written notification (the “Bid Price Notification”) from the Staff stating that we had not regained compliance with the Bid Price Rule and our common stock was subject to delisting from Nasdaq. On February 24, 2023, we submitted a request for a hearing before the Nasdaq Hearings Panel (the “Panel”) to appeal the delisting (the “Appeal”). Under Nasdaq rules, the delisting of the Company’s common stock was stayed during the pendency of the Appeal and, during such time, the Company’s common stock continued to be listed on Nasdaq.
On March 28, 2023, the
Company received written notification (the “Additional Staff Determination”) from the Staff stating that (i) following the Bid Price Notification, and in accordance with Listing Rule 5810(c)(2)(A), Nasdaq is no longer permitted to consider the Stockholders’ Equity Requirement Plan, (ii) the Additional Staff Determination serves as an additional basis for delisting the Company’s common stock from Nasdaq and (iii) the Panel will consider the Additional Staff Determination in rendering a determination regarding the continued listing of the Company’s common stock on Nasdaq.
On April 6, 2023, the
Company participated in the Appeal before the Panel. The Company provided an update to the Panel on the Company’s substantial progress made towards the previously submitted Stockholders’ Equity Requirement Plan during the three months ended March 31, 2023, and requested the Panel grant the Company an exception to (1) re-allow the previously granted exception until May 15, 2023 for the Company to regain compliance with the Minimum Stockholders’ Equity Rule and (2) grant an exception allowing the
Company up to 180 days following the Bid Price Notification to regain compliance with the Bid Price Rule by effecting a reverse stock split following stockholder approval at the 2023 annual meeting of the Company’s stockholders. On May 1, 2023, the Panel granted the Company’s request to continue the Company’s listing on Nasdaq, subject to the following conditions: (1) on or before May 15, 2023, the Company shall file with the Securities and Exchange Commission its quarterly report for the three months ended March
31, 2023 demonstrating compliance with the Minimum Stockholders’ Equity Rule and (2) on or before July 7, 2023, the Company shall demonstrate compliance with the Bid Price Rule.
As of the date of this Quarterly Report, the Company believes it has regained compliance with the Minimum Stockholders’ Equity Rule for continued listing on the Nasdaq Capital Market. However, there can be no assurance that the Company will be able to regain compliance with the Bid Price Rule or maintain compliance with the Minimum Stockholders’ Equity Rule, Bid Price Rule, or other Nasdaq listing requirements. If the
Company fails to regain compliance with Nasdaq’s continued listing standards in accordance with the Panel’s decision, the Company’s common stock will be subject to delisting from Nasdaq.
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Liquidity andcapitalresources
Cash
At March 31, 2023, our cash balance was approximately $301 thousand, compared to approximately $52 thousand at December 31,
2022.
The following summarizes cash flows from operating, investing, and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows included in Part I, Item 1, “Financial Statements,” of this Quarterly Report (in thousands):
Net cash used in operating activities was $1.2 million for the three months ended March 31, 2023. The net loss for the three months ended March 31, 2023 was $1.3 million and was adjusted for non-cash items, including depreciation and amortization, stock-based compensation, provisions for inventory, warranty, and accounts receivable reserves and working capital changes. During the three months ended March
31, 2023, we generated $562 thousand from inventory and $66 thousand due to changes in accrued and other liabilities. We used $496 thousand through the timing of collection of accounts receivable and $27 thousand from accounts payable due to the timing of inventory receipts and payments. .
Net cash used in operating activities was $2.7 million for the three months ended March 31, 2022. The net loss for the three months ended March 31, 2022 was $2.8 million and was adjusted for non-cash items, including depreciation and amortization, stock-based compensation, provisions for inventory, warranty, gain on forgiveness of the Paycheck Protection Program (PPP) loan and accounts receivable reserves and working capital changes. During the three months ended March 31, 2022, we generated
$61 thousand in cash from accounts payable due to the timing of inventory receipts and payments, and $83 thousand through the timing of collection of accounts receivable. We used $370 thousand for inventories primarily due to the timing of inventory receipts, and we used $211 thousand due to changes in accrued and other liabilities (primarily due to a reduction of $0.1 million in accrued accounting and legal fees and $0.2 million in accrued bonuses; partially offset by increases of $100 thousand in accrued payroll).
Net cash used in investing activities
For the three months ended March 31, 2022, net cash used in investing activities was $35 thousand and resulted primarily from the purchase of software and a vehicle to support production operations, as well as development of the e-commerce platform.
Net
cash provided by financing activities
Net cash provided by financing activities during the three months ended March 31, 2023 was $1.4 million, primarily related to proceeds from the private placement of common stock of $3.0 million, offset by net payments on the Credit Facilities of $1.1 million and the 2022 Streeterville Note of $500 thousand.
In January 2022, all of the Company’s pre-funded warrants to purchase 85,228 shares of common stock at an exercise price of $0.0001 per share that were issued in December 2021 were exercised. As of March 31, 2023, warrants issued in December 2021 (the “December 2021 Warrants”) exercisable for an aggregate of 1,278,413 shares remained
outstanding with an exercise price of $3.52 per share. The December 2021 Warrants expire on December 16, 2026. The exercise of the remaining December 2021 Warrants outstanding could provide us with cash proceeds of up to $4.5 million in the aggregate.
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Net cash provided by financing activities during the three months ended March 31, 2022 was $281 thousand, primarily related to net proceeds from borrowings under the Credit Facilities of $897 thousand and proceeds from the exercise of 156,446 warrants of $0.
Contractual
and other obligations
As of March 31, 2023, we had approximately $1.4 million in outstanding purchase commitments for inventory. Almost all of this amount is expected to ship in the second quarter of 2023, with the balance expected to ship in the third quarter of 2023 and thereafter. Included in the total of outstanding purchase commitments are orders of $733 thousand to a related party.
There have been no other material changes to our contractual and other obligations as compared to those included in our 2022 Annual Report.
Critical accounting policies
There have been no material changes to our critical accounting policies as
compared to those included in our 2022 Annual Report.
Certain risks and concentrations
We have certain customers whose net sales individually represented 10% or more of our total net sales, or whose net trade accounts receivable balance individually represented 10% or more of our total net trade accounts receivable; we have certain suppliers, which individually represent 10% or more of our total purchases, or whose trade accounts payable balance individually represented 10% or more of our total trade accounts payable balance, as follows:
For the three months ended March 31, 2023, sales to our primary distributor for the U.S. Navy, a U.S. Navy shipbuilder, and a distributor
to the U.S. Department of Defense, accounted for approximately 22%, 27%, and 11% of net sales, respectively. When sales for our top military customers are combined, total net sales of military products comprised approximately 49% of net sales for the same period. For the three months ended March 31, 2022, sales to our primary distributor for the U.S. Navy, a U.S. Navy shipbuilder, and a commercial building systems provider, accounted for approximately 15%, 21%, and 19% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 37% of net sales for the same period.
A distributor for the U.S. Navy, a U.S. Navy shipbuilder, and a distributor to the U.S. Department of Defense, accounted for approximately 32%, 22%, and 17% of net
trade accounts receivable, respectively, at March 31, 2023. At December 31, 2022, a distributor to the U.S. Department of Defense accounted for 25% of our net trade accounts receivable and a shipbuilder for the U.S. Navy accounted for 30% of our net trade accounts receivable.
No one supplier accounted for more than 10% of our total expenditures for the three months ended March 31, 2023. For the three months ended March 31, 2022, one offshore supplier accounted for approximately 19% of total expenditures.
At March 31, 2023 and December 31, 2022, one offshore supplier accounted for approximately
36% of our trade accounts payable balance for each quarter.
Recent accounting pronouncements
For information on recent accounting pronouncements, please refer to Note 2, “Basis of Presentation and Summary of Significant Accounting Policies,” included under Part I, Item 1, “Financial Statements,” of this Quarterly Report.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As
a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that
such information is accumulated and communicated to management, including our Chief Executive Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Pursuant to Rule 13a-15(b) under the Exchange Act, our management must evaluate, with the participation of our Chief Executive Officer, the effectiveness of our disclosure controls and procedures, as of March 31, 2023, the end of the period covered by this Quarterly Report. Management, with the participation of our Chief Executive Officer, did evaluate the effectiveness of our disclosure controls and procedures as of the end of period covered by this Quarterly Report. Based on this evaluation, our Chief Executive Officer concluded that our disclosure controls and procedures were effective as of March 31, 2023.
Changes
in internal control over financial reporting
During the quarterly period covered by this Quarterly Report, there have not been any changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time,
we may be involved in various claims and legal actions arising in the ordinary course of business. As of March 31, 2023, we were not involved in any material legal proceedings.
ITEM 1A. RISK FACTORS
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the Company is not required to provide information required by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
On May 10, 2023, the Company received notice from James R. Warren regarding his intention to resign as Senior Vice President, General Counsel and Corporate Secretary of the Company later
this year in order to pursue other personal and professional opportunities.
The following financial information from our Quarterly Report for the quarter ended March 31, 2023, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at March 31, 2023 and December 31, 2022, (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, 2023 and 2022, (iii) Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31,
2023 and 2022, (v) Condensed Consolidated Statements of Cash Flows for the three and three months ended March 31, 2023 and 2022, and (vi) the Notes to Condensed Consolidated Financial Statements.
*104
Cover Page Interactive Data File (embedded within the Inline XBRL document)
* Pursuant to Regulation S-T, this interactive data file is not deemed filed for purposes of Section 11 of the Securities Act, or Section 18 of the Exchange Act, or otherwise subject to the liabilities of these sections.
++ This exhibit shall not be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act or the Exchange Act.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
