Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.14M
2: EX-31.1 Certification -- §302 - SOA'02 HTML 25K
3: EX-32.1 Certification -- §906 - SOA'02 HTML 23K
9: R1 Cover Page HTML 76K
10: R2 Condensed Consolidated Balance Sheets HTML 132K
11: R3 Condensed Consolidated Balance Sheets HTML 47K
(Parentheticals)
12: R4 Condensed Consolidated Statements of Operations HTML 97K
13: R5 Condensed Consolidated Statements of Operations HTML 24K
(Parentheticals)
14: R6 Condensed Consolidated Statements of Changes in HTML 145K
Stockholders' Equity
15: R7 Condensed Consolidated Statements of Cash Flows HTML 121K
16: R8 Condensed Consolidated Statements of Changes in HTML 24K
Stockholders' Equity (Parentheticals)
17: R9 Nature of Operations HTML 29K
18: R10 Basis of Presentation and Summary of Significant HTML 110K
Accounting Policies
19: R11 Inventories HTML 44K
20: R12 Other Current Assets HTML 26K
21: R13 Property and Equipment HTML 35K
22: R14 Leases HTML 118K
23: R15 Debt HTML 64K
24: R16 Income Taxes HTML 29K
25: R17 Stockholders' Equity HTML 94K
26: R18 Commitments and Contingencies HTML 26K
27: R19 Basis of Presentation and Summary of Significant HTML 82K
Accounting Policies (Policies)
28: R20 Basis of Presentation and Summary of Significant HTML 76K
Accounting Policies (Tables)
29: R21 Inventories (Tables) HTML 45K
30: R22 Property and Equipment (Tables) HTML 34K
31: R23 Leases (Tables) HTML 74K
32: R24 Debt (Tables) HTML 51K
33: R25 Stockholders' Equity (Tables) HTML 81K
34: R26 Nature of Operations - Narrative (Details) HTML 39K
35: R27 Basis of Presentation and Summary of Significant HTML 54K
Accounting Policies - Basis of presentation
(Details)
36: R28 Basis of Presentation and Summary of Significant HTML 36K
Accounting Policies - Disaggregation of Revenue
(Details)
37: R29 Basis of Presentation and Summary of Significant HTML 43K
Accounting Policies - Accounts Receivable and
Geographic information (Details)
38: R30 Basis of Presentation and Summary of Significant HTML 33K
Accounting Policies - Net Accounts Receivable
(Details)
39: R31 Basis of Presentation and Summary of Significant HTML 46K
Accounting Policies - Reconciliation of Basic and
Diluted Loss per Share (Details)
40: R32 Basis of Presentation and Summary of Significant HTML 32K
Accounting Policies - Net Loss per Share (Details)
41: R33 Basis of Presentation and Summary of Significant HTML 31K
Accounting Policies - Product Warranties (Details)
42: R34 Basis of Presentation and Summary of Significant HTML 33K
Accounting Policies - Warranty Activity (Details)
43: R35 Basis of Presentation and Summary of Significant HTML 64K
Accounting Policies - Certain Risks and
Concentrations (Details)
44: R36 Inventories - Inventories, Net (Details) HTML 31K
45: R37 Inventories - Reserve Rollforward (Details) HTML 30K
46: R38 Other Current Assets (Details) HTML 26K
47: R39 Property and Equipment - Schedule of Property and HTML 47K
Equipment (Details)
48: R40 Property and Equipment - Narrative (Details) HTML 25K
49: R41 Leases - Narrative (Details) HTML 30K
50: R42 Leases - Components of Lease Cost (Details) HTML 29K
51: R43 Leases - Schedule of Supplemental Balance Sheet HTML 34K
Information (Details)
52: R44 Leases - Schedule of Future Maturities of Lease HTML 38K
Liabilities (Details)
53: R45 Leases - Schedule of Supplemental Cash Flow HTML 27K
Information (Details)
54: R46 Debt - Credit Facilities (Details) HTML 70K
55: R47 Debt - Promissory Note Narrative (Details) HTML 35K
56: R48 Debt - Promissory Notes (Details) HTML 66K
57: R49 Debt - Streeterville Notes (Details) HTML 86K
58: R50 Income Taxes - (Details) HTML 35K
59: R51 Stockholders' Equity - June 2023 private placement HTML 38K
(Details)
60: R52 Stockholders' Equity - 1-for-7 Reverse Stock Split HTML 38K
(Details)
61: R53 Stockholders' Equity - March 2023 Private HTML 39K
Placements (Details)
62: R54 Stockholders' Equity - February 2023 Private HTML 38K
Placement (Details)
63: R55 Stockholders' Equity - January 2023 Sander HTML 42K
Electronics Private Placement (Details)
64: R56 Stockholders' Equity - January 2023 Transactions HTML 39K
with Mei Yun (Gina) Huang (Details)
65: R57 Stockholders' Equity - June 2022 Private Placement HTML 61K
(Details)
66: R58 Stockholders' Equity - December 2021 Private HTML 55K
Placement (Details)
67: R59 Stockholders' Equity - Preferred Stock (Details) HTML 77K
68: R60 Stockholders' Equity - January 2020 Equity HTML 56K
Offering (Details)
69: R61 Stockholders' Equity - Outstanding Warrants from HTML 45K
the January 2020 Equity Offering (Details)
70: R62 Stockholders' Equity - Stock-Based Compensation HTML 38K
(Details)
71: R63 Stockholders' Equity - Estimates Utilized HTML 45K
(Details)
72: R64 Stockholders' Equity - Stock Options and a Summary HTML 67K
of Activity (Details)
73: R65 Stockholders' Equity - Restricted Stock Units HTML 46K
(Details)
74: R66 Commitments and Contingencies (Details) HTML 28K
77: XML IDEA XML File -- Filing Summary XML 145K
75: XML XBRL Instance -- efoi-20230630_htm XML 1.47M
76: EXCEL IDEA Workbook of Financial Report Info XLSX 154K
5: EX-101.CAL XBRL Calculations -- efoi-20230630_cal XML 141K
6: EX-101.DEF XBRL Definitions -- efoi-20230630_def XML 694K
7: EX-101.LAB XBRL Labels -- efoi-20230630_lab XML 1.46M
8: EX-101.PRE XBRL Presentations -- efoi-20230630_pre XML 970K
4: EX-101.SCH XBRL Schema -- efoi-20230630 XSD 170K
78: JSON XBRL Instance as JSON Data -- MetaLinks 420± 634K
79: ZIP XBRL Zipped Folder -- 0000924168-23-000084-xbrl Zip 306K
(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 August 8, 2023 was i3,495,032.
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 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;
•our ability to attract and retain a new chief financial officer;
2
•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”). Our mission is to enable our customers to run their facilities with greater energy efficiency, productivity, and increased 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 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.
At the Company’s annual meeting of stockholders held on June 15, 2023, the Company’s stockholders approved a form of the certificate of amendment (the “Certificate of Amendment”) to the
Company’s Certificate of Incorporation, as amended (the “Certificate of Incorporation”), and authorized the board of directors of the Company to amend the Certificate of Incorporation to effect a reverse stock split of the outstanding shares of the Company’s common stock, par value $i0.0001
per share, at a ratio ranging from any whole number of at least 1-for-2 and up to 1-for-10, with the exact ratio within the foregoing range to be determined by the board of directors in its sole discretion.
On June 15, 2023, our board of directors determined to set the reverse stock split ratio at 1-for-7 (the “Split Ratio”). The Certificate of Amendment to our Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on June 15, 2023, with an effective date of June 16, 2023 (the “Effective Time”). At the Effective Time, every seven shares of common stock issued and outstanding automatically combined into one validly issued, fully paid and non-assessable
share of common stock. No fractional shares were issued as a result of the reverse stock split. The $i0.0001 par value per share of common stock and other terms of the common stock were not affected by the reverse stock split. The number of authorized shares of common stock under the Certificate of Incorporation remained unchanged at i50,000,000
shares. Proportional adjustments were made to the conversion and exercise prices of our outstanding warrants and stock options, and to the number of shares issued and issuable under our stock incentive plans in connection with the reverse stock split. The current financial statements, as well as the prior-period financial statements have been retroactively adjusted to reflect the reverse stock split. Preferred shares outstanding were not affected by the reverse stock split and as such, those shares have not been adjusted.
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 and six months ended June 30, 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 June 30, 2023 and December 31, 2022, Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2023 and 2022, Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended
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 June 30, 2023 and December 31,
2022, including net losses of $i2.5 million for the six months ended June 30, 2023 and $i10.3 million for the twelve months ended December 31, 2022, and total cash used in operating
activities of $i1.3 million for the six months ended June 30, 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 June 30, 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. Our Common Stock traded below $i1.00
per share starting in the second quarter of 2022. 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
11
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $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 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 Company’s 2023 annual meeting of stockholders. On May 1, 2023, the Panel granted the Company’s request (the “Panel Decision”) 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 Minimum Stockholders’ Equity Rule and (2) on or before July 7, 2023, the Company shall demonstrate compliance with the Bid Price Rule.
On July 27, 2023, the Company received written notification from the Staff stating that the Company has regained compliance with the Bid Price Rule and the Minimum Stockholders’ Equity Rule, as required by the Panel Decision. Pursuant to Nasdaq Listing Rule 5815(d)(4)(B), the
Company will be subject to a mandatory panel monitor for a period of one year from July 27, 2023 (the “Monitoring Period”). If, within the Monitoring Period, the Staff finds the Company again out of compliance with the Minimum Stockholders’ Equity Rule, notwithstanding Nasdaq Listing Rule 5810(c)(2), the Company will not be permitted to provide the Staff with a plan of compliance with respect to that deficiency and the Staff will not be permitted to grant additional time for the Company to regain compliance with respect to that deficiency, nor will the Company be afforded an
applicable cure or compliance period pursuant to Nasdaq Listing Rule 5810(c)(3). Instead, the Staff will issue a delist determination letter and the Company will have an opportunity to request a new hearing with the initial Panel or a newly convened hearings panel if the initial Panel is unavailable. The Company will have the opportunity to respond and present to the Panel as provided by Nasdaq Listing Rule 5815(d)(4)(C). The Company’s common stock may be at that time delisted from Nasdaq.
As of the date of this Quarterly Report, the Company believes it has maintained compliance with the Minimum
Stockholders’ Equity Rule for continued listing on the Nasdaq Capital Market. To become compliant with the Bid Price Rule, the Company effected a 1-for-7 reverse stock split to increase the per share trading price of the common stock. At the Company’s annual meeting of stockholders held on June 15, 2023, the Company’s stockholders approved a form of the Certificate of Amendment to the Certificate of Incorporation and authorized our board of directors to amend the Certificate of Incorporation to
effect a reverse stock split of the outstanding shares of the Company’s common stock at a ratio ranging from any whole number of at least 1-for-2 and up to 1-for-10, with the exact ratio within the foregoing range to be determined by the Board of Directors in its sole discretion.
On June 15, 2023, the Board of Directors determined to set the Split Ratio. The Certificate of Amendment to our Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on June 15, 2023, with the reverse stock split becoming effective on June 16, 2023. At the Effective Time, every seven shares of common stock
issued and outstanding automatically combined into one validly issued, fully paid and non-assessable share of common stock. The common stock began trading on Nasdaq on a split-adjusted basis at the opening of trading on June 19, 2023.
12
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
However, there can be no assurance that the Company will be able to maintain compliance
with the Minimum Stockholders’ Equity Rule, Bid Price Rule, or other Nasdaq listing requirements. If the Company fails to maintain 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 allowance for doubtful accounts receivable under Accounting Standards Codification (“ASC”) 326, Measurement of Credit Losses on Financial Instruments (“CECL”) 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 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. Substantially all of 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
13
ENERGY
FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. 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 past delinquencies and forward-looking considerations, such as customer responsiveness. This resulted in a $i2.6 thousand
adjustment to Retained Earnings as of December 31, 2022 and charges to bad debt expense of $i12 thousand in the first quarter of 2023 and $i3 thousand in the
second 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:
All of our long-lived fixed assets are located in the United States. For the three months ended June 30, 2023 and 2022, less than ii1/%
of sales were attributable to customers outside the United States. For the six months ended June 30, 2023, less than i1% of sales were attributable to customers outside the United States and approximately i1% of sales were attributable to customers outside the United States
for the six months ended June 30, 2022. 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.
14
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basic
and diluted weighted average shares of common stock outstanding *
ii2,766/
ii1,024/
ii2,539/
ii973/
*
Shares outstanding for prior periods have been restated for the 1-for-7 reverse stock split effective June 16, 2023.
/
As a result of the net loss we incurred for the three months ended June 30, 2023, convertible securities representing approximately i25 thousand
shares of common stock were excluded from the basic loss per share calculation as their inclusion would have been anti-dilutive. As a result of the net loss we incurred for the three months ended June 30, 2022, restricted share units, warrants and convertible securities representing approximately i2 thousand, i53 thousand
and i25 thousand shares of common stock, respectively, were excluded from the basic loss per share calculation as their inclusion would have been anti-dilutive.
As a result of the net loss we incurred for the six months ended June 30, 2023, convertible securities representing approximately i25 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 six months ended June 30, 2022, restricted share units, warrants and convertible securities representing approximately i1 thousand, i31 thousand
and i25 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.
/i
The
following table summarizes warranty activity for the periods presented (in thousands):
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.
16
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 June 30, 2023, sales to two U.S. Navy shipbuilders and a distributor to the U.S. Navy accounted for approximately i26%
and i16% of net sales, respectively. When sales to our primary distributors 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 i42% of net sales for the same period. For the three months ended June
30, 2022, sales to our primary distributor for the U.S. Navy, a regional commercial lighting retrofit company, and a commercial building systems provider accounted for approximately i22%, i14%, and i13%
of net sales, respectively. When sales to our primary distributors 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 i24% of net sales for the same period.
For the six months ended June 30, 2023, sales to a U.S. Navy shipbuilder and a distributor to the Department of Defense accounted for approximately i23%
and i11% 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 i34% of net sales for the same period. For the six months ended June
30, 2022, sales to our primary distributor for the U.S. Navy, a U.S. Navy shipbuilder, and a regional commercial lighting retrofit company accounted for approximately i18%, i12%, and i12%
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 i31% of net sales for the same period.
A distributor for the Department of Defense and a U.S. Navy shipbuilder accounted for approximately i24%
and i14% of net trade accounts receivable, respectively, at June 30, 2023. At December 31, 2022, a distributor for the Department of Defense accounted for i25% of our net trade accounts receivable and a shipbuilder for
the U.S. Navy accounted for i30% of our net trade accounts receivable.
No one supplier accounted for more than 10% of our total expenditures for the three and six months ended June 30, 2023. Two offshore suppliers accounted for approximately i19%
and i10%, respectively, of our total expenditures for the three months ended June 30, 2022. For the six months ended June 30, 2022, one offshore supplier accounted for approximately i19% of our total expenditures.
At
June 30, 2023, one offshore supplier accounted for approximately i31% of our trade accounts payable balance. At December 31, 2022, this offshore supplier accounted for approximately i36% of our trade accounts payable
balance.
/i
Recently adopted accounting standard
In June 2016, the Financial Accounting Standards Board issued Accounting Standard Update No. 2016-13, Financial Instruments - Credit Losses (ASC 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. We adopted this guidance during the first quarter of 2023, and it did not have a material impact on our consolidated financial position or results of operations.
17
ENERGY
FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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):
Reserves
for excess, obsolete, and slow-moving inventories
$
(i2,400)
$
(i2,792)
$
(i2,400)
$
(i2,792)
/
NOTE
4. iOTHER CURRENT ASSETS
Employee Retention Tax Credit
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
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 were 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 during the second quarter of 2023. This amount was recorded as a receivable in the Condensed Consolidated Balance Sheet as of December 31, 2022.
18
ENERGY
FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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):
Leasehold
improvements (the shorter of useful life or lease life)
i141
i141
Property
and equipment at cost
i1,392
i1,392
Less:
accumulated depreciation
(i1,332)
(i1,316)
Property
and equipment, net
$
i60
$
i76
/
Depreciation
expense was $i8 thousand and $i43 thousand for the three months ended June 30, 2023 and 2022, respectively. For the six months ended June 30, 2023 and 2022,
depreciation expense was $i16 thousand and $i87 thousand, respectively.
NOTE 6. iiLEASES/
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 (“ASC 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 7, “Debt”) and Factors Southwest L.L.C. (as described below in Note 7, “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 weighted average remaining lease term for the operating leases is i4.0 years.
i
Components
of the operating lease costs recognized in net loss were as follows (in thousands):
iSupplemental balance sheet information related to the Company’s operating and finance leases as of June 30, 2023 and December 31, 2022 are as follows
(in thousands):
iFuture
minimum lease payments required under operating leases for each of the 12-month rolling periods below in effect at June 30, 2023 are as follows (in thousands):
Operating Leases
July 2023 to June 2024
$
i380
July
2024 to June 2025
i378
July 2025 to June 2026
i386
July
2026 to June 2027
i393
Total
future undiscounted lease payments
i1,537
Less imputed interest
i412
Total
lease obligations
$
i1,125
/
iSupplemental
cash flow information related to leases for the three and six months ended June 30, 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 i11.05%
per annum) or (ii) at Crossroads’ discretion, an alternative reference rate, SOFR (Secured Overnight Financing Rate), plus i6.00% (currently i11.09% per annum). As of June 30, 2023, the effective rate was equal to
i12.34%.
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 and (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 Crossroads, which intercreditor agreement was also terminated.
Borrowings under the Inventory Facility were $i0.3 million and $i1.4
million at June 30, 2023 and December 31, 2022, respectively. Borrowings under the Receivables Facility were approximately $i0.1 million at December 31, 2022. These facilities are recorded in the Condensed Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022 as a current liability under the caption “Credit line borrowings.” Outstanding balances include unamortized
net issuance costs totaling $i12 thousand for the Inventory Facility as of June 30, 2023, and $i47 thousand for the Inventory Facility 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 9, “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 9, “Stockholders’ Equity.”
21
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 i71,715 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 $i1.3
million and $i2.0 million at June 30, 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.
22
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 2021 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 8. iINCOME TAXES
As a result of the operating loss incurred during each of the three and six months ended June 30, 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.
23
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On June 29, 2023, the Company entered into a securities purchase agreement with certain purchasers, pursuant to which the Company agreed to issue and sell in a private placement an aggregate of i746,875
shares of the Company’s common stock, par value $i0.0001 per share, for a purchase price per share of $i1.76 (the “June 2023 Private Placement”). One of the purchasers was Jay Huang, a member of the
Company’s Board of Directors.
Aggregate gross proceeds to the Company in respect of the June 2023 Private Placement were approximately $i1.3 million. The June 2023 Private Placement closed on June 29, 2023.
1-for-7 Reverse Stock Split
At the
Company’s annual meeting of stockholders held on June 15, 2023, the Company’s stockholders approved a form of the Certificate of Amendment to the Certificate of Incorporation and authorized our board of directors to amend the Certificate of Incorporation to effect a reverse stock split of the outstanding shares of the Company’s common stock at a ratio ranging from any whole number of at least 1-for-2 and up to 1-for-10, with the exact ratio within the foregoing range to be determined by the board of directors in its sole discretion.
On
June 15, 2023, our board of directors determined to set the Split Ratio. The Certificate of Amendment to our Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on June 15, 2023, with the reverse stock split becoming effective on June 16, 2023. At the Effective Time, every seven shares of common stock issued and outstanding automatically combined into one validly issued, fully paid and non-assessable share of common stock. No fractional shares were issued as a result of the reverse stock split. The fractional shares were settled in cash in an amount not material to the Company. The $i0.0001
par value per share of common stock and other terms of the common stock were not affected by the reverse stock split. The number of authorized shares of common stock under the Certificate of Incorporation remained unchanged at i50,000,000 shares.
The current financial statements, as well as the prior-period financial statements have been retroactively adjusted to reflect the reverse stock split.
Our
outstanding shares of restricted stock and shares underlying our options and warrants entitling the holders to purchase shares of common stock have been adjusted as a result of the reverse stock split, as required by the terms of these securities. Also, the number of shares reserved for issuance under our existing 2020 Stock Incentive Plan, as amended, and our 2013 Employee Stock Purchase Plan were reduced proportionately based on the Split Ratio. Preferred shares outstanding were not affected by the reverse stock split and as such, those shares have not been adjusted.
The reverse stock split was effected solely to increase the per share trading price of the common stock to satisfy the Bid Price Rule for continued listing on Nasdaq. The common stock began trading on Nasdaq on a split-adjusted basis at the opening of trading on June 19, 2023.
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”), i15,500
shares of the Company’s common stock for a purchase price of $i3.55 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”), i71,428 shares of the Company’s common stock for a purchase price of $i3.50
per share.
Aggregate gross proceeds to the Company in respect of the March 2023 Private Placements were $i305 thousand. Each of the March 2023 Private Placements was priced at-the-market under the Nasdaq rules.
24
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
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”), i114,744
shares of the Company’s common stock, for a purchase price of $i3.49 per share.
Gross proceeds to the Company in respect of the February 2023 Private Placement were $i400
thousand. 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 i778,017
shares of common stock for a purchase price per share of $i3.51. 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 7, “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.
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, i36,828 shares of the Company’s common stock, for a purchase price of $i2.72
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, i46,543 shares of the Company’s common stock for a purchase price of $i3.22
per share.
Aggregate gross proceeds to the Company in respect of these private placements to Ms. Huang were $i250 thousand. 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 $i817 thousand aggregate outstanding amounts on previous short-term bridge financings, including the 2022 Promissory Notes issued to Ms. Huang, as described above in Note 7, “Debt”, for an aggregate of i207,371
shares of common stock at a price per share of $i3.94. 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 i187,637
shares of our common stock at a purchase price of $i9.10 per share. We also sold to the same institutional investors (i) pre-funded warrants (the “June 2022 Pre-Funded Warrants”) to purchase i196,978
shares of common stock at an exercise price of $i0.0007 per share and (ii) warrants (collectively with the June 2022 Pre-Funded Warrants, the “June 2022 Warrants”) to purchase up to an aggregate of i384,615
shares of common stock at an exercise price of $i9.10 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 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 i196,978
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 June 30, 2023, June 2022 Warrants to purchase an aggregate of i384,615 shares remained outstanding, with a weighted average exercise price of $i9.10
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.
25
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In December 2021, we completed a private placement (the “December 2021 Private Placement”) with certain institutional investors for the sale of i170,455 shares of our common stock at a purchase price of $i24.64
per share. We also sold to the same institutional investors (i) pre-funded warrants (the “December 2021 Pre-Funded Warrants”) to purchase i12,175 shares of common stock at an exercise price of $i0.0007
per share and (ii) warrants (collectively with the December 2021 Pre-Funded Warrants, the “December 2021 Warrants”) to purchase up to an aggregate of i182,630 shares of common stock at an exercise price of $i24.64
per share. In connection with the December 2021 Private Placement, we paid the placement agent commissions of $i360 thousand plus $i42 thousand
in expenses and we also paid legal, accounting and other fees of $i97 thousand. Net proceeds from the December 2021 Private Placement were approximately $i4.0 million.
In
January 2022, all of the December 2021 Pre-Funded Warrants were exercised. As of June 30, 2023, December 2021 Warrants to purchase an aggregate of i182,630 shares remained outstanding, with an exercise price of $i24.64
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 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 1-for-35 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 i3,187
shares of common stock. During the year ended December 31, 2021, i1,721,023 shares of Series A Preferred Stock were converted into i49,172
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. (both of which are 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 the 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”).
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 i1.582% 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 1-for-35 basis. On March 29, 2019, the Company also filed a Certificate of Elimination with respect
26
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 i98,337
shares of our common stock to certain institutional investors, at a purchase price of $i23.59 per share. We also sold, to the same institutional investors, warrants (the “January 2020 Investor Warrants”) to purchase up to i98,337
shares of common stock at an exercise price of $i23.59 per share in a concurrent private placement for a purchase price of $i4.38 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 i6,883 shares of common stock at an exercise price of $i34.96
per share.
January 2020 Warrants issued to purchase an aggregate of i32,773 shares remain outstanding at June 30, 2023 with a weighted average exercise price of $i25.66
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 and six months ended June 30, 2023 and June 30, 2022, iiiino///
January 2020 Warrants were exercised.
iAs of June 30, 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 $i0.1 million at June 30, 2023, compared to $i0.2
million at June 30, 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 June 30, 2023 is expected to be recognized is approximately i2.6 years.
27
ENERGY
FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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:
*Options
have been restated for the 1-for-7 reverse stock split effective June 16, 2023.
/
Restricted stock units
iA summary of restricted stock unit activity under all outstanding stock incentive plans for the six months ended June
30, 2023 is presented as follows:
Restricted Stock Units
Weighted Average Grant Date Fair Value
Weighted Average Remaining Contractual Life (in years)
As of June 30, 2023, we had approximately $i2.1 million
in outstanding purchase commitments for inventory, $i0.4 million of which is expected to ship in the third quarter of 2023 and $i1.7 million of which is expected to ship in the fourth quarter of 2023. We have i80%
of the outstanding purchase commitments with a related party.
29
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”). 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 a market leader for the most demanding applications where performance, quality, value, environmental impact and health are considered
paramount. We specialize in energy efficient LED lighting retrofit products, 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.
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 price 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. In the second quarter of 2023 we have enhanced the performance of our RedCap®product. 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.
In 2019, the Company began the process of right-sizing the business and undertook cost-cutting measures. 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 ultraviolet light disinfection technology that ultimately gained little traction in the market.
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.
30
It is our belief that the dramatic rightsizing efforts undertaken in 2022, along with reorganization of the sales team and ongoing development of innovative, high-value products and an expanded 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 order can often take at least six months, and many MMM products are built-to-order with resultant lead times before orders become revenue. 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 pipeline in the second half of 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. The recent strategic investment by Sander Electronics, Inc. (“Sander”) contributed meaningful external capital, as well as presents synergistic opportunities to improve and diversify our supply chain and product offerings. We plan to achieve profitability through developing and launching innovative products such as EnFocus 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 EnFocus platform that aim to serve the commercial market. We are also evaluating adjacent technologies including ruggedized industrial retrofit lighting applications and 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 June 30, 2023.
On June 28, 2023, the Company received notices of resignation from the following four members of the Board of Directors: Jennifer Cheng, Brian Lagarto, Jeffery Parker, and Stephen Socolof. Their terms as directors would have otherwise expired at the 2024 annual meeting of stockholders of the
Company. The resignations did not involve any disagreement with the Company.
On July 2, 2023, the remaining members of the Board of Directors unanimously appointed the following four new members to the Board of Directors: Kin-Fu Chen, Dr. Shou-Jang Lee, Jason Tien-Chia Tsai, and Dr. Chao-Jen Huang. The Board of Directors affirmatively determined that, at the time of his appointment, each of the new members of the Board of Directors is an independent director under the corporate governance standards of the Nasdaq.
31
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 $1.1 million for the second quarter of 2023 decreased $0.4 million, or 29%, compared to second quarter of 2022 net sales of $1.5 million, primarily driven by a decrease in commercial sales of $0.5 million, or 55%, that was partially offset by an increase in MMM sales of $0.1 million, or 21%. MMM sales increased due to improved 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. Net commercial product sales decreased in the second quarter of 2023 compared to the same period in 2022, primarily due to the lack of availability in high margin, high demand commercial products as a result of supply chain interruptions.
Net sales of $2.0 million for the first six months of 2023 decreased $1.6 million, or 44%, compared to the same period in 2022, primarily driven by a 64% decrease
in commercial product sales. MMM product sales also decreased 15% for the first six months of 2023, as compared to the same period of 2022. Net commercial product sales for the first six months of 2023 decreased as compared to the same period of 2022 due to the unavailability of high margin, high demand commercial items because of supply chain interruptions. Net sales of our MMM products decreased mainly 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.
32
Gross Profit
Gross
profit was $0.2 million, or 17% of net sales, for the second quarter of 2023. This compares with gross profit of $0.1 million, or 7% of net sales, in the second quarter of 2022. The period-over-period increase in gross profit was driven mainly by a favorable impact from lower fixed costs of $0.2 million, or 15% of net sales. The $0.1 million favorable impact from product mix was offset by an unfavorable impact of $0.1 million from lower sales. Additionally, there was an overall net unfavorable impact from the change in inventory reserves of $0.1 million, or 7% of net sales, versus the second quarter of 2022 which included a one-time adjustment from a scrap write-off.
Gross profit was $0.2 million, or 10% of net sales, for the first six months of 2023 compared to $0.1 million, or 2% of net sales, for the first six months of 2022. The year-over-year increase was driven by (i) a favorable $0.4 million decrease in fixed costs,
or 18% of net sales, which was offset by an unfavorable impact from lower sales volume of $0.4 million, or 18% of net sales; and (ii) a favorable impact of $0.1 million, or 4% of net sales, from the change in inventory reserves which included a one-time adjustment taken during the second quarter of 2022 for a scrap write-off.
Operating expenses
Product development
Product development expenses include salaries and related expenses, contractor and consulting fees, product development related 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 $0.1 million for the second quarter of 2023, down 58% from the second quarter of 2022. Product development expenses in the second quarter of 2023 primarily relate to customization of product offerings for key customers.
Product development expenses were $0.3 million for the first six months of 2023, a $0.6 million decrease compared to $0.9 million for the first six months of 2022. The decrease is primarily related to payroll expense and decreased headcount.
Selling, general andadministrative
Selling, general and administrative expenses were $1.1 million for the second quarter of 2023, down 42% as compared to $2.0 million in the second quarter of 2022. The decrease in expenses from the second quarter of 2022 primarily relates to (i) a reduction of $0.6 million in
payroll and payroll related expenses due to reduced headcount; and (ii) a reduction of $0.1 million in trade show and other marketing expense. The decrease in expenses were partially offset by a $0.1 million increase in legal and professional expenses.
Selling, general and administrative expenses were $2.2 million for the first six months of 2023, compared to $4.1 million for the first six months of 2022. The decrease is primarily due to (i) decreases in payroll and payroll related expenses of $1.3 million due to reduced headcount; (ii) a reduction of $0.3 million in trade show and other marketing expense; and (iii) a reduction in network and software expenses of $0.1 million.
Other Expense (Income)
Interest expense
Interest
expense was $69 thousand for the second quarter of 2023, compared to interest expense of $260 thousand for the second quarter of 2022. The decrease in interest expense is primarily related to interest attributable to an overall reduction in principal on the Inventory Facility (as defined below) and the 2022 Streeterville Note (as defined below), lower facility fees on the Inventory Facility and elimination of the Receivables Facility (as defined below), as well as the amortization of debt costs related to the Inventory Facility. The actual cash interest paid in the second quarter of 2023 was $10 thousand compared to $105 thousand in the second quarter of 2022.
Interest expense was $192 thousand for the first six months of 2023, compared to interest expense of $444 thousand for the first six months of 2022. The decrease in interest expense is primarily related to interest attributable to a promissory note we sold and issued
to Streeterville Capital, LLC (“Streeterville”) in the principal amount of approximately $1.7 million (the “2021 Streeterville Note”), as well as the amortization of debt costs related to the Credit Facilities (as defined below). The actual cash interest paid for each of the six months ended June 30, 2023 and 2022 was $70 thousand and $183 thousand, respectively.
33
Other income and expenses
Other expenses were $14 thousand for the second quarter of 2023, compared to other expenses of $18 thousand for the second quarter of 2022. Other expenses were $21 thousand for the six months ended June
30, 2023, compared to other expenses of $29 thousand for the six months ended June 30, 2022. Other expenses are mainly comprised of bank and collateral management fees.
Other income for the second quarter and first half of 2023 of $16 thousand, relates to the reversal of credit balances recorded from online retail sales. Other income of $30 thousand for the first half 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 taken to income during the first quarter of 2022.
Provision for income taxes
Due
to the operating losses incurred during the three and six months ended June 30, 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 June 30, 2023, our net loss of $1.2 million decreased 53% from the net loss for the three months ended June 30, 2022 of $2.5 million. The decrease
is primarily due to a decrease in operating expenses in the second quarter of 2023 from the second quarter of 2022 as gross profit remained relatively flat.
For the six months ended June 30, 2023, our net loss of $2.5 million increased 53% over the net loss for the six months ended June 30, 2022 of $5.3 million. The decrease is primarily due to a decrease in operating expenses in the first half of 2023 from the first half of 2022 as gross profit remained relatively flat.
Financial condition
At June 30, 2023, we had $1.3 million in cash and a total of $1.6 million of debt,
net of discounts and unamortized debt costs. Total debt, net of discounts and unamortized debt costs, at June 30, 2023 included $0.3 million outstanding under the Inventory Facility and $1.3 million aggregate principal amount of the 2022 Streeterville Note outstanding. We have historically incurred substantial losses, and as of June 30, 2023, we had an accumulated deficit of $151.5 million. Additionally, our sales have been concentrated among a few major customers and for the six months ended June 30, 2023, two customers accounted for approximately 34% of net sales.
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.
34
•The
Company has aggressively re-evaluated operating expenses, and reduced its workforce significantly throughout 2022 and into 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 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) 187,637 shares of our common stock, (ii) pre-funded warrants (the “June 2022 Pre-Funded Warrants”) to purchase 196,978 shares of common stock at an exercise price of $0.0001 per share and (iii) warrants (collectively with the June 2022 Pre-Funded Warrants, the “June 2022 Warrants”) to purchase up to an aggregate of 384,615 shares of common stock at an exercise price of $9.10 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 previously outstanding 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 $817 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.
◦ 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.
35
◦ In June 2023, we entered into a private placement agreement, pursuant to which aggregate gross proceeds to the Company in respect of the private placements were $1.3 million, before deducting estimated offering
expenses payable by the Company.
During 2022 and into 2023, we redoubled our cost control efforts to streamline our operations by closely managing all spending done throughout the Company, while carefully investing in new products and strategies that sought to reenergize sales.
Throughout 2022 and into 2023, 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. 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 long-term impacts 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.
Listing
Compliance
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.
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
36
“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 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 Company’s 2023 annual meeting of stockholders. On May 1, 2023, the Panel granted the
Company’s request (the “Panel Decision”) 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 Minimum Stockholders’ Equity Rule and (2) on or before July 7, 2023, the Company shall demonstrate compliance with the Bid Price Rule.
On July 27, 2023, the
Company received written notification from the Staff stating that the Company has regained compliance with the Bid Price Rule and the Minimum Stockholders’ Equity Rule, as required by the Panel Decision. Pursuant to Nasdaq Listing Rule 5815(d)(4)(B), the Company will be subject to a mandatory panel monitor for a period of one year from July 27, 2023 (the “Monitoring Period”). If, within the Monitoring Period, the Staff finds the Company again out of compliance with the Minimum Stockholders’ Equity Rule, notwithstanding Nasdaq Listing Rule 5810(c)(2), the Company will not be
permitted to provide the Staff with a plan of compliance with respect to that deficiency and the Staff will not be permitted to grant additional time for the Company to regain compliance with respect to that deficiency, nor will the Company be afforded an applicable cure or compliance period pursuant to Nasdaq Listing Rule 5810(c)(3). Instead, the Staff will issue a delist determination letter and the Company will have an opportunity to request a new hearing with the initial Panel or a newly convened hearings panel if the initial Panel is unavailable. The Company will have the opportunity to respond and present to the Panel as provided
by Nasdaq Listing Rule 5815(d)(4)(C). The Company’s common stock may be at that time delisted from Nasdaq.
As of the date of this Quarterly Report, the Company believes it has maintained compliance with the Minimum Stockholders’ Equity Rule for continued listing on the Nasdaq Capital Market. To become compliant with the Bid Price Rule, the Company effected a 1-for-7 reverse stock split to increase the per share trading price of the common stock. At the Company’s annual meeting of stockholders held on June 15, 2023, the
Company’s stockholders approved a form of the Certificate of Amendment to the Certificate of Incorporation and authorized our board of directors to amend the Certificate of Incorporation to effect a reverse stock split of the outstanding shares of the Company’s common stock at a ratio ranging from any whole number of at least 1-for-2 and up to 1-for-10, with the exact ratio within the foregoing range to be determined by the Board of Directors in its sole discretion.
On June 15, 2023, the Board of Directors determined to set the Split Ratio. The Certificate of Amendment to our Certificate
of Incorporation was filed with the Secretary of State of the State of Delaware on June 15, 2023, with the reverse stock split becoming effective on June 16, 2023. At the Effective Time, every seven shares of common stock issued and outstanding automatically combined into one validly issued, fully paid and non-assessable share of common stock. The common stock began trading on Nasdaq on a split-adjusted basis at the opening of trading on June 19, 2023.
37
Liquidity andcapitalresources
Cash
At June 30, 2023, our cash balance was approximately $1.3 million, compared to approximately $0.1 million 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 $1.3 million for the six months ended June 30, 2023. The net loss for the six months ended June 30, 2023 was $2.5 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 six months ended June
30, 2023, we generated $0.3 million from inventory, $0.5 million from changes in prepaid and other assets, mainly from the receipt of $445 thousand in Employee Retention Tax Credit funds, and $0.9 million from accounts payable due to the timing of inventory receipts and payments. During the six months ended June 30, 2023, we used $0.4 million through the timing of collection of accounts receivable.
Net cash used in operating activities was $5.3 million for the six months ended June 30, 2022. The net loss for the six months ended June 30, 2022 was $5.3 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 six
months ended June 30, 2022, we generated $0.8 million from inventory, $0.1 million through the timing of collection of accounts receivable, and $0.1 million from changes in prepaid and other assets. We used $0.7 million from accounts payable due to the timing of inventory receipts and payments, $0.4 million due to changes in accrued and other liabilities (primarily due to a decrease in accrued payroll), and $0.3 million from changes in deferred revenue.
Net cash used in investing activities
For the six months ended June 30, 2022, net cash used in investing activities was $37 thousand and resulted primarily from the purchase of tooling.
Net cash provided by financing activities
Net
cash provided by financing activities during the six months ended June 30, 2023 was $2.6 million, primarily related to $4.3 million of net proceeds from the issuance of common stock, offset by net payments on the Credit Facilities of $1.2 million and the 2022 Streeterville Note of $500 thousand.
As of June 30, 2023, the June 2022 Warrants, expiring June 7, 2027, to purchase an aggregate of 384,616 shares remained outstanding, with a weighted average exercise price of $9.10 per share; warrants issued in December 2021, expiring December 16, 2026 (the “December 2021 Warrants”), to purchase an aggregate of 182,630 shares remained outstanding, with an exercise price of $24.64 per share, and warrants issued in January 2020,
expiring January 13, 2025 (the “January 2020 Warrants”), to purchase an aggregate of 32,773 shares remained outstanding with a weighted average exercise price of $25.66 per share. The exercise of the remaining June 2022 Warrants, December 2021 Warrants and January 2020 Warrants outstanding could provide us with cash proceeds of up to $3.5 million, $4.5 million and $0.8 million, respectively, in the aggregate.
38
Net cash provided by financing activities during the six months ended June 30, 2022 was $3.6 million, primarily related to net proceeds of $1.8 million from the 2022 Streeterville Note and net proceeds of $3.2 million from the June 2022 Private Placement. These
proceeds were offset slightly by $1.0 million in payments made against the 2021 Streeterville Note and $0.3 million in net payments made under the Credit Facilities.
Contractual and other obligations
As of June 30, 2023, we had approximately $2.1 million in outstanding purchase commitments for inventory, $0.4 million of which is expected to ship in the third quarter of 2023 and $1.7 million of which is expected to ship in the fourth quarter of 2023. We have 80% of the outstanding purchase commitments with 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 June 30, 2023, sales to two U.S. Navy shipbuilders and a distributor to the U.S. Navy accounted for approximately 26% and 16% of net sales, respectively. When sales to our primary distributors 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 42% of net sales for the same period. For the three months ended June 30, 2022, sales to our primary distributor for the U.S. Navy, a regional commercial lighting retrofit company, and a commercial building systems provider accounted for approximately 22%, 14%, and 13% of net sales, respectively. When sales to our primary distributors 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 24% of net sales for the same period.
For the six months ended June 30, 2023, sales to a U.S. Navy shipbuilder and a distributor to the Department of Defense accounted for approximately 23% and 11% 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 34% of net sales for the same period. For the six months ended June 30, 2022, sales to our primary distributor for the U.S. Navy, a U.S. Navy shipbuilder, and a regional commercial lighting retrofit company accounted for approximately18%, 12%, and 12% 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 31% of net sales for the same period.
A distributor for the Department of Defense and a U.S. Navy shipbuilder accounted for approximately 24% and 14% of net trade accounts receivable, respectively, at June 30, 2023. At December 31, 2022, a distributor for the 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 June 30, 2023. Two offshore suppliers accounted for approximately 19% and 10%, respectively,
of our total expenditures for the three months ended June 30, 2022. For the six months ended June 30, 2022, one offshore supplier accounted for approximately 19% of our total expenditures.
At June 30, 2023, one offshore supplier accounted for approximately 31% of our trade accounts payable balance. At December 31, 2022, this offshore supplier accounted for approximately 36% of our trade accounts payable balance.
39
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.
40
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 who also serves as our principal financial 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 June 30, 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 June 30, 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.
41
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 June 30, 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
The following financial information from our Quarterly Report for the quarter ended June 30, 2023, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at June 30, 2023 and December 31, 2022, (ii) Condensed Consolidated Statements of Operations for
the three and six months ended June 30, 2023 and 2022, (iii) Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2023 and 2022, (v) Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 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.
44
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.
