Quarterly Report — Form 10-Q Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 799K
2: EX-10.2 Material Contract HTML 162K
3: EX-10.3 Material Contract HTML 217K
4: EX-31.1 Certification -- §302 - SOA'02 HTML 25K
5: EX-31.2 Certification -- §302 - SOA'02 HTML 25K
6: EX-32.1 Certification -- §906 - SOA'02 HTML 24K
13: R1 Cover Page HTML 75K
14: R2 Condensed Consolidated Balance Sheets HTML 134K
15: R3 Condensed Consolidated Balance Sheets HTML 41K
(Parentheticals)
16: R4 Condensed Consolidated Statements of Operations HTML 74K
(Unaudited)
17: R5 Condensed Consolidated Statements of Operations HTML 23K
(Unaudited) (Parenthetical)
18: R6 Condensed Consolidated Statements of Comprehensive HTML 38K
Loss (Unaudited)
19: R7 Condensed Consolidated Statements of Changes in HTML 103K
Stockholders' Equity (Unaudited)
20: R8 Condensed Consolidated Statements of Changes in HTML 23K
Stockholders' Equity (Unaudited) (Parenthetical)
21: R9 Condensed Consolidated Statements of Cash Flows HTML 106K
(Unaudited)
22: R10 Nature of Operations HTML 27K
23: R11 Basis of Presentation and Summary of Significant HTML 127K
Accounting Policies
24: R12 Restructuring HTML 46K
25: R13 Inventories HTML 44K
26: R14 Property and Equipment HTML 44K
27: R15 Leases HTML 134K
28: R16 Debt HTML 34K
29: R17 Income Taxes HTML 27K
30: R18 Stockholders' Equity HTML 101K
31: R19 Commitments and Contingencies HTML 24K
32: R20 Subsequent Events HTML 25K
33: R21 Basis of Presentation and Summary of Significant HTML 54K
Accounting Policies (Policies)
34: R22 Basis of Presentation and Summary of Significant HTML 105K
Accounting Policies (Tables)
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36: R24 Inventories (Tables) HTML 45K
37: R25 Property and Equipment (Tables) HTML 43K
38: R26 Leases (Tables) HTML 164K
39: R27 Stockholders' Equity (Tables) HTML 97K
40: R28 Nature of Operations (Details) HTML 33K
41: R29 Basis of Presentation and Summary of Significant HTML 108K
Accounting Policies - Narrative (Details)
42: R30 Basis of Presentation and Summary of Significant HTML 31K
Accounting Policies - Disaggregation of Revenue
(Details)
43: R31 Basis of Presentation and Summary of Significant HTML 37K
Accounting Policies - Reconciliation of Basic and
Diluted Loss per Share (Details)
44: R32 Basis of Presentation and Summary of Significant HTML 31K
Accounting Policies - Warranty Activity (Details)
45: R33 Basis of Presentation and Summary of Significant HTML 30K
Accounting Policies - Financial Instruments Assets
and Liabilities (Details)
46: R34 Basis of Presentation and Summary of Significant HTML 37K
Accounting Policies - Fair Value Inputs (Details)
47: R35 Basis of Presentation and Summary of Significant HTML 30K
Accounting Policies - Rollforward (Details)
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49: R37 Restructuring - Reconciliation of Restructuring HTML 37K
Liability (Details)
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52: R40 Property and Equipment - Schedule of Property and HTML 62K
Equipment (Details)
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54: R42 Leases - Components of Lease Cost (Details) HTML 37K
55: R43 Leases - Schedule of Supplemental Balance Sheet HTML 41K
Information (Details)
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Liabilities (Details)
57: R45 Leases - Schedule of Supplemental Cash Flow HTML 27K
Information (Details)
58: R46 Debt - Narrative (Details) HTML 142K
59: R47 Income Taxes - Narrative (Details) HTML 33K
60: R48 Stockholders' Equity - Stock Split (Details) HTML 33K
61: R49 Stockholders' Equity - Preferred Stock (Details) HTML 53K
62: R50 Stockholders' Equity - Issuance of Common Stock HTML 50K
and Warrants (Details)
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64: R52 Stockholders' Equity - Stock-Based Compensation HTML 37K
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65: R53 Stockholders' Equity - Stock Options and a Summary HTML 71K
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(Details)
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(Exact name of registrant as specified in its charter)
iDelaware
i94-3021850
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i32000 Aurora Road, iSuite
BiSolon, iOH
(Address of principal executive offices)
i44139
(Zip
Code)
(Registrant’s telephone number, including area code): i(440)i715-1300
None
(Former
name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock, par value $0.0001 per share
iEFOI
iNASDAQ
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 i☐ No
☑
The number of outstanding shares of the registrant’s common stock, $0.0001 par value, as of August 10, 2020 was i3,239,874.
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 predecessor entity 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, and Section 21E of the Securities Exchange Act of 1934, as amended. 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, 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, 2019 and other matters described in this Quarterly Report generally. Some of these factors include:
•disruptions in the U.S. and global economy and business interruptions resulting from the recent coronavirus (“COVID-19”) health pandemic outbreak and related stay-at-home orders, quarantine policies and restrictions on travel, trade and business operations;
•our
need for additional financing in the near term to continue our operations;
•our ability to obtain refinancing or extend maturing debt;
•our ability to continue as a going concern for a reasonable period of time;
•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 increase sales by adding new customers to reduce the reliance of our sales on a smaller group of customers, and the long sales-cycle that our product requires;
•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 invest in growth opportunities;
•our ability to compete effectively against companies with lower cost structures or greater resources, or more rapid development efforts, and new competitors in our target markets;
•our ability to successfully scale our network of sales representatives, agents, and distributors to match the sales reach of larger, established competitors;
•market acceptance of our LED lighting and control technologies and products;
•our
ability to attract and retain qualified personnel, and to do so in a timely manner;
•the impact of any type of legal inquiry, claim or dispute;
•general economic conditions in the United States and in other markets in which we operate or secure products;
2
•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;
•the possible impact on our military maritime customers and their ability
to honor the timing for existing orders or place future orders due to COVID-19 breakouts amongst personnel that might impact the use of ships in service;
•business interruptions resulting from geopolitical actions, including war and terrorism, natural disasters, including earthquakes, typhoons, floods and fires or from health epidemics or pandemics or other contagious outbreaks;
•our reliance on a limited number of third-party suppliers, our ability to obtain critical components and finished products from such suppliers on acceptable terms and of acceptable quality, and the impact of our fluctuating demand on the stability of such suppliers;
•our ability to timely and efficiently transport products from our third-party suppliers to our facility by ocean marine channels;
•our
ability to respond to new lighting technologies and market trends, and 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
•maintain effective internal controls and otherwise comply with our obligations as a public company and under Nasdaq listing standards.
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.
Energy Focus®, Intellitube®, RedCap® and EnFocus™ are our registered trademarks. We may also refer to trademarks of other corporations and organizations in this document.
Trade
accounts receivable, less allowances of $i7 and $i28, respectively
i2,518
i2,337
Inventories,
net
i5,900
i6,168
Prepaid
and other current assets
i677
i479
Total
current assets
i11,822
i9,334
Property
and equipment, net
i415
i389
Operating
lease, right-of-use asset
i1,051
i1,289
Restructured
lease, right-of-use asset
i214
i322
Other
assets
i405
i405
Total
assets
$
i13,907
$
i11,739
LIABILITIES
Current
liabilities:
Accounts payable
$
i2,617
$
i1,340
Accrued
liabilities
i57
i186
Accrued
legal and professional fees
i307
i215
Accrued
payroll and related benefits
i585
i360
Accrued
sales commissions
i50
i32
Accrued
restructuring
i25
i24
Accrued
warranty reserve
i215
i195
Deferred
revenue
i61
i18
Operating
lease liabilities
i577
i550
Restructured
lease liabilities
i331
i319
Finance
lease liabilities
i3
i3
Warrant
liability
i4,011
i—
Convertible
notes
i—
i1,700
Iliad
note, net of discount and loan origination fees
i603
i885
PPP
loan
i263
i—
Credit
line borrowings, net of loan origination fees
i1,331
i715
Total
current liabilities
i11,036
i6,542
Other
liabilities
i—
i14
Operating
lease liabilities, net of current portion
i623
i906
Restructured
lease liabilities, net of current portion
i—
i168
Finance
lease liabilities, net of current portion
i2
i4
PPP
loan, net of current maturities
i532
i—
Iliad
note, net of current maturities
i—
i109
Total
liabilities
i12,193
i7,743
STOCKHOLDERS'
EQUITY
Preferred stock, par value $ii0.0001/
per share:
Authorized: i5,000,000 shares (i3,300,000
shares designated as Series A Convertible Preferred Stock) in 2020 and i2,000,000 shares (ino shares designated as Series A Convertible Preferred Stock)
in 2019
Energy Focus, Inc. (“the Company”) engages 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 products and controls in the commercial and military maritime markets (“MMM”). Our mission is to enable our customers to run their facilities and offices with greater energy efficiency, productivity, and wellness through advanced LED retrofit solutions. Our goal is to be the LED lighting technology and market leader for the most demanding applications where performance, quality and health are considered paramount. We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge (“HID”)
lighting and other types of lamps in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military tubular LED (“TLED”), as well as other LED products and controls.
At the Company’s annual meeting of stockholders held on December 17, 2019, 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-20,
with the exact ratio within the foregoing range to be determined by the board of directors in its sole discretion.
On June 2, 2020, our board of directors determined to set the reverse stock split ratio at 1-for-5 (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 11, 2020, upon which the reverse stock split became effective immediately (the “Effective Time”). At the Effective Time, every five 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 prior period’s 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 unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary in Taiwan during 2019. All significant inter-company balances and transactions
have been eliminated. 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, 2020 and 2019 pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“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,
2019 (“2019 Annual Report”). The Condensed Consolidated Balance Sheet as of December 31, 2019 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, 2020 and December 31, 2019, Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019, Condensed Consolidated
Statements of Comprehensive Loss for the three and six months ended June 30, 2020 and 2019, 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
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; the cost and offsetting income related to subleased property; and stock-based compensation. 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.
Certain risks and concentrations
We have certain customers whose net sales individually represented i10%
or more of our total net sales, or whose net trade accounts receivable balance individually represented i10% or more of our total net trade accounts receivable, as follows:
For the three months ended June 30, 2020, sales to our primary distributor for the U.S. Navy, a regional commercial lighting retrofit company and a primary shipbuilder for the U.S. Navy, accounted for approximately i40%,
i15% 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
i60% of net sales for the same period. For the three months ended June 30, 2019, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company accounted for approximately i13%
and i26% 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 i20%
of net sales for the same period.
For the six months ended June 30, 2020, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company accounted for approximately i39% and i15%
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 i53% of net sales for the same period. For the six months ended June 30, 2019, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company accounted for approximately i17%
and i28% 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 i26%
of net sales for the same period.
A regional commercial lighting retrofit company and our primary distributor for the U.S. Navy accounted for approximately i19% and i47%
of net trade accounts receivable, respectively, at June 30, 2020. At December 31, 2019, our primary distributor for the U.S. Navy accounted for approximately i10% of net trade accounts receivable and a large regional retrofit company accounted for i41%
of our net trade accounts receivable.
iRecent accounting pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which significantly changes the accounting for credit losses
on instruments within its scope. The new guidance introduces an approach based on expected losses to estimate credit losses on certain financial instruments, including trade receivables, and requires an entity to recognize an allowance based on its estimate of expected credit losses rather than incurred losses. For smaller reporting companies, this standard will be effective for interim and annual periods starting after December 15, 2022 and will generally require adoption on a modified retrospective basis. We are in the process of evaluating the impact of the standard.
11
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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. 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. During the first eleven months of 2019 we evaluated and monitored the creditworthiness of each customer on a case-by-case basis. However, during December 2019 we transitioned to an account receivable insurance program with a high credit worthy insurance company where we have the large majority of the accounts receivable insured with a portion of self-retention. This third party also provides credit-worthiness ratings and metrics that significantly assists us in evaluating the
credit worthiness of both existing and new customers. 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 customer creditworthiness and historical
payment experience, the age of outstanding receivables, and performance guarantees to the extent applicable. Past due amounts are written off when our internal collection efforts have been unsuccessful, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. We do not generally require collateral from our customers.
Our standard payment terms with customers are net 30 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 to certain 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.
Geographic information
All of our long-lived fixed assets are located in the United States. Sales attributable to customers outside the United States for both the three and six months ended June 30, 2020 were less than ii1/%
of net sales. There were ino net sales attributable to customers outside the United States for the three months ended June 30, 2019 and less thani1%
for the six months ended June 30, 2019. The geographic location of our net sales is derived from the destination to which we ship the product.
12
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted loss per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of incremental shares upon the exercise of stock options and warrants, unless the effect would be anti-dilutive.
i
The
following table presents a reconciliation of basic and diluted loss per share computations (in thousands):
Basic
weighted average common shares outstanding *
i3,192
i2,467
i3,139
i2,446
*
Shares outstanding for prior periods have been restated for the 1-for-5 stock split
/
As
a result of the net loss we incurred for three and six months ended June 30, 2020, options, warrants and convertible securities representing approximately i47 thousand and i4 thousand
shares of common stock were excluded from the loss per share calculation, respectively, because their inclusion would have been anti-dilutive. As a result of the net loss we incurred for the three and six months ended June 30, 2019, options, warrants and convertible securities representing approximately i28 thousand and i66 thousand
shares of common stock were excluded from the loss per share calculation, respectively, because of this same reason.
iProduct warranties
Through March 31, 2016, we warranted finished goods against defects in material and workmanship under normal use and service for periods generally between one and ifive
years. Beginning April 1, 2016, we warrant our commercial Tubular LED Lamps, (“TLEDs”), excluding RedCap®, our Battery Backup TLED, the troffer luminaires, and certain Globe Lights for a period of iten years and all other LED products for ifive
years per the Terms and Conditions outlined on our website. Beginning in October 2019, TLEDs (excluding Red Caps®) are warranted for iten years and the warranty for all of our other products is ifive
years. Warranty settlement costs consist of actual amounts expensed for warranty, which are largely a result of the cost of replacement products 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. 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. iThe
following table summarizes warranty activity for the periods presented (in thousands):
In January 2020, we completed a registered direct offering for the sale of i688,360 shares of our common stock to certain
institutional investors, at a purchase price of $i3.37 per share. We also sold, to the same institutional investors, warrants to purchase up to i688,360
shares of common stock at an exercise price of $i3.37 per share in a concurrent private placement for a purchase price of $i0.625
per warrant. We paid the placement agent commissions of $i193 thousand plus $i50 thousand
in expenses in connection with the registered direct offering and the concurrent private placement and we also paid legal, accounting and other fees of $i231 thousand related to the offering. Total offering costs of $i474 thousand
have been presented as a reduction of additional paid-in capital and have been netted within equity. In addition, we issued warrants to the placement agent to purchase up to i48,185 shares of common stock at an exercise price of $i4.99
per share. Net proceeds to us from the sale of common stock and warrants (the “January 2020 Equity Offering”) were approximately $i2.3 million. In accordance with the terms of the Iliad Note (as defined below in Note 7), ii10/%
of the gross proceeds from the January 2020 Equity Offering ($i275 thousand) were used to make payments on the Iliad Note, of which $i226 thousand
went towards the outstanding principal amount and the balance to interest.
Warrants to purchase an aggregate of i721,546 shares remain outstanding at June 30, 2020 with a weighted average exercise price of $i3.48
per share. The exercise of warrants could provide us with cash proceeds of $i2.5 million. During the six months ended June 30, 2020, i15
thousand warrants were exercised resulting in total proceeds of $i51 thousand.
The warrants have been classified as liabilities, as opposed to equity, due to the potential adjustment to the exercise price that could result upon late delivery of the shares or potential cash settlement and are recorded at their fair values at each balance sheet date. Please also refer to Note 9, “Stockholder’s Equity”.
Fair Value Measurements
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.
i
The following table provides a summary of the financial assets and
liabilities measured at fair value on a recurring basis as of June 30, 2020 (in thousands):
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.
The estimated fair value of warrants accounted for as liabilities, representing a level 3 fair value measure, was determined on the issuance date and subsequently marked to market at each financial reporting date. We use the Black-Scholes valuation model to value the warrant liabilities at fair
value. The fair value is estimated using the expected volatility based on our historical volatility and is determined using probability weighted-average assumptions, when appropriate.
14
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended June 30, 2020, we recorded net restructuring credits of approximately $i14
thousand and $i28 thousand, respectively, and for the three and six months ended June 30, 2019, we recorded restructuring charges totaling approximately $i128
thousand and $i262 thousand, respectively, related to the costs and offsetting sublease income and accretion expense for the remaining lease obligation for our former New York, New York office. For additional information regarding the restructuring actions taken as part of the 2017 and 2019 restructuring plans, please refer to Note 3, “Restructuring,” included under Item 8 of our 2019 Annual Report.
Our restructuring liabilities consist of estimated ongoing costs related to long-term operating lease obligations, which
the Company has exited. The recorded value of the ongoing lease obligations is based on the remaining lease term and payment amount, discounted to present value. Changes in subsequent periods resulting from a revision to either the timing or the amount of estimated cash flows over the future period are measured using the credit adjusted, risk free rate that was used to measure the restructuring liabilities initially. Please also refer to Note 6, “Leases”.
i
The
following is a reconciliation of the beginning and ending balances of our restructuring liability as it relates to the 2017 and 2019 restructuring plans (in thousands):
Long-term restructuring liability, included in other liabilities
$
i—
/
As
a result of the restructuring actions and initiatives described above, we have reduced our operating expenses to be more commensurate with our sales volumes. However, we continue to incur losses and have a substantial accumulated deficit, and
15
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
substantial doubt about our ability to continue as a going concern continues to exist at June 30, 2020.
Since the executive transition on
April 1, 2019, we have continued to evaluate and assess strategic options as we seek to achieve profitability. We plan to achieve profitability through growing our sales by continuing to execute 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 channel partnerships. We also plan to continue to develop advanced lighting and lighting control technologies and introduce impactful new products such as the EnFocus™, a breakthrough lighting control platform we officially launched during the second quarter of 2020. Furthermore, we have been developing ultraviolet (UV) disinfection technologies and products which we have filed provisional patents on and which we expect to launch by the end of 2020. In addition, we continue to apply rigorous and financial disciplines in our organizational structure,
business processes and policies, and supply chain practices to help accelerate our path towards profitability.
As described in Note 9, we also raised approximately $i2.3 million of net proceeds upon the issuance of common stock and warrants in connection with the January 2020 Equity Offering.
The restructuring and cost cutting initiatives implemented during
2019 as well as the January 2020 Equity Offering that significantly strengthened our balance sheet were designed to allow us to effectively execute these strategies. However, our efforts may not occur as quickly as we envision or be successful, due to the long sales cycle in our industry, the corresponding time required to ramp up sales from new products and markets into this sales cycle, the timing of introductions of additional new products, significant competition, potential sales volatility given our customer concentration, and the recent and lingering economic impact from the COVID-19 pandemic, among other factors. 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 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 and/or conditions, such as interest rate, restrictive covenants, conversion features, refinancing demands, and control or revocation provisions, which are not acceptable to management or our board of directors; and
•the current environment in capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing.
If we fail to obtain the required additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need to delay, scale back or eliminate our growth plans and further reduce our operating costs and headcount, each of which would have a material adverse effect on our business, future prospects,
and financial condition. A lack of additional funding could also result in our inability to continue as a going concern and force us to sell certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire investment.
Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to obtain additional 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, application and successful acquisition of a Paycheck Protection Program (“PPP”) loan during April 2020, plans and initiatives in our R&D, product development and sales and marketing, development
of potential channel partnerships, if adequately executed, will provide us with an ability to finance our operations through the next twelve months and will mitigate the substantial doubt about our ability to continue as a going concern.
16
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On May 15, 2019, we received a letter from the Nasdaq Stock Market (“Nasdaq”) advising us that for 30 consecutive trading days preceding the date of the letter, the bid price
of our common stock had closed below the $1.00 per share minimum required for continued listing on Nasdaq pursuant to listing rules. Therefore we could be subject to delisting if we did not regain compliance within the compliance period or extend the compliance period by filing for an extension. On October 15, 2019, the Company formally requested a 180-day extension beginning November 12, 2019 to regain compliance.
On April 16, 2020, Nasdaq announced that, in response to the COVID-19 pandemic and related extraordinary market conditions, it is providing temporary relief through June 30, 2020 from, among other rules, the $1.00
minimum bid price rule. As a result, we had until July 24, 2020 to come into compliance with the $1.00 minimum bid price rule.
To become compliant with the $1.00 minimum bid price requirement, the Company effected a 1-for-5 reverse stock split to increase the per share trading price of the common stock.
At the Company’s annual meeting of stockholders held on December 17, 2019, 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-20, with the exact ratio within the foregoing range to be determined by the board of directors in its sole discretion.
On June 2, 2020, 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
11, 2020, upon which the reverse stock split became effective immediately (the “Effective Time”). At the Effective Time, every five 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 12, 2020.
NOTE 4. iINVENTORIES
i
Inventories
are stated at the lower of standard cost (which approximates actual cost determined using the first-in, first-out cost method) or net realizable value, and consist of the following (in thousands):
Property
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)
i211
i211
Finance
lease right-of-use asset
i13
i13
Projects
in progress
i128
i48
Property
and equipment at cost
i3,102
i2,984
Less:
accumulated depreciation
(i2,687)
(i2,595)
Property
and equipment, net
$
i415
$
i389
/
Depreciation
expense was $i46 thousand and $i95 thousand for the three months ended June 30, 2020 and 2019, respectively. For the six months
ended June 30, 2020 and 2019, depreciation expense was $i92 thousand and $i200 thousand, respectively.
NOTE
6. iLEASES
The Company leases certain equipment, manufacturing, warehouse and office space under non-cancellable operating leases expiring through 2024 under which it is responsible for related maintenance, taxes and insurance. The Company has one finance lease containing a bargain purchase option upon expiration of the lease in 2022. The lease
term consists of the non-cancellable period of the lease, periods covered by options to extend the lease if the Company is reasonably certain to exercise the option, and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise the option. The present value of the remaining lease obligation for these leases was calculated using an incremental borrowing rate (“IBR”) of i7.25%,
which was the Company’s borrowing rate on its revolving credit agreement signed on December 11, 2018. The weighted average remaining lease term for operating, restructuring and finance leases is i2.1 years, i1.0
years, and i1.8 years, respectively.
The Company had one restructured lease with sub-lease component for the New York, New York office that was closed in 2017. The lease expires in 2021. As part of the lease agreement there was $i0.3
million in restricted cash in other long-term assets on the accompanying Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 which represents collateral against the related letter of credit issued as part of this agreement.
The restructured lease and sub-lease were not scoped out of the requirements of ASC 842, Leases (“Topic 842”) and were evaluated for impairment in accordance with the asset impairment provisions of ASC 360, Property, Plant and Equipment (“Topic 360”). The Company concluded its net right-of-use assets were not impaired and the carrying amount approximates expected
sublease income in future years as of June 30, 2020. The Company continues to carry certain immaterial operating expenses associated with this lease as restructuring liabilities and will continue to accrete those liabilities in accordance with Topic 420, as has been done since the cease use date in 2017. For additional information regarding treatment of leases please refer to Note 6, “Leases.” included under Item 8 of our 2019 Annual Report.
18
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Components
of the operating, restructured and finance lease costs recognized in net loss for the three and six months ended June 30, 2020 and 2019, were as follows (in thousands):
Supplemental
balance sheet information related to the Company’s operating and finance leases as of June 30, 2020 and December 31, 2019 are as follows (in thousands):
Future
minimum lease payments required under operating, restructured and finance leases for each of the 12-month rolling periods below in effect at June 30, 2020 are as follows (in thousands):
Operating Leases
Restructured Leases
Restructured Leases Sublease Payments
Finance
Lease
July 2020 to June 2021
$
i621
$
i342
$
(i273)
$
i3
July
2021 to June 2022
i644
i—
i—
i2
July
2022 to June 2023
i16
i—
i—
i—
July
2023 to June 2024
i9
i—
i—
i—
Total
future undiscounted lease payments
i1,290
i342
(i273)
i5
Less
imputed interest
(i90)
(i11)
i9
i—
Total
lease obligations
$
i1,200
$
i331
$
(i264)
$
i5
//
i
Supplemental
cash flow information related to leases for the six months ended June 30, 2020 and 2019, was as follows (in thousands):
Cash paid, net, for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
i267
$
i268
Operating
cash flows from restructured leases
$
i35
$
i47
Financing
cash flows from finance leases
$
i2
$
i1
/
NOTE
7. iDEBT
Credit facilities
Borrowings under the Company’s revolving line of credit (the “Austin Credit Facility”) with Austin Financial Services (“Austin”) were $i1.3
million at June 30, 2020 and $i0.7 million at December 31, 2019 and are recorded in the Condensed Consolidated Balance Sheets as a current liability under the caption, “Credit line borrowings.” Outstanding balances include unamortized net issuance costs totaling $ii0.1/
million as of June 30, 2020 and December 31, 2019.
The Austin Credit Facility is secured by a lien on our assets. Interest on advances under the line is due monthly at the “Prime Rate,” as published by the Wall Street Journal from time to time, plus a margin of i2%. The borrowing rate as of June 30, 2020 and December 31,
2019 was i5.25% and i6.75%, respectively. Overdrafts are subject to a i2%
fee. Additionally, an annual facility fee of i1% on the entire $i5.0 million amount of the Austin Credit Facility is due at the
beginning of each of the ithree years and a i0.5% collateral management fee on the average outstanding loan balance is payable monthly. We paid Austin the first year’s fee when the Austin Credit Facility was signed and the second year’s fee
in December of 2019. For additional information regarding the Austin Credit Facility, please refer to Note 9 included under Item 8 of our 2019 Annual Report.
In August 2020, we secured two new working capital financing facilities which replaced the Austin Credit Facility. These new facilities will significantly expand the credit capacity at a lower blended borrowing cost than the Austin Credit Facility. For details regarding the new facilities, please refer to Note 11, “Subsequent Events” as well as Part II, Item 5 of this quarterly report on Form 10-Q.
20
ENERGY FOCUS, INC.
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On March 29, 2019, we raised $i1.7 million (before transaction expenses) from the issuance of $i1.7 million
in principal amount of subordinated convertible promissory notes to certain investors (the “Convertible Notes”). The Convertible Notes had a maturity date of December 31, 2021 and bore interest at a rate of i5% per annum until June 30, 2019 and at a rate of i10%
thereafter. Pursuant to their terms, on January 16, 2020, following approval by our stockholders of certain amendments to our certificate of incorporation, the principal amount of all of the Convertible Notes,the accumulated interest thereon ($i0.1 million) and unamortized issuance costs at the date of conversion ($i0.04
million), which totaled $i1.8 million converted at a conversion price of $i0.67 per
share into an aggregate of i2,709,018 shares of the Company’s Series A Convertible Preferred Stock, par value $i0.0001
per share (“Series A Preferred Stock”), which is convertible on a one-for-five basis into shares of our common stock. During the second quarter of 2020, i111,548 of the Series A Preferred Stock were converted into i22,310
shares of common stock.
The purchase agreement related to the Convertible Notes contain customary representations and warranties and provide for resale registration rights with respect to the shares of our common stock issuable upon conversion of the Series A Preferred Stock. Please also refer to Note 9, “Stockholder’s Equity”.
Iliad Note
On November 25, 2019, we entered into a note purchase agreement (“the Iliad Note Purchase Agreement”) with Iliad Research and Trading, L.P. (“Iliad”) pursuant to which the Company sold and issued to Iliad a promissory note in the principal amount of approximately $i1.3
million (“Iliad Note”). The Iliad Note was issued with an original issue discount of $i142 thousand and Iliad paid a purchase price of $i1.1 million
for the issuance of the Iliad Note, after deduction of $i15 thousand of Iliad transaction expenses.
The Iliad Note has a maturity date of November 24, 2021 and accrues interest at i8%
per annum, compounded daily, on the outstanding balance. The Company may prepay the amounts outstanding under the Iliad Note at a premium, which is i15% during the first year and i10%
during the second year. Beginning in May 2020, Iliad may require the Company to redeem up to $i150 thousand of the Iliad Note in any calendar month. The Company has the right on three occasions to defer all redemptions that Iliad could otherwise require the Company to make during any calendar month. As of June 30,
2020, no deferrals have been exercised. Each exercise of this deferral right by the Company will increase the amount outstanding under the Iliad Note by i1.5%.
The total liability for the Iliad Note Purchase Agreement, net of discount and financing fees, was $i0.6
million at June 30, 2020 and $i1.0 million at December 31, 2019. Unamortized loan discount and debt issuance costs were $ii0.2/
million at June 30, 2020 and December 31, 2019.
In the event our common stock is delisted from Nasdaq, the amount outstanding under the Iliad Note will automatically increase by i15% as of the date of such delisting.
Pursuant to the Iliad Note Purchase Agreement and the Iliad Note, we have, among
other things, agreed that, until the Iliad Note is repaid:
•i10% of gross proceeds the Company receives from the sale of our common stock or other equity must be paid to Iliad and will be applied to reduce the outstanding balance of the Iliad Note (the failure to make such a prepayment is not an event of default under the Iliad Note, but will increase the amount then outstanding under the Iliad Note by i10%);
and
•unless agreed to by Iliad, we will not engage in certain financings that involve the issuance of securities that include a conversion rights in which the number of shares of common stock that may be issued pursuant to such conversion right varies with the market price of our common stock (a “Restricted Issuance”); provided, however, if Iliad does not agree to a Restricted Issuance, the Company may on up to three occasions make the Restricted Issuance anyway, but the outstanding balance of the Iliad Note will increase i3%
on each occasion the Company exercises its right to make the Restricted Issuance without Iliad’s agreement.
21
ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the terms of the Iliad Note, i10%
of the gross proceeds from the January 2020 Equity Offering ($i275 thousand) were used to make payments on the Iliad Note, of which $i226
thousand went towards the outstanding principal amount.
Upon the occurrence of an event of default under the Iliad Note, Iliad may accelerate the date for the repayment of the amount outstanding under the Iliad Note and increase the amount outstanding by an amount ranging from i5% to i15%,
depending on the nature of the default. Certain insolvency and bankruptcy related events of default will result in the automatic acceleration of the amount outstanding under the Iliad Note and the outstanding amount due will be automatically increased by i5%. After the occurrence of an event of default, Iliad may elect to have interest accrue on the Iliad Note at a rate per annum of i22%,
or such lesser rate as permitted under applicable law.
PPP Loan
On April 17, 2020, the Company was granted a loan from KeyBank National Association in the amount of approximately $i795 thousand, pursuant to the PPP under Division A of the Coronavirus Aid, Relief and Economic Securities Act (the "CARES
Act"), which was enacted on March 27, 2020. The funds were received on April 20, 2020. At June 30, 2020, $i263 thousand is classified as short-term debt and $i532 thousand
is classified as long-term debt on the Company’s balance sheet. The loan accrues interest at a rate of i1.0% per annum and matures on April 17, 2022. We have recorded accrued interest of $i2 thousand
through June 30, 2020. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company intends to use the loan for qualifying expenses, however there is no assurance that the Company will obtain forgiveness for any portion of the loan.
NOTE 8. iINCOME
TAXES
As a result of the operating loss incurred during each of the three and six months ended June 30, 2020 and 2019, and after the application of the annual limitation set forth under Section 382 of the Internal Revenue Code (“IRC”), it was not necessary to record a provision for U.S. federal income tax or various states income taxes.
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, 2019, we had a net operating loss carry-forward of approximately $i108.8 million for federal income tax purposes ($i64.5
million for state and local income tax purposes). However, due to changes in our capital structure, approximately $i54.5 million of the $i108.8
million is available after the application of IRC Section 382 limitations. As a result of the Tax Cuts and Jobs Act of 2017 (“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 $i8.3 million and $i8.7
million in net operating losses generated in 2019 and 2018 will be subject to the new limitations under the Act. If not utilized, the carry-forwards generated prior to December 31, 2017 of $i37.3 million will begin to expire in 2021 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 12, “Income
Taxes,” included under Item 8 of our 2019 Annual Report.
NOTE 9.iSTOCKHOLDERS’ EQUITY
1-for-5 Reverse Stock Split
At the
Company’s annual meeting of stockholders held on December 17, 2019, 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-20, with the exact ratio within the foregoing range to be determined by the board of directors in its sole discretion.
22
ENERGY
FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On June 2, 2020, 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 11, 2020, upon which the reverse stock split became effective immediately (the “Effective Time”). At the Effective Time, every five 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 prior period’s 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 2014 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 $1.00
minimum bid price requirement pursuant to Nasdaq Marketplace Rule 5550(a)(2) for continued listing on Nasdaq.
The common stock began trading on Nasdaq on a split-adjusted basis at the opening of trading on June 12, 2020.
Preferred Stock
Pursuant to the
terms of the Convertible Notes, on January 16, 2020 following approval by our stockholders of certain amendments to our certificate of incorporation, the principal amount of all of the Convertible Notes and the accumulated interest thereon in the amount of $i1.8 million converted at a conversion price of $i0.67
per share into an aggregate of i2,709,018 shares of the Company’s Series A Convertible Preferred Stock, par value $i0.0001
per share, which is convertible on a one-for-five basis into shares of our common stock. During the second quarter of 2020, i111,548 of the Series A Preferred Stock were converted into i22,310
shares of common stock.
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 authorized i2,000,000 shares of Series A Preferred Stock (“Original Series A Certificate of Designation”). The Original Series A Certificate of Designation was amended on January 15, 2020 following stockholder
approval to increase the number of authorized shares of Series A Preferred Stock to i5,000,000 (the Original Series A Certificate of Designation as so amended, the “Series A Certificate of Designation”). Of the i5,000,000
Series A Preferred Stock, i3,300,000 shares were further designated as Series A Convertible Preferred Stock.
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 be entitled to a number of votes equal to i11.07% of the number of shares of common stock into which such share of Series A Preferred Stock is convertible.
The Series A Preferred Stock (a) has a preference upon liquidation equal to $i0.67
per share and then participates on an as-converted basis with the common stock with respect to any additional distributions, (b) shall receive any dividends declared and payable on our common stock on an as-converted basis, and (c) is convertible at the option of the holder into shares of our common stock on a one-for-five basis. We also filed a Certificate of Elimination with respect to its authorized, but unissued, Series A Participating Preferred Stock, to return such shares to the status of preferred stock available for designation as the Series A Preferred Stock.
The purchase agreement related to the Convertible Notes contain customary representations and warranties and provide for resale registration rights with respect to the shares of our common stock issuable upon conversion of the Series A Preferred Stock.
23
ENERGY
FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In January 2020, we completed a registered direct offering for the sale of i688,360
shares of our common stock to certain institutional investors, at a purchase price of $i3.37 per share. We also sold, to the same institutional investors, warrants to purchase up to i688,360
shares of common stock at an exercise price of $i3.37 per share in a concurrent private placement for a purchase price of $i0.625
per warrant. We paid the placement agent commissions of $i193 thousand plus $i50 thousand
in expenses in connection with the registered direct offering and the concurrent private placement and we also paid legal, accounting and other fees of $i231 thousand related to the offering. Total offering costs of $i474 thousand
have been presented as a reduction of additional paid-in capital and have been netted within equity. In addition, we issued warrants to the placement agent to purchase up to i48,185 shares of common stock at an exercise price of $i4.99
per share. Net proceeds to us from the sale of common stock and warrants were approximately $i2.3 million. In accordance with the terms of the Iliad Note, ii10/%
of the gross proceeds from the January 2020 Equity Offering ($i275 thousand) were used to make payments on the Iliad Note, of which $i226 thousand
went towards the outstanding principal amount and the balance to interest.
Warrants to purchase an aggregate of i721,546 shares remain outstanding at June 30, 2020 with a weighted average exercise price of $i3.48
per share. The exercise of warrants could provide us with cash proceeds of $i2.5 million if all warrants are exercised. During the six months ended June 30, 2020, i15
thousand warrants were exercised resulting in total proceeds of $i51 thousand.
i
As of June 30,
2020, we had the following outstanding non-tradeable, registered warrants to purchase shares of common stock:
We
account for common stock warrants as either liabilities or as equity instruments depending on the specific terms of the warrant agreement. Common stock warrants that could require cash settlement are accounted for as liabilities. We classify these warrant liabilities on the consolidated balance sheet as a current liability. The warrant liabilities are revalued at fair value at each balance sheet date subsequent to the initial issuance. Changes in the fair market value of the warrant are reflected in the consolidated statement of operations as income (expense) based upon the change in fair value of warrants.
The warrants we issued in the January 2020 registered direct offering contain a provision for a cash payment in the event that the shares are not delivered to the holder within two trading days. The cash payment equals $10 per day per $1,000 of warrant shares for each day late. The warrants issued in the
January 2020 private placement also contain a provision for net cash settlement in the event that there is a fundamental transaction (e.g., merger, sale of substantially all assets, tender offer, or share exchange). If a fundamental transaction occurs in which the consideration issued consists of all cash or stock in a non-public company, then the warrant holder has the option to receive cash equal to a Black-Scholes value of the remaining unexercised portion of the warrant.
The warrants have been classified as liabilities, as opposed to equity, due to the potential adjustment to the exercise price that could result upon late delivery of the shares or potential cash settlement upon the occurrence of certain events as described above, and are recorded at their fair values at each balance sheet date.
Stock-based compensation
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.
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ENERGY FOCUS, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Total
unearned stock-based compensation was $i0.2 million at June 30, 2020, compared to $i0.1
million at June 30, 2019. 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, 2020 is expected to be recognized is approximately i2.9 years.
Stock options
The
fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. iEstimates utilized in the calculation include the expected life of the option, risk-free interest rate, and expected volatility, and are further detailed below. There were no options issued the six months ended June 30, 2019.
*Restricted
stock units have been restated for the 1-for-5 reverse stock split
/
NOTE 10.iCOMMITMENTS
AND CONTINGENCIES
Purchase Commitments
As of June 30, 2020, we had approximately $i8.5 million in outstanding purchase commitments for inventory. Of this amount, approximately $i1.9 million
is expected to ship in the third quarter of 2020 with the balance expected to ship in the fourth quarter of 2020 and thereafter.
NOTE 11. iSUBSEQUENT EVENTS
On August 11, 2020, we entered into two debt financing arrangements (together, the “New Credit Facilities”). The first arrangement is an inventory
financing facility (the “Inventory Facility”) in the form of a Loan and Security Agreement (the “Inventory Loan Agreement”) between the Company and Crossroads Financial Group, LLC, a North Carolina limited liability company (the “IF Lender”). Borrowings under the Inventory Facility are permitted up to the lower of (i) $i3,000,000 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. The outstanding indebtedness under the Inventory Facility accrues at an annual rate equal to the greater of (i) i5.75% and (ii) i4.00%
plus the three (3) month LIBOR rate and is also subject to a service fee of i1.00% per month. The Inventory Facility’s interest and service fees combined amount is subject to a minimum monthly fee of $i18,490.
The second arrangement is a receivables financing facility (the “Receivables Facility”) in the form of a 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 are permitted up to the lower of (i) $i2,500,000
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. Interest on outstanding indebtedness under the Receivables Facility accrues at an annual rate equal to (i) the highest prime rate announced from time to time by the Wall Street Journal plus (ii) i2.00%.
A $i25 thousand, or i1.00%, facility fee was charged at closing.
In
connection with the entry into the New Credit Facilities, on August 11, 2020the Company terminated the existing Austin Credit Facility with Austin. For additional detail related to the New Credit Facilities, please refer to Part II, Item 5 of this quarterly report on Form 10-Q.
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ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our
financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto, included under Item 1 of this Quarterly Report, as well as the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Annual Report”).
Overview
Energy Focus, Inc. engages 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 products and controls
in the commercial and military maritime markets (“MMM”). Our mission is to enable our customers to run their facilities and offices with greater energy efficiency, productivity, and wellness through advanced LED retrofit solutions. Our goal is to be the LED lighting technology and market leader for the most demanding applications where performance, quality and health are considered paramount. We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge (“HID”) lighting and other types of lamps in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military tubular LED (“TLED”) and other LED products and controls.
Net sales increased 13.7% for the six months ended June 30, 2020 as compared to the six months ended June
30, 2019, primarily driven by a 102% increase in military sales period over period offset by a decrease in net sales of our commercial products of 32% for the six months ended June 30, 2020 as compared to the same prior year period. The sale cycles for the military market is dependent on many factors, including the availability of government funding, the timing and fulfillment of U.S. Navy awards, new ship construction, diversion of funds to other government needs, and the timing of vessel maintenance schedules. The sale cycles for our commercial target markets can range from several months to over one year and our financial results reflect volatility from the continued fluctuations in the timing, pace and size of commercial projects for a major healthcare customer.
Despite continuing progress in the last four quarters in reducing our operating losses
significantly from second quarter of 2019, the Company’s results reflect the challenges due to long and unpredictable sales cycles, unexpected delays in customer retrofit budgets and project starts, continuing aggressive price competition and an intensely competitive lighting industry going through constant change. 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, 2020.
The COVID-19 pandemic has and may continue to have a significant economic and business impact on our Company. In the second quarter, as in the first quarter, we have seen a slowdown in commercial
sales as some customers in the healthcare, education, and commercial and industrial sectors delayed order placements in reaction to the crisis. We continue to monitor the potential impact of the COVID-19 pandemic. This includes evaluating the impact on our customers, suppliers, and logistics providers as well as evaluating governmental actions being taken to curtail the spread of the virus. The significance and duration of the ongoing impact on us is still uncertain. Material adverse effects on our customers, suppliers, or logistics providers could significantly impact our operating results. We also plan to continue to actively follow, assess and analyze the development of the COVID-19 pandemic and stand ready to adjust our organizational structure, strategies, plans and processes to respond to the impacts from the virus spread in the timeliest manner.
Nevertheless, during the first half of 2020 we continued
to see benefits from the relaunch efforts, described in our 2019 Annual Report, undertaken in the last three quarters of 2019. It is our belief that the continued momentum of the efforts undertaken in 2019, along with the launch of new and innovative products will over time result in improved sales and bottom-line performance for the Company. Our newly launched EnFocus™ platform during the second quarter of 2020 continues to receive positive feedback from existing, new, and potential new customers. The EnFocus™ platform was launched with 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. Furthermore, we have been accelerating our initiatives to develop ultraviolet (UV) disinfection technologies and products for both consumer as well as commercial and industrial
markets. In addition, significant efforts undertaken to reduce costs and become more competitive in the Company’s MMM business segment offerings have positioned us to be more competitive in this business segment to win bids and proposals that have allowed us to generate additional business during 2020, offsetting some of the slowdown being experienced in our commercial business. While we continue to aggressively pursue growth on the commercial side of our business due to its much larger potential and size, the MMM business does offer us continued sales in addition to validating our product quality and strengthening our brand trust in the marketplace.
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Meanwhile, we continue
to seek additional external funding alternatives and sources to support our growth strategies, plans and initiatives. We plan to achieve profitability through 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. In addition, we intend to continue to apply rigorous and financial disciplines in our organizational structure, business processes and policies, and supply chain practices to help accelerate our path towards profitability.
At June 30, 2020, we had $2.7 million in cash, which excludes $0.3 million restricted
cash held, and a total of $2.7 million in debt, including $1.3 million outstanding under our prior revolving line of credit (the “Austin Credit Facility”) with Austin Financial Services, $0.6 million relating to our promissory note (“Iliad Note”) with Iliad Research and Trading, L.P. (“Iliad”) and $0.8 million for the PPP (as defined below) loan. In addition, we hold $4.0 million in warrant liability. At June 30, 2020, we had $1.2 million of additional availability for us to borrow under the Austin Credit Facility. In August 2020, we secured two new working capital financing facilities which replaced the Austin Credit Facility. For details regarding the new credit facilities, please see “Liquidity and capital resources - New Credit Facilities” below as well as Part II, Item 5 of this Quarterly Report.
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 $3.3 million for the second quarter of 2020 increased compared to the second quarter of 2019 primarily driven by an increase in MMM product sales. Net sales of our commercial products decreased in the second quarter of 2020 compared to the second quarter of 2019, reflecting (i) a decrease in sales, caused by delayed orders, have occurred mainly in the healthcare, education, commercial and industrial sectors because of the macroeconomic slowdown and purchasing decisions being put on hold due to the COVID-19 pandemic, (ii) lower sales from our agency network which was also impacted by COVID-19, (iii) fluctuations in the timing, pace and size of commercial projects.
Net sales of $7.1 million for the first six months of 2020 increased 13.7% compared to the same period in 2019 primarily driven by an increase in MMM product sales. Net sales of our commercial products decreased in the first six months of
2020 compared to the same period of 2019, reflecting (i) a decrease in sales, caused by delayed orders, have occurred mainly in the healthcare, education, commercial and industrial sectors because of the macroeconomic slowdown and purchasing decisions being put on hold due to the COVID-19 pandemic, (ii) lower sales from our agency network which was also impacted by COVID-19, (iii) fluctuations in the timing, pace and size of commercial projects.
Gross profit
Gross profit (loss) was $1.3 million, or 40.3% of net sales, for the second quarter of 2020, compared to $(0.1) million, or (3.5)% of net sales, for the second quarter of 2019. As a result of current manufacturing and sales volumes, gross margin for the second quarter
of 2020 included favorable warranty and inventory reserves of $0.3 million or 8.4% of net sales. Gross margin for the second quarter of 2019 included unfavorable inventory reserves of $0.5 million or 14.7% of net sales.
Gross profit (loss) was $2.4 million or 33.4% of net sales, for the first six months of 2020 compared to $(11) thousand or (0.2)% of net sales, for the first six months of 2019. The increase is primarily related to relatively higher profit margin of sold product, favorable price and usage variances for material and labor of $0.3 million or 4.0% of net sales, and favorable inventory reserves recorded of $0.4 million, or 5.5% of net sales. The gross margin for the first six months of 2019 was primarily related to unfavorable inventory reserves recorded during the first six months of 2019 of $0.4 million, or 6.8% of net sales.
Operating
expenses
Product development
Product development expenses include salaries and related expenses, contractor and consulting fees, legal fees, supplies and materials, as well as overhead, such as depreciation and facility costs. Product development costs are expensed as they are incurred.
Product development expenses were $0.3 million for the second quarter of 2020, which is flat compared to $0.3 million for the second quarter of 2019.
Product development expenses were $0.6 million for the first six months of 2020, a $0.2 million decrease compared to $0.8 million for the first six months of 2019. The decrease is primarily related to favorable payroll cost largely due to the close of the Taiwan office during the second
quarter of 2019.
Selling, general andadministrative
Selling, general and administrative expenses were $2.0 million for the second quarter of 2020, compared to $1.6 million for the second quarter of 2019. The primary drivers of the increased expense were an increase in payroll due to our growth initiatives that expanded our staff and an increase in professional services, partly offset by a decrease in cost for marketing and travel partly due to COVID-19 and a decrease in stock- based compensation.
Selling, general and administrative expenses were $4.0 million for the first six months of 2020, compared to $3.8 million for the first six months of 2019. The increase is primarily due to increase in payroll and professional services, mostly
offset by a decrease in marketing and travel cost.
Restructuring
For the three and six months ended June 30, 2020, we recorded restructuring credits totaling approximately $14 thousand and $28 thousand respectively, and for the three and six months ended June 30, 2019, we recorded restructuring charges totaling approximately $128 thousand and $262 thousand related to the cost and offsetting sublease income for the remaining lease obligations for the former New York, New York office. For additional information regarding the
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restructuring actions taken in 2017
and 2019, please refer to Note 3, “Restructuring,” included under Item 8 of our 2019 Annual Report.
During the three and six months ended June 30, 2020, we recorded no severance and related benefits charges and during each of the three and six months ended June 30, 2019, we recorded severance and related benefits charges of $0.1 million.
Interest expense
Interest expense was $87 thousand for the second quarter of 2020, compared to interest expense of $26 thousand for the second quarter of 2019. The increase in interest expense of $61 thousand was a result of increased
amortization of the debt financing costs in the second quarter of 2020. The actual cash interest paid in the second quarter of 2020 was $18 thousand compared to $23 thousand in the second quarter of 2019.
Interest expense was $220 thousand for the first six months of 2020, compared to interest expense of $69 thousand for the first six months of 2019. The increase in interest expense of $151 thousand was a result of increased amortization of the debt financing costs in the first six months of 2020. The actual cash interest paid for the six months ended June 30, 2020 was $85 thousand compared to $44 thousand for the six months ended June 30, 2019.
Loss from change in fair value of warrants
A
loss of $2.4 million was recognized during the six months ended June 30, 2020 for the market value change in our warrant liabilities. The loss recognized in the first six months of 2020 was a result of the revaluation of the warrant liability using the market price of the Company’s stock at June 30, 2020 versus the market price of the Company’s stock at the time of initial issuance of the warrants (January 13, 2020).
Other expenses
Other expense was $24 thousand for the second quarter of 2020, compared to other expense of $79 thousand
for the second quarter of 2019. Other expense was $42 thousand for the six months ended June 30, 2020 compared to other expense of $98 thousand for the six months ended June 30, 2019. Other expenses are mainly comprised of bank and collateral management fees.
Provision for income taxes
Due to the operating losses incurred during the three and six months ended June 30, 2020 and 2019, and after application of the annual limitation set forth under Section 382 of the IRC, it was not necessary to record a provision
for U.S. federal income tax or various states income taxes as income tax benefits are fully offset by a valuation allowance recorded.
Net loss
For the three months ended June 30, 2020, our net loss was $4.3 million, compared to $2.3 million for the three months ended June 30, 2019. The increase in the net loss was primarily driven by the change in the warrant liability fair value from inception at January 13, 2020 through June 30, 2020.
For the six months ended
June 30, 2020, our net loss was $4.9 million compared to $5.1 million for the six months ended June 30, 2019. The decrease in the net loss was primarily driven by higher sales at more favorable gross profit margin.
Financial condition
We had cash of $2.7 million at June 30, 2020, which excludes $0.3 million restricted cash held, and a total of $2.7 million in debt, including $1.3 million outstanding under the Austin Credit Facility, $0.6 million relating to our Iliad Note and $0.8 million relating to the PPP (as defined below) loan. In addition we hold $4.0 million in warrant
liability. At June 30, 2020, we had $1.2 million of additional availability for us to borrow under the Austin Credit Facility. We have historically incurred substantial losses, and as of June 30, 2020, we had an accumulated deficit of $129.8 million. Additionally, our sales have been concentrated in a few major customers and for the six months ended June 30, 2020, two customers accounted for approximately 54% of net sales.
As a result of the restructuring actions and initiatives described above, we have reduced our operating expenses to be more commensurate with our sales volumes. However, we continue to incur losses and have a substantial accumulated deficit, and
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substantial
doubt about our ability to continue as a going concern continues to exist at June 30, 2020.
Since the executive transition on April 1, 2019, we have continued to evaluate and assess strategic options as we seek to achieve profitability. We plan to achieve profitability through growing our sales by continuing to execute 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 technologies and introduce impactful new products such as the EnFocus™, a breakthrough lighting control platform we officially launched during the second quarter of 2020. Furthermore, we have been developing
ultraviolet (UV) disinfection technologies and products which we have filed provisional patents on and which we expect to launch by the end of 2020. In addition, we continue to apply rigorous and financial disciplines in our organizational structure, business processes and policies, and supply chain practices to help accelerate our path towards profitability.
As described in Note 9, we also raised approximately $2.3 million of net proceeds upon the issuance of common stock and warrants as part of the registered direct offering for the sale 688,360 shares of our common stock to certain institutional investors as well as the sale of warrants to the same institutional investors and the placement agents, to purchase up to 688,360 and 48,185 shares, respectively, of common stock (“January 2020 Equity Offering”).
The restructuring and cost cutting
initiatives implemented during 2019 as well as the January 2020 Equity Offering that significantly strengthened our balance sheet were designed to allow us to effectively execute these strategies. However, our efforts may not occur as quickly as we envision or be successful, due to the long sales cycle in our industry, the corresponding time required to ramp up sales from new products and markets into this sales cycle, the timing of introductions of additional new products, significant competition, potential sales volatility given our customer concentration, and the recent and lingering economic impact from the COVID-19 pandemic, among other factors. 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 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 and/or conditions, such as interest rate, restrictive covenants, conversion features, refinancing demands, and control or revocation provisions, which are not acceptable to management or our board of directors; and
•the current environment in capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing.
If we fail to obtain the required additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need to delay, scale back or eliminate our growth plans and further reduce our operating costs and headcount, each of which would have a material adverse effect on our business,
future prospects, and financial condition. A lack of additional funding could also result in our inability to continue as a going concern and force us to sell certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire investment.
Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to obtain additional 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, application and successful acquisition of a Paycheck Protection Program (“PPP”) loan during April 2020, plans and initiatives in our R&D, product development and sales and
marketing, development of potential channel partnerships, if adequately executed, will provide us with an ability to finance our operations through the next twelve months and will mitigate the substantial doubt about our ability to continue as a going concern.
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On May 15, 2019, we received a letter from the Nasdaq Stock Market advising us that for 30 consecutive trading days preceding the date of the letter, the bid price of our common stock had closed below the $1.00 per share minimum required for continued listing on Nasdaq pursuant to listing rules. Therefore we could be subject to delisting if we did not regain compliance within the compliance period or extend the compliance period by filing for an
extension. On October 15, 2019, the Company formally requested a 180-day extension beginning November 12, 2019 to regain compliance.
On April 16, 2020, Nasdaq announced that, in response to the COVID-19 pandemic and related extraordinary market conditions, it is providing temporary relief through June 30, 2020 from, among other rules, the $1.00 minimum bid price rule. As a result, we had until July 24, 2020 to come into compliance with the $1.00 minimum bid price rule. To become compliant with the $1.00 minimum bid price requirement, we effected a 1-for-5 reverse stock split
to increase the per share trading price of the common stock.
At the Company’s annual meeting of stockholders held on December 17, 2019, 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 $0.0001 per share, at a ratio ranging from any whole number of at least 1-for-2 and up to 1-for-20, with the exact ratio within the foregoing range to be determined by the board of directors in its sole discretion.
On June 2, 2020, our board of directors determined to set the reverse stock split ratio at 1-for-5. The Certificate of Amendment to our Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on June
11, 2020, upon which the reverse stock split became effective immediately (the “Effective Time”). At the Effective Time, every five 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 12, 2020.
On April 17, 2020, the Company was granted a loan from KeyBank National Association in the amount of approximately $795 thousand, pursuant to the PPP under Division A of the Coronavirus Aid, Relief and Economic Securities Act (the "CARES Act"), which was enacted on March 27, 2020. The loan accrues
interest at a rate of 1.0% per annum and matures on April 17, 2022. The funds were received on April 20, 2020. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company intends to use the loan for qualifying expenses, however there is no assurance that the Company will obtain forgiveness for any portion of the loan.
Liquidity andcapitalresources
Cash
At June 30, 2020, our cash balance was approximately $2.7 million, compared to approximately $0.4 million at December 31, 2019. The balance at June 30, 2020 and December 31, 2019 excluded restricted cash of $0.3 million for a letter of credit requirement under a lease obligation.
The following summarizes cash flows from operating, investing, and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows (in thousands):
Net cash used in operating activities was $0.7 million for the six months ended June 30, 2020. The net loss was $4.9 million and was adjusted for non-cash items, including: depreciation and amortization, stock-based compensation, change in fair value of warrant liabilities, provisions for inventory, warranty reserves and working capital changes. During the six months ended June
30, 2020, we generated $1.3 million in cash for accounts payable due to the timing of inventory receipts and
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payments, and $0.6 million for inventories primarily due to the timing of inventory receipts and we used $0.2 million of prepaid and other assets due to prepaid deposits to our contract manufacturers for inventory for the new EnFocus™ platform. We used cash of $0.2 million through the timing of collection of accounts receivable and generated $0.3 million cash through an increase of other accrued liabilities, primarily related to accrued payroll and benefits and commissions.
For the six months ended June
30, 2019, net cash used in operating activities was $5.1 million, and resulted primarily from the net loss incurred of $5.1 million, adjusted for non-cash items, including: depreciation, stock-based compensation, and provisions for inventory and warranty reserves, and working capital changes. During the six months ended June 30, 2019, we used $1.5 million in cash for accounts payable, primarily due to the timing of inventory receipts and payments, and $0.4 million through a decrease in accounts receivable, due to the higher shipments in the first half of 2019 as compared to December 2018. In addition, prepaid and other assets decreased by $0.4 million as the inventory for which we paid deposits to our contract manufacturers in prior quarters was received in the first quarter of 2019.
Net
cash used in investing activities
Net cash used in investing activities was $118 thousand for the six months ended June 30, 2020 and resulted primarily from the purchase software and tooling to support production operations and development of the e-commerce platform.
For the six months ended June 30, 2019, net cash used in investing activities was $28 thousand, and resulted primarily from the purchase of tooling to support production operations.
Net cash provided by financing activities
Net cash provided by financing activities during the six months ended June
30, 2020 was $3.2 million, primarily resulting from the $2.8 million in proceeds received from the January 2020 Equity Offering, partially offset by $0.5 million in offering costs for the issuance. Investors in our equity offering have received warrants to purchase shares of our common stock, of which warrants to purchase an aggregate of 721,546 shares remain outstanding at June 30, 2020 with a weighted average exercise price of $3.48 per share. The exercise of warrants could provide us with cash proceeds of $2.5 million. During the six months ended June 30, 2020, 15 thousand warrants were exercised. Additionally we received $0.8 million in proceeds from the PPP loan and $0.6 million proceeds from borrowing under the Austin Credit Facility. We had $0.5 million in repayments of the Iliad Note which includes a share issuance related mandatory repayment of the Iliad Note
of which $0.2 million was allocated against principal. At June 30, 2020, we had $1.2 million of additional availability for us to borrow under the Austin Credit Facility.
Net cash provided by financing activities during the six months ended June 30, 2019 was $1.0 million, primarily resulting from the $1.7 million in proceeds we received for the subordinated convertible notes we entered into on March 29, 2019, partially offset by net repayments of $0.6 million on borrowings under the Austin Credit Facility we entered into on December 11, 2018. In addition, we used approximately $0.1 million to issue and immediately repurchase our stock for employee tax withholding related to restricted stock unit vesting during
the period.
New Credit Facilities
In August 2020, we secured two new working capital financing facilities which replaced the Austin Credit Facility. These new facilities will significantly expand the credit capacity at a lower blended borrowing cost than the previous Austin Credit Facility. For detail regarding the new facilities, please refer to Part II, Item 5 of this Quarterly Report.
Contractual obligations
As of June 30, 2020, we had approximately $8.5 million in outstanding purchase commitments for inventory. Of this amount, approximately $1.9 million
is expected to ship in the third quarter of 2020 with the balance expected to ship in the fourth quarter of 2020 and thereafter.
There have been no other material changes to our contractual obligations as compared to those included in our 2019 Annual Report.
Critical accounting policies
Fair value of warrant liabilities
The estimated fair value of warrants accounted for as liabilities, representing a level 3 fair value measure, was determined on the issuance date and subsequently marked to market at each financial reporting date. We use the Black-Scholes
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valuation
model to value the warrant liabilities at fair value. The fair value is estimated using the expected volatility based on our historical volatility and is determined using probability weighted-average assumptions, when appropriate.
There have been no other material changes to our critical accounting policies as compared to those included in our 2019 Annual Report.
Certain risks and concentrations
We had certain customers whose net sales individually represented 10 percent or more of our total net sales, or whose net trade accounts receivable balance individually represented 10 percent or more of our total net trade accounts receivable, as follows:
For
the three months ended June 30, 2020, sales to our primary distributor for the U.S. Navy, a regional commercial lighting retrofit company and a primary shipbuilder for the U.S. Navy, accounted for approximately 40%, 15% 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 60% of net sales for the same period. For the three months ended June 30, 2019, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company accounted for approximately 13% and 26% 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 20%
of net sales for the same period.
For the six months ended June 30, 2020, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company accounted for approximately 39% and 15% 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 53% of net sales for the same period. For the six months ended June 30, 2019, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company accounted for approximately 17% and 28% 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 26% of net sales for the same period.
A regional commercial lighting retrofit company and our primary distributor for the U.S. Navy accounted for approximately 19% and 47% of net trade accounts receivable, respectively, at June 30, 2020. At December 31, 2019, our primary distributor for the U.S. Navy accounted for approximately 10% of net trade accounts receivable and a large regional retrofit company accounted for 41% of our net trade accounts receivable.
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 of this Quarterly Report.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the company is not required to provide information required by this item.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended (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 SEC, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief 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 and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as of June 30, 2020, the end of the period covered by this report. Management, with the participation of our Chief Executive Officer and Chief Financial Officer, did evaluate the effectiveness of our disclosure controls and procedures as of the end of period covered by this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2020.
Changes in internal control over financial reporting
During the quarterly period covered
by this report, there have not been any changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in various claims and legal actions arising in
the ordinary course of business. As of June 30, 2020, we were not involved in any material legal proceedings.
ITEM 1A. RISK FACTORS
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the company is not required to provide information required by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
ITEM 5. OTHER INFORMATION
On August 11, 2020, Energy Focus, Inc. (the “Company” or “Borrower”) entered into two debt financing arrangements (collectively, the “Facilities”).
The
first arrangement was an inventory financing facility (the “Inventory Facility”) in the form of a Loan and Security Agreement (the “Inventory Loan Agreement”) between the Company and Crossroads Financial Group, LLC, a North Carolina limited liability company (the “IF Lender”), dated as of August 11, 2020. The Inventory Facility matures on August 11, 2022, subject to early termination upon 90 days’ notice and otherwise in accordance with the terms of the Inventory Loan Agreement. The term is automatically extended in successive one (1) year increments unless terminated by either party in accordance with the Inventory Loan Agreement.
Borrowings under the Inventory Facility are permitted up to the lower of
(i) $3,000,000 and (ii) a borrowing base, determined from time to time based on the value of the Company’s eligible inventory, valued at 75% of inventory cost or 85% of the inventory net orderly liquidation value, less the availability reserves. As of the date of the Inventory Loan Agreement, the borrowing base was approximately $2.448 million, and therefore less than the $3,000,000 maximum amount. The outstanding indebtedness under the Inventory Facility currently accrues at an annual rate equal to the greater of (i) 5.75% and (ii) 4.00% plus the three (3) month LIBOR rate and is also subject to a service fee of 1.00% per month; provided that the combined amount is subject to a minimum monthly fee of $18,490. The Inventory Facility is secured by substantially all of the present and future assets of the Borrower and is also governed by an intercreditor agreement among the Borrower, IF
Lender and RF Lender (defined below).
The Inventory Loan Agreement also contains customary events of default, including, among others, breaches of representations, covenants or warranties thereunder; failure to perform any payment obligations; a sale of fifty percent (50%) or more of the beneficial interest in any class of voting stock of Borrower, or the failure of any key employee to devote all of its efforts in furtherance of the business affairs of Borrower for any one month or such person ceases to be employed by Borrower in the same capacity as of the date of the Inventory Loan Agreement. The Inventory Loan Agreement is subject to certain affirmative covenants which include, among others, (i) maintenance of Borrower’s factoring relationship under the Receivables Facility (as defined below); (ii) delivery to the IF Lender of certain reports and financial statements on a periodic basis, (iii) payment of
taxes when due and (iv) maintenance of insurance. The Inventory Loan Agreement is subject to certain negative covenants which include, among others, restrictions (with certain exceptions) on the ability of Borrower: (i) to grant any lien on the collateral, except in favor of IF Lender or pursuant to the Receivables Facility; (ii) to merge with or into another person, liquidate or dissolve, acquire all or substantially all of the assets of any person, or sell, assign or otherwise dispose of a substantial part of its business; (iii) to sell, convey, assign, lease, transfer, abandon or otherwise dispose of any of its properties, except in the ordinary course of business; (iv) incur or guarantee any
36
indebtedness, (v) to make any distribution or dividend or to repurchase its capital
stock, (vi) to enter into material transactions with its affiliates, other than in the ordinary course of business, (vii) relating to the storage and sale of inventory, and (viii) to establish new deposit accounts.
The second arrangement was a receivables financing facility (the “Receivables Facility”) in the form of a 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”), dated as of August 11, 2020. The Receivables Facility matures on August 11, 2022, subject to early termination in accordance with the terms of the Receivables Loan Agreement; provided that the term is automatically
extended in successive one (1) year increments unless terminated by either party in accordance with the Receivables Loan Agreement.
Borrowings under the Receivables Facility are permitted up to the lower of (i) $2,500,000 and (ii) a borrowing base determined from time to time based on the value of the Company’s eligible accounts receivable, valued at 90% of the face value of such accounts receivable, less availability reserves, if any. As of the date of the Receivables Loan Agreement, the borrowing base was approximately $1.637 million, which is less than the $2,500,000 maximum amount. Interest on outstanding indebtedness under the Receivables Facility currently accrues at an annual rate equal to (i) the highest prime rate announced from time to time by the Wall Street Journal plus (ii) 2.00%. The Receivables Facility is
also secured by substantially all of the present and future assets of the Borrower and is also governed by an intercreditor agreement among the Borrower, IF Lender and RF Lender. A $25 thousand, or 1.00%, facility fee was charged at closing.
The Receivables Loan Facility also contains customary events of default, including, among others, failure to perform any payment obligations; the failure to comply with its other material obligations under the Receivables Loan Agreement; a change of control of Borrower or any other obligor occurs; or the failure of any key employee to devote substantially all of his or her efforts in furtherance of the business affairs of Borrower or any obligor under the Receivables Loan Agreement, or such person ceases to be employed by Borrower or any obligor under the Receivables Loan Agreement in the same capacity as of the date of the Receivables Loan Agreement and Borrower has
failed to demonstrate to RF Lender a reasonable replacement within 60 days. The Receivables Loan Agreement is subject to certain affirmative covenants which include, among others, (i) delivery to the RF Lender of certain reports and financial statements on a periodic basis; (ii) maintenance of properties; (iii) payment of taxes when due; (iv) maintenance of insurance; (v) compliance with laws; and (vi) maintenance of corporate existence. The Receivables Loan Agreement is subject to certain negative covenants which include, among others, restrictions (with certain exceptions) on the ability of Borrower: (i) to grant any lien on the collateral, except in favor of the RF Lender or as contemplated by the intercreditor agreement with the Inventory Facility, (ii) incur or guarantee any indebtedness other than pursuant to the Facilities or as otherwise permitted, (iii) to merge with or into another person, liquidate or dissolve, or sell, assign or otherwise dispose of all or
a substantial part of its assets; (iv) to sell, convey, assign, lease, transfer, abandon or otherwise dispose of any of its properties, except in the ordinary course of business, (v) to change Borrower’s name or suffer a change in control, (vi) to make any distribution or dividend or to repurchase its capital stock, (vii) to enter into material transactions with its affiliates, other than in the ordinary course of business, (vii) to relocate its chief executive office, and (viii) fail to comply with certain covenants relating to the collateral.
The Inventory Loan Agreement and Receivables Loan Agreement are being filed herewith solely to provide investors and security holders with information regarding their terms. They are not intended to be a source of financial, business or operational information about the Borrower or any of its subsidiaries.
The representations, warranties and covenants contained in the Inventory Loan Agreement and Receivables Loan Agreement are made solely for purposes of the loan documents and are made as of specific dates; are solely for the benefit of the parties thereto; may be subject to qualifications and limitations agreed upon by the parties in connection with negotiating the terms of such loan documents, including being qualified by confidential disclosures made for the purpose of allocating contractual risk between the parties and are not for the purpose of establishing matters as facts; and may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors or security holders. Investors and security holders should not rely on the representations, warranties and covenants or any description thereof as characterizations of the actual state of facts or condition of the Borrower or any of its subsidiaries.
Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of the loan documents, which subsequent information may or may not be fully reflected in public disclosures.
Additionally, in connection with the entry into the Facilities described, on August 11, 2020, the Borrower terminated its existing credit agreement dated as of December 11, 2018, by and among Borrower and Austin Financial Services, Inc. The terminated credit facility permitted loans in an amount of up to $5,000,000. The terminated facility was secured by substantially all of the assets of Borrower. The other material terms of the terminated facility have been previously disclosed in Borrower’s periodic public filings. There was a $100,000 breakage fee associated with the terminated
credit facility.
The following financial information from our Quarterly Report for the quarter ended June 30, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at June 30, 2020 and December 31, 2019, (ii) Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019, (iii) Condensed Consolidated Statements of Comprehensive Loss
for the three and six months ended June 30, 2020 and 2019, (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and six months ended June 30, 2020 and 2019, (v) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019, 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 deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
++ This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (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 of 1933, as amended, or the Exchange Act.
#Portions of this exhibit have been redacted in compliance with
Regulation S-K Item 601(b)(10)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
