UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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☑þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20172019
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☐¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ___________
Commission file number 0-24230
ENERGY FOCUS, INC.
(Exact name of registrant as specified in its charter)
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| DELAWARE | | 94-3021850 |
(State or other jurisdiction of incorporation)incorporation or organization) | | (I.R.S. Employer Identification No.) |
32000 Aurora Road, Suite B
Solon, Ohio 44139
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: 440.715.1300
Securities registered pursuant to Section 12(b) of the Act: None
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| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| Common stock, par value $0.0001 per share | EFOI | NASDAQ |
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Title of Each Class
Common Stock, Par Value $0.0001
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act of 1933. Yes ☐No ☑¨No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes ☐¨ No ☑þ
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. Yes ☑þ No ☐¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑þ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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.
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Large accelerated filer ☐¨ | | Accelerated filer ☐¨ |
Non-accelerated filer ☐ (Do not check if a smaller reporting company)þ | | Smaller reporting company ☑þ |
| | Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐¨ No ☑þ
The aggregate market value of the Company’s common stock held by non-affiliates of the Company was approximately $29.1$5.0 million as of June 30, 2017,28, 2019, the last day of the Company’s most recently completed second fiscal quarter, when the last reported sales price was $2.63$0.41 per share.
Number of the registrant’s shares of common stock outstanding as of February 16, 2018: 11,889,517March 12, 2020: 15,892,526
Documents Incorporated by Reference
Portions of the Company’s definitive Proxy Statement for its 2017 Annual Meeting of Stockholders are incorporated by reference into Part III, Items 10-14 of this Annual Report on Form 10-K.
TABLE OF CONTENTS
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| | PART I | Page |
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| ITEM 1. | BUSINESS | |
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| ITEM 1A. | RISK FACTORS | |
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| ITEM 1B. | UNRESOLVED STAFF COMMENTS | |
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| ITEM 2. | PROPERTIES | |
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| ITEM 3. | LEGAL PROCEEDINGS | |
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| ITEM 4. | MINE SAFETY DISCLOSURES | |
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| | PART II | |
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| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES | |
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| ITEM 6. | SELECTED FINANCIAL DATA | |
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| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
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| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | |
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| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURESDISCLOSURE | |
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| ITEM 9A. | CONTROLS AND PROCEDURES | |
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| ITEM 9B. | OTHER INFORMATION | |
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| | PART III | |
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| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE | |
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| ITEM 11. | EXECUTIVE COMPENSATION | |
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| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS | |
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| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE | |
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| ITEM 14. | PRINCIPAL ACCOUNTANTACCOUNTING FEES AND SERVICES | |
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| | PART IV | |
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| ITEM 15. | EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES | |
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| ITEM 16. | FORM 10-K SUMMARY | |
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| | SIGNATURES | |
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| EXHIBIT INDEX | |
PART I
Forward-looking statements
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 subsidiaries, and their respective predecessor entitiesentity for the applicable periods, considered as a single enterprise.
This Annual Report on Form 10-K (“Annual 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 Annual 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 Annual 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 Annual 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 Item 1A of this Annual Report and other matters described in this Annual Report generally. Some of these factors include:
our history of operating losses and our ability to effectively implement cost-cutting measures and generate sufficient cash from operations or receive sufficientneed for additional financing on acceptable terms,in the near term to continue our operations;
our liquidity and refinancing demands;
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 implement and manage our growth plans to diversify our customer base, increase sales by adding new customers to reduce the reliance of our sales on a smaller group of customers, and control expenses;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;
our dependence on distributors and sales representatives, whose sales efforts may fluctuate and are not bound by long term commitments;
the timing of large customer orders, and significant expenses and fluctuations between demand and capacity as we invest in growth opportunities;
our dependence on military maritime customersability to compete effectively against companies with lower cost structures or greater resources, or more rapid development efforts, and onnew competitors in our target markets;
our ability to successfully scale our network of sales representatives, agents, and distributors to match the levelssales reach of government funding available to such customers, as well as funding resourceslarger, established competitors;
market acceptance of our other customershigh-quality LED lighting technologies and products;
our ability to attract and retain qualified personnel, and to do so in a timely manner;
the public sector and commercial markets;impact of any type of legal inquiry, claim or dispute;
general economic conditions in the United States and in other markets in which we sell our products;
market acceptance of LED lighting technology;
the entrance of competitors in the market for the U.S. Navyoperate or secure products;
our abilitydependence on military maritime customers and on the levels and timing of government funding available to respond to new lighting technologiessuch customers, as well as the funding resources of our other customers in the public sector and market trends,commercial markets;
business interruptions resulting from health epidemics or pandemics or other contagious outbreaks, such as the recent corona-virus outbreak or geopolitical actions, including war and fulfill our warranty obligations with safeterrorism, natural disasters, including earthquakes, typhoons, floods and reliable products;
any delays we may encounter in making new products available or fulfilling customer specifications;
our ability to compete effectively against companies with greater resources, lower cost structures, or more rapid development efforts;
our ability to protect our intellectual property rights and other confidential information, manage infringement claims by others, and the impact of any type of legal claim or dispute;fires;
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 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;fluctuations, including tariffs and other potential barriers to international trade; and
our ability to attract and retain qualified personnel, and to do so inremediate a timely manner; and
our ability tosignificant deficiency, maintain effective internal controls and otherwise comply with our obligations as a public company.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 Annual 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.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® and Intellitube® are our registered trademarks. We may also refer to trademarks of other corporations and organizations in this document.
ITEM 1. BUSINESS
Overview
The Company was founded in 1985 as Fiberstars, Inc., a California corporation, and reincorporated in Delaware in November 2006. In May 2007, Fiberstars, Inc. merged with and became Energy Focus, Inc., also a Delaware corporation. Our principal executive offices are located at 32000 Aurora Road, Suite B, Solon, Ohio 44139. Our telephone number is 440.715.1300. Our website address is www.energyfocus.com. Information on our website is not part of this Annual Report.
Energy Focus, Inc. and its subsidiary engageengages in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems.systems and controls. We operate in a single industry segment, developingdevelop, market and selling oursell high quality energy-efficient light-emitting diode (“LED”) lighting products intoand controls in the general commercial industrial and military maritime markets.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 become a trustedbe the retrofit technology and market leader for the most demanding applications where performance, quality and health are considered paramount. We specialize in the LED lighting retrofit market by replacing fluorescent, lamps in institutional buildings and high-intensity discharge (“HID”) lighting and other types of lamps in low-bay and high-bayinstitutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military tubular LED (“TLED”) products.and other LED products and controls.
OverIn 2019, we were a company that was going through significant transition and transformation in order to stabilize and regrow our business. This transition is exemplified by the past few years we have exited non-core businessesfollowing key and significant changes that occurred during 2019:
Executive management changes - James Tu returned to focus our efforts on TLED products, starting with the sale of our pool lighting products business in 2013. During 2015 we exited our turnkey solutions business operated by our subsidiary, Energy Focus LED Solutions, LLC (“EFLS”), and exited our United Kingdom business through the sale of Crescent Lighting Limited (“CLL”), our wholly-owned subsidiary. As a result, we have reclassified all net sales and expenses associated with both EFLS and CLL from the Consolidated Statements of Operations and have reported the related net income (loss) as discontinued operations. Please refer to Note 4, “Discontinued Operations,” for more information on our disposition of these businesses.
Given the decline in our military maritime business, the changing competitive landscape of the U.S. Navy sales channel and the timing uncertainty of commercial sales growth, we implemented a restructuring initiative during the first quarter of 2017. The intent of the restructuring strategy was to maximize operating cost reductions without sacrificing either our new product pipeline or potential long-term revenue growth and return the Company to profitability. On February 19, 2017, the Board appointed Dr. Ted Tewksbury to serve as the Company’sour Chairman of the Board,and Chief Executive Officer and Tod A. Nestor was named our new President and Chief Financial Officer. These management changes set the stage to leadstart the Company’s restructuring efforts. Dr. Tewksbury, who holds M.S.stabilization and Ph.D. degreesrelaunch necessary to ensure Energy Focus is revitalized to become a viable, trusted and sustainable manufacturer in Electrical Engineering from MIT, is a well-seasoned semiconductor industry executive with experience in implementing and managing successful business restructurings.the LED market.
The restructuring initiative included an organizational consolidation
EnFocus™ lighting platform development - During 2019, we refocused our R&D efforts to define the most acute and significant customer needs and believe that providing affordable and user-friendly lighting controls for existing buildings represents a large market for us in the US and globally. We ultimately invented and developed a dimming and color tuning lighting control platform, EnFocus™, that is adaptable to all possible lighting environments and can be implemented. By leveraging on the existing power lines, to facilitate lighting controls, buildings do not have to install new communication wires or wireless communication paths that incur cybersecurity risks.
RedCap™ - We repositioned this patented emergency backup battery integrated technology in order to streamlinemake it more readily available and better alignsimple to understand by customers. Our activities included items such as supply chain consolidation for cost and pricing reductions and eliminating the Company intoneed to do a more focused, efficient,“bundled purchase” in order to buy this highly differentiated and cost-effective organization.value-added product.
Enhanced focus on direct selling efforts - The initiative also includedcompany experienced significant decrease in sales and profit in part by relying on an agency-based sales model before the transition from our historical2019 management change. We returned to a direct sales model approach that the Company successfully executed in winning marque customers prior to an agency driven2017. While we still work with select lighting agencies, we only work with agencies that understand and embrace our value propositions and can properly and actively support our products and provide sales. We also have been expanding our internal sales team and channel strategypartnerships to complement our regional sales force.
Other key tactical transitions included:
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| ◦ | Securing a $3 million “Key Customer” healthcare contract; |
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| ◦ | Reengineering and redesign efforts to lower cost on numerous products in our US Navy product line; and |
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| ◦ | Winning an award of a $2.5 million contract for our small globe fixtures, typically found on the exterior of US Navy vessels. |
During 2019, we also streamlined our operations including consolidating our R&D operations by closing offices in order to expand our market presenceTaiwan and San Jose, California and establishing a lean organizational structure by further reducing headcount, significantly reducing executive compensation, closely managing all spending done throughout the United States (“U.S.”). During 2017 we closedCompany, significantly reducing inventory purchases through more order driven methods, negotiating meaningful cost reductions for our New York, New York, Arlington, Virginiaproducts, while reinvesting in primarily sales driven initiatives and Rochester, Minnesota and offices, reduced full-time equivalent headcount by 51 percent and significantly decreased operating expenses from 2016 levels (a net reduction of $8.4 million, which includes $1.8 million in offsetting restructuring and impairment charges). As of December 31, 2017, we had effectively transitioned our sales force to an agency driven sales channel, expanding our sales coverage to the entire U.S. through 6 geographic regions and 30 sales agents. efforts.
As a result of this transition,these efforts, we have substantially expanded fromwere able to stabilize the company, significantly reduce operating losses even when sales were still low in the third quarter of 2019, reposition the company with a primarily Midwest focuscustomer centric culture and operation, and began to build market presence and awarenessexperience a reversal of momentum in other regionsthe fourth quarter by achieving a 21.1% increase in quarter-over-quarter growth in sales. Although the short-term business impact of the U.S. with significant demand potential, includingcorona-virus outbreak is still difficult to predict, we remain optimistic that these stabilization and relaunch efforts will provide benefits in the Northeast, Southeast and California.future for Energy Focus.
Our industryIndustry
We are committed to developingdevelop advanced LED technologyretrofit technologies and product solutions that enable our customers to run their facilities with greater energy efficiency, productivity and employee wellness. We striveaim to be thea LED lighting retrofit technology solutions leader by providing high-quality, energy-efficient, “flicker-free”, long-lived, and mercury-free TLED products, as retrofit solutionsother LED lamps and fixture products, and lighting controls to replace existing linear fluorescent, lamp products in general purpose lighting applicationsincandescent and HID lamps in low-bay and high baymostly indoor lighting applications.
We believe these applications represent a dominantsignificant portion of the LED lighting market and energy savings potential for our targeted commercial, industrial and military maritime markets.MMM.
LED lighting, and particularly LED retrofit of fluorescent and incandescent lights in existing buildings, represents a large and growing market. We estimate the 2017 North American commercial and industrial linear fixtures market, including retrofit applications, to be approximately $16.0 billion. A 2018 report by Navigant Research entitled, “Tubular LEDs,” forecasts that TLEDs, the segment most important to Energy Focus, will grow at a 7.6% compound annual growth rate from 2018 to 2027. LEDs are still in the very early phases of adoption in our target markets. IBIS Industry Reports projects that, by 2020, healthcare, education, commercial and industrial markets will still only be 17% to 18% penetrated, leaving a large opportunity for future growth for us. The U.S.increasing demand for LED lighting is being driven by energy and cost savings, environmental considerations and human health.
Energy consumption can be reduced by over 50% by replacing fluorescent tubes with LED tubes and by another 20-30% (70% to over 80% in total) by utilizing smart lighting technologies, including dimmable TLEDs with ambient light and occupancy sensors. For this reason, building codes are increasingly requiring not only LEDs, but dimmable LEDs. Governments around the world are implementing regulations and standards that incentivize the use of LED lighting, both smart and conventional, to reduce energy consumption and, therefore, carbon dioxide emissions. Our new product research and development investments since April 2019 have been focusing on advanced and smart lighting technologies to capitalize on these trends, and EnFocus™ represents such a control platform that we aim to expand in terms of functionalities, applications and intelligence, going forward.
There is also a growing awareness in the industry of the profound influence lighting can have on human health and well-being. Flicker, which is the modulation of the intensity of LED light at the frequency of the power supply, is well known to cause headaches, eye strain, fatigue, mood triggers and other health issues as well as interfering with electronic equipment such as barcode scanners. The Department of Energy (“DOE”), which has been a leading advocate of the solid-state lighting (“SSL”) revolution, presented a report at LightFair in May 2018, supporting these and has supported various studies forecasting the market penetration of LEDs in general lighting applications since 2002. Based on the DOE’s research, the caseother findings. For these reasons, there is growing demand for the transition toflicker-free LED lighting, technology solutions is compelling. The DOE published their “Energy Saving Forecast of Solid-State Lightingparticularly in General Illumination Applications” in September 2016 (“DOE Report”), outlining the future path for SSL. Currently, fluorescent lighting systems represent almost half of all lighting energy consumption across all U.S. markets, creatinghealthcare and education where concentration, learning and wellness are imperative. Energy Focus tubes are UL-certified at less than 1% optical flicker, positioning us as a significant energy savings opportunity forleading LED lighting. The DOE’s marketmanufacturer to capitalize on this growing opportunity.
analysis assumesSmart, or connected, lighting is disrupting the market adoption of LED lighting will be driven by improvements in LED product efficacy, priceindustry and technological improvements, including connected lighting.providing new opportunities for growth. The DOE Report defines connected lighting as an LED lighting system with integrated sensors and controllers that are networked, enabling lighting products within the system to communicate with each other and transmit data. IfIn addition to enabling the DOE’s SSL Program Goal for LED efficacy forintensity and correlated color temperature (“CCT”) of lights to respond to ambient light, time of day and the U.S.activities of building occupants, connectivity enables building automation functions that extend well beyond lighting. The interference of blue light with human circadian rhythms is well known. This can be alleviated by smart lighting techniques that change the CCT of the LEDs depending on the time of day in order to emulate natural light. Examples include asset tracking, indoor wayfinding, location-based services, air quality, humidity, smoke, fire and carbon monoxide detection, security and surveillance, and Internet-of-Things (IoT). Since lighting sockets are metubiquitous and accelerated consumer adoptionhave access to power, tubes, controls and fixtures are ideal vehicles to retrofit these capabilities into existing buildings. According to Market and Research, the global smart lighting market is estimated to grow from $13.4 billion in 2020 and to $30.6 billion by 2025, at a CAGR of connected lighting is achieved, the market penetration of LEDs is projected to drive a 75 percent reduction in U.S. energy consumption, the equivalent to the energy consumed by 45 million U.S. homes, in 2035 alone.18.0%.
According toFrom the DOE Report, the 75 percent reductioncustomer feedback we have been receiving, there is a great and growing interest in energy will be driven largely by linear fixtures, including retrofitimplementing technologies that assist with color-shift and various IoT applications and low and high bay product categories, principally in the commercial and industrial markets. The DOE Report further estimated the 2015 LED penetration rates in the U.S. for fixtures and low and high bay products was approximately three percent and six percent, respectively, increasing to penetration rates of 77 percent for fixtures and 86 percent for low and high bay products by 2035. The DOE Report further estimated commercial and industrial penetration rates between 8 and 12 percent in 2015, increasing to between 83 percent and 86 percent by 2035.
We estimate the 2017 North American commercial and industrial linear fixtures market, including retrofit applications, to be approximately $16.0 billion. While the overall revenue within linear fixture market is forecasted to decline at a 0.5 percent CAGR through 2026, LED lamps within this product category are forecast to increase at a 5.7 percent CAGR for the same time period. Within the commercial and industrial markets we estimate the 2017 overall penetration rate for LED lamps to approximate 21 percent. The estimated penetration rates for healthcare and education markets, two markets that value our high quality, high efficacy and less than one percent flicker, are estimated to be 14 percent and 26 percent, respectively. As the efficiency and cost of LED lighting continue to improve, we believe that the overall smart lighting market adoption will accelerate, particularlyis still severely underdeveloped due to the cost and difficulty of installations of related technologies today in commercial and industrial applicationsthe marketplace, representing significant potential for solutions that could meet customer needs and that could also be affordable, easy to install and secure. We believe our upcoming EnFocus™ lighting platform could effectively address the unmet needs for smart lighting, particularly for existing buildings that have limited economical options to implement lighting controls.
While the LED lighting and smart lighting market is large, growing and underpenetrated, it has also been characterized in recent years by intensifying competition, market leadership changes and aggressive pricing tactics on commoditized products. Our strategy to overcome these challenges is to develop customer-centric technologies and products, and to focus more on a direct sales force approach to ensure and enrich our effective and frequent communication with customers in order to better understand and serve their needs. By understanding the voice of the customer and by incorporating rapidly evolving technologies surrounding LED and smart lighting, be it hardware, software or sensor-to-cloud technologies, we are well positionedbelieve that we will continue to capitalize on this market opportunity.be able to develop solutions that better address the customer’s needs with unique and novel product offerings, such as EnFocus™, our upcoming dimmable and tunable lighting and control platform, that deliver substantial value to our customers and accelerate LED and smart lighting adoptions.
Our productsProducts
We design, develop, manufacture and market a wide variety of LED lighting technologies, products and solutions to serve our primary end user markets, including the following:
Commercial products to serve our targeted commercial markets:
Direct-wire single-ended and double-ended TLED replacements for linear fluorescent lamps;
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• | Commercial Intellitube® TLED replacement for linear fluorescent lamps;RedCap™ emergency battery backup TLEDs; EnFocus™ lighting platform; |
LED fixtures and panels for fluorescent replacement or HID replacement in low-bay, high-bay and high-bayoffice applications;
LED down-lights;downlights;
LED dock lights and wall-packs;lights;
LED vapor tight lighting fixtures; and
LED retrofit kits.
Military maritimeMMM LED lighting products to serve the U.S. Navy and allied foreign navies:
Military Intellitube®;
Military globe lights;
Military berth lights;
Invisitube ultra-low EMI TLED;
Military LED retrofit kits;
Military fixtures; and
Military fixtures.EnFocus™ lighting platform.
Our LED products are more energy-efficient than traditional lighting products, such as fluorescent, incandescent and HID lamps, and we believe they can improve the overall sustainability profile of our customers by providing financial, environmental and human benefits, including achieving significant long-term energy and maintenance cost savings, reducing carbon emission and enhancing the health of building occupants.
The key features of our products are as follows:
Many of our products make use of proprietary or patented optical and electronics delivery systems that enable high efficiencies with superior lighting qualities and proven records of extremely high product reliability.
Our products have exceptionally long life, and are backed bywith the majority of our TLED sales providing a 10-year warranty.
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| • | Our products have extremely low flicker. Optical flicker, or fluctuations in brightness over time, is largely invisible to the human eye, but has been proven to exert stress on the human brain, causing headaches and eye strain, which reduce occupant comfort and productivity. The Institute of Electrical and Electronics Engineers (“IEEE”), one of the world's largest technical professional society promoting the development and application of electrotechnology and allied sciences for the benefit of humanity, recommends optical flicker of five percent5% or less. Our 500D series TLED products arewere the first in the lighting industry to be certified by Underwriters Laboratories (“UL®”) as “low optical flicker, less than 1%”. |
ManyMost of our products meet the lighting efficiency standards mandated by the Energy Independence and Security Act of 2007.
ManyMost of our products qualify for federal and state tax and rebate incentives for commercial consumers available in certain states.
We continue to invest in connected lighting research and development activities and partnerships as we seek to develop new connected lighting LED solutions. The DOE Report estimated that as of 2015 the penetration rates for any type of lighting controls to be 32 percent for commercial applications and six percent for industrial applications. Lighting controls, including dimming, sensor and daylighting technologies, can yield significant energy savings. The controllability of LED technology and the ability to integrate sensing, data processing and network interface hardware into our existing products will allow us to further differentiate our LED solutions and provide greater value to our customers.
Our strengths and strategy
Our LED products are more energy-efficient than traditional lighting products, such as incandescent bulbs and fluorescent lamps, and we believe they can provide significant long-term energy and maintenance cost savings, reduce carbon emissions and improve the sustainability profile of our customers.
Our strengths,product development capabilities, which we believe provide a strategic competitive advantage, include the following:
aA long research, engineering, and market developmental history, with broad and intimate understanding of lighting technologies and LED lighting applications;
owningStrong and controlling the development, design,growing team of experienced engineers in electrical, electronics, optical, thermal, mechanical, communications and construction of our TLED products to ensure we provide industry-leading LED products that offer premium performance with respect optical quality, efficacy, efficiency and power factor;software technologies;
leading the industry in the development of ultra-low flicker TLEDs with less than one percent flicker
concentrationConcentration on developing and providing high-quality, price competitive TLED lamps and the surrounding technologies to replace fluorescent and HID lamps for commercial markets;
providingProviding high quality and high performing LED and TLED products with a proven history of reliability; and
aA deep understanding of the adoption dynamics and decision-making process for LED lighting products in existing MMM, government and commercial building markets.
Through our strengths,As we seek to achieve the following objectives:
develop new connected lighting LED solutions, we have invested and expect to be a streamlined and high-performing organization, focused on providing industry-leading LED lighting products with compelling, superior value propositions that generate energy savings, reduce carbon emissions, and improve health and well-being for our customers;
continue to expand our market reachinvestments in smart, connected lighting research and development activities and partnerships. Lighting controls, including dimming, sensor and daylighting technologies, can yield significant energy savings. We believe that the controllability of LED technology and our ability and plan to integrate more occupancy sensing, data processing and network interface hardware and software into our existing products will allow us to further penetratedifferentiate our target markets including healthcare, education, commercial, industrialLED solutions and military maritime; and
sales growthprovide greater non-energy benefits (“NEBs”) to support sustainable and profitable financial performance.
Our strategy to achieve these objectives includes the following actions:
to utilize our patents and proprietary know-how to develop innovative LED lighting products that are differentiated by their quality, efficiency, reliability, adaptability and cost of ownership;
invest in product development resources and partnerships to develop and execute a strategic product pipeline for profitable and compelling energy-efficient LED lighting products;
expand our market presence through a network of trusted relationships with key sales agents throughout the United States in order to increase awareness and knowledge of our technology, product offerings and value proposition within our targeted markets;
maintain cost control discipline without sacrificing either new product pipeline or potential long-term revenue growth; and
continue our efforts to reduce product cost and drive further operating efficiencies.
customers.
Sales and marketing
HistoricallyDue to our products were sold throughbelief that technologies and performance associated with LED lighting are not well understood due to the nature of LED’s rapid evolution, we are mainly focusing on a direct sales model that aims to better educate end-users and contracting
partners regarding the benefits and unique value propositions of our products. Our primary target customers are enterprise end-users, as well as contractors or energy service companies that could incorporate our products into their projects. In a more limited way, we also sell through lighting agencies that represent our products in territories in which includedwe do not have a combination of direct sales employees, electrical and lighting contractors, and distributors. The 2017 restructuring initiative included the transition to an agency driven sales channel strategy in order to expand our market presence throughout the U.S.presence. As of December 31, 2017,2019, we had effectively transitionedhave seven in-house sales personnel and eighteen sales agencies, each of which has, on average, approximately ten agents representing Energy Focus products. We aim to continue to expand our in-house sales forceteam, which now covers regions in the Midwest, Northeast, South and West, to an agency driven sales channel, expanding our sales coverage to the entire U.S. through sixeventually cover all geographic regions and 30 sales agents. As a result of this transition, we have substantially expanded from a primarily Midwest
focus to build market presence and awareness in other regions ofacross the U.S. with significant demand potential, including the Northeast, Southeast and California.
Targeted vertical marketsUnited States.
We focus on marketsindustry verticals where the economic benefits and NEBs, as well as technical specifications of our high-quality lighting product offerings are most compelling. Our LED lighting products fall into two separate applications,broad market categories, commercial markets, focusedwhich tend to focus on quality, efficacy, total cost of ownership and return on investment, and military maritime markets, requiringMMM which require higher, more rigorous military specifications for durability and dependability.
With the introduction of our military Intellitube® product in 2011, our resultswhich replaced two-foot fluorescent lamps on U.S. Navy ships, military sales had been driven by our military maritime market, accounting for approximately 78 percentrepresented the majority of our net sales foroverall sales. Since 2016 when the year-ended December 31, 2015. The military maritime competitive landscape changed due to the entrance of new competitors into the MMM, a drastic decline in late 2016pricing and limited remaining opportunities, the military sector, while still important, has made up a smaller percentage of our total sales. However, since our management change in April 2019, we are no longerhave been focusing on improving the only qualified TLED provider for the U.S. Navy. Additionally,design of our MMM products to significantly reduce product cost, and we believe that these efforts will enhance our competitiveness in the military maritime market for our military Intellitube® product is limited as we estimate that 50 percent of the Navy’s potentially replaceable fluorescent tubes had been retrofitted with our military Intellitube® product through December 31, 2017. Accordingly, for the years ended December 31, 2017 and 2016 our military maritime market accounted for 23 percent and 52 percentMMM allowing us to carefully grow this portion of our net sales, respectively. We continue to diversify our military maritime business through the development of LED fixtures, globe and berth lights and our continued efforts to expand sales beyond the U.S. Navy into foreign navies, the military sealift command, U.S. Coast Guard, commercial shipping companies, and military bases.business.
In light of the changing military maritime market, over the past three yearsWe launched our first commercial LED lighting products in 2010. Since then, we have been focused onaggressively building and expanding our commercial and industrial market presence where the economic and non-energy benefits, and technical specifications of our high-quality lighting product offerings are compelling, particularly for mission-critical facilities in the enterprise verticals such as the healthcare, education and industrial verticals.industrial. For example:
Given the 24/7 lighting requirements of hospital systems we believe that our LED solutions offer the proven quality, performance, long lifetime, return on investment and low flicker lightning that is particularly attractive to this target market. Since 2015 we have been the trustedprimary LED lighting supplier and partner for a major northeast Ohio hospital system and as a result of our continued success, we have been able to leverage this relationship to introduce our lighting solutions and value proposition to an increasing number ofexpand into more hospital systems. We further believe thatsystems across the strength of our agency relationships will allow us to further penetrate this market on a regional basis. As of December 31, 2017, we estimate that the LED penetration rate within the healthcare market is approximately 14 percent.country.
As we advocate for the benefits of low flickerlow-flicker LED lighting in schools, both in terms of energy-efficiency and in creating a healthy and effective learning environment, we continue to receive orders to retrofit local school districts, colleges and universities. Again, we believe that our relationships with our sales agents will allow us to further build awareness of the benefits of low flickerOur LED lighting helping us to drive further penetrationproducts are now installed in this market. Asover 100 school districts across the country and increasing number of December 31, 2017, we estimate that the LED penetration rate within the education market is approximately 26 percent.colleges and universities.
Low and high bay applications are generally used in commercial and industrial markets to provide light to large open areas like big-box retail stores, warehouses and manufacturing facilities. In the past few years, technological and cost improvements have allowed LED low and high bay applications to be more competitive against traditional low and high bay applications.applications with fluorescent or metal halide light sources. In the industrial market in particular, due to the usage of HIDmetal halide lighting, the energy and maintenance savings that can be achieved by switching to our LED products could be substantial, and we believe we have attractive product offerings in this space.
In addition to our direct and indirect sales force, we have also started launching more outbound telephonic and email campaigns that will help us contact a much larger number of potential new customers. In addition, we believe that our renewed and continuing focus on technology innovation and product engineering designs to lower product costs will continue to enhance the overall competitiveness of our LED lighting products and provide us with the strategic flexibility to expand our distribution channels.
Concentration of sales
Consistent with our efforts to diversify our customer base, threeIn 2019, two customers accounted for 48.4 percent,45% of net sales in 2017, comparedand total sales to two customers accounting for 47.4 percentdistributors to the U.S. Navy represented 23% of net sales in 2016.sales. In 2017, our commercial sales2018, one customer, a distributor to the U.S. Navy, accounted for 76.7 percent42% of net sales while sales of our military maritime products accounted for 23.3 percent.sales. In 2017, two commercial customers, a major northeastern Ohio hospital system and a large regional retrofit company located in Texas, accounted for 18.3 percent,18% and 12.8 percent13% of net sales, respectively, while sales to a distributor to the U.S. Navy accounted for 17% of net sales. Total sales to distributors to the U.S. Navy represented 22.0 percent22% of net sales. No other customers accounted for more than 10 percent of our net sales in 2017.
Competition
Our LED lighting products compete against a variety of lighting products, including conventional light sources such as compact fluorescent lamps and HID lamps, as well as other TLEDs and full fixture lighting products. Our ability to compete depends substantially upon the superior performance and lower total cost of ownership of our products. Principal competitors in our markets include large lamp manufacturers and lighting fixture companies based in the U.S.,United States, as well as TLED
manufacturers mostly based in Asia, whose financial resources may substantially exceed ours and whose cost structure may be well below ours. These competitors may introduce new or improved products that may reduce or eliminate some of the competitive advantage of our products.products and may have substantially lower pricing. We anticipate that the competition for our products will also come from new technologies that offer increased energy efficiency, lower maintenance costs, and/or advanced features. We compete with LED systems produced by large lighting companies such as Philips Lighting, CREE, Osram Sylvania and GE Lighting, as well as smaller manufacturers or distributors such as LED Smart, Revolution Lighting Technologies, and Orion Energy Systems.Systems, Green Creative and Keystone Technologies. Some of these competitors offer products with performance characteristics similar to those of our products.
Manufacturing and suppliers
We produce our lighting products and systems through a combination of internal manufacturing and assembly at our Solon, Ohio facility, and sourced finished goods, manufactured to our specifications. Our internal lighting system manufacturing consists primarily of final assembly, testing, and quality control. We have worked with several vendors to design custom components to meet our specific needs. Our quality assurance program provides for testing of all sub-assemblies at key stages in the assembly process, as well as testing of finished products produced both internally and sourced through third parties.
Manufacturing costs are managed through the balance of internal production and an outsourced production model for certain parts and components, as well as finished goods in specific product lines, to a small number of vendors in various locations throughout the world, primarily in the United States, Malaysia, Taiwan, and China. In some cases, we rely upon a single supplier to source certain components, sub-assemblies, or finished goods. We continually attempt to improve our global supply chain practices to satisfy client demands in terms of quality and volumes, while controlling our costs and achieving targeted gross margins.margins, and this includes the evaluation of additional outsourcing of internal production where cost, quality and performance can be maintained or improved.
Product development
Product development ishas been a key area of operating focus and competitive differentiation for us and we are dedicated toin designing and developing industry leading LED lighting products. Gross product development expenses for the years ended December 31, 2019, 2018 and 2017 2016,were $1.3 million, $2.6 million and 2015 were $2.9 million, $3.6 million,respectively. We believe that our now customer centric product development efforts represent a better leverage on our R&D investments and $3.0 million respectively.aim to continue to focus on developmental projects that could produce more timely and impactful products and solutions for faster customer adoptions.
Intellectual property
We have a policy of seeking to protect our intellectual property through patents, license agreements, trademark registrations, confidential disclosure agreements, and trade secrets as management deems appropriate. We have approximately 10Certain of our patents that we considerare key to our current product lines. Additionally, we have various pending United StatesU.S. patent applications, and various pending Patent Cooperation Treaty patent applications filed with the World Intellectual Property Organization that serve as the basis for national patent filings in countries of interest. Our issued patents expire at various times through July 2032.April 2037. Generally, the term of patent protection is twenty years from the earliest effective filing date of the patent application. There can be no assurance; however, that our issued patents are valid or that any patents applied for will be issued, and that our competitors or clients will not copy aspects of our lighting systems or obtain information that we regard as proprietary. There can also be no assurance that others will not independently develop products similar to ours. The laws of some foreign countries in which we manufacture, sell or may sell our products do not protect proprietary rights to products to the same extent as the laws of the United States.
Insurance
All of our properties and equipment are covered by insurance and we believe that such insurance is adequate. In addition, we maintain general liability and workers’ compensation insurance in amounts we believe to be consistent with our risk of loss and industry practice.
Employees
At December 31, 2017,2019, we had 7442 full-time employees, sevenall of whom were located in Taiwan and 67 in the United States. We also had four temporary contract employees at December 31, 2019. None of our employees or contract employees are subject to collective bargaining agreements.
Business segments
We currently operate in a single business segment that includes the marketing and sale of commercial and military maritimeMMM lighting products.products and controls. Please refer to Note 4, “Discontinued Operations” and Note 12,13, “Product and Geographic Information,” included in Item 8 of this Annual Report, for additional information.
Available information
OurWe maintain a website at www.energyfocus.com. We are providing the address to our website solely for the information of investors. The information on our website is located at www.energyfocus.com. Wenot a part of, nor is it incorporated by reference into this Annual Report. Through our website, we make available, free of charge, on or through our website, our annual proxy statement, annual reports on Form 10-K, quarterly andreports on Form 10-Q, current reports as well as anyon Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after we electronically filingfile such reportsmaterial with, or furnish them to, the Securities and Exchange Commission. Information contained on ourCommission, or the SEC. The SEC maintains a website is not part of this Annual Report.that contains these reports at www.sec.gov.
ITEM 1A. RISK FACTORS
Risks associated with our business
WeThe recent corona virus outbreak could have an adverse effect on our business.
Concerns are rapidly growing about the global outbreak of a historynovel strain of operating lossescorona-virus (COVID-19). The virus has spread rapidly across the globe, including the U.S. The pandemic is having an unprecedented impact on the U.S. economy as federal, state and local governments react to this public health crisis, which has created significant uncertainties. These uncertainties include, but are not limited to, the potential adverse effect of the pandemic on the economy, our supply chain partners, transportation and logistics providers, our employees and customers. As the pandemic continues to grow, fear about becoming ill with the virus and recommendations and/or mandates from federal, state and local authorities to avoid large gatherings of people or self-quarantine may continue to increase, which has already affected, and may incur losses incontinue to affect our supply chain as well as our customer base. Continued impacts of the future.
We have incurred substantial losses in the pastpandemic could materially adversely affect our near-term and reported net losses from continuing operations of $11.3 million and $16.9 million for the years ended December 31, 2017 and 2016. As of December 31, 2017, we had cashlong-term revenues, earnings, liquidity and cash equivalentsflows, and may require significant actions in response, including but not limited to, employee furloughs, plant and operational shut-downs in Ohio and Nevada (third-party warehouse), expense reductions or discounting of approximately $10.8 millionpricing of our products, all in an effort to mitigate such impacts. The extent of the impact of the pandemic on our business and an accumulated deficitfinancial results will depend largely on future developments, including the duration of $108.2 million.the spread of the outbreak within the U.S., the impact on capital and financial markets and the related impact on consumer confidence and spending, all of which are highly uncertain and cannot be predicted. This situation is changing rapidly, and additional impacts may arise that we are not aware of currently.
In order for usWe rely on equity and debt financing to operate our business profitably, we need to continue to expand our market presence to further penetrate our targeted vertical markets, maintain cost control discipline without sacrificing either new product pipeline or potential long-term revenue growth, continue our efforts to reduce product cost, drive further operating efficiencies and develop and execute a strategic product pipeline for profitable and compelling energy-efficient LED lighting products. There is a risk that our strategy to return to profitability may not be as successful as we envision. If our operations do not achieve, or we experience an unanticipated delay in achieving, our intended level and pace of profitability, we may require additional funding.
We maywill require additional financing andin the near-term, which we may not be able to raise funds on favorable terms or at all.all, and our failure to obtain funding when needed may force us to delay, scale back or eliminate our business plan or even discontinue or curtail our operations.
For the year ended December 31, 2019, we reported a net loss of $7.4 million and are dependent upon the availability of financing in order to continue our business.
As of December 31, 2017,2019, we had cash and cash equivalents of approximately $10.8$0.4 million and forhad a balance of $0.7 million under our $5.0 million revolving line of credit (the “Credit Facility”) with Austin Financial Services (“Austin”). As of March 5, 2020, our cash was approximately $2.6 million and our outstanding balance under the Credit Facility was approximately $0.8 million. Our ability to draw on the Credit Facility is limited based on the amount of qualified accounts receivable, plus a portion of the net realizable value of our eligible inventory. The repayment of outstanding advances and interest under the Credit Facility may be accelerated upon an event of default including, but not limited to, failure to make timely payments or breach of any terms set forth in the loan agreement. The Credit Facility is secured by our assets and is subject to customary affirmative and negative operating covenants and defaults and restricting indebtedness, liens, corporate transactions, dividends, and affiliate transactions, among others. Austin has the ability to terminate the Credit Facility with 90-days’ notice. The maturity date of the Credit Facility is December 11, 2021.
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 $1,257,000 (the “Iliad Note”). The Iliad Note has a maturity date of November 24, 2021 and accrues interest at 8% per annum, compounded daily, on the outstanding balance. The Company may prepay the amounts outstanding under the Iliad Note at a premium, which is 15% during the first year ended December 31, 2017,and 10% during the second year. Beginning in May 2020, Iliad may require the Company to redeem up to $150,000 of the Iliad Note in any calendar month, subject to certain limited deferral rights. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and capital resources-Iliad Note.”
Even with the Credit Facility, we reported a net lossmay not generate sufficient cash flows from continuingour operations of $11.3 million. During the quarter ended September 30, 2015,or be able to borrow sufficient funds to sustain our operations. As such, we raised approximately $23.6 million from a follow-on offering of 1,500,000 shares of common stock. The proceeds from that offeringwill likely need additional external financing during 2020 and will continue to provide funding for the near-term, however, there is a risk that we will require additional external financing if our business does not generate adequate cash flow or if our business plans change or require more investment than we currently anticipate.
In addition, we terminated our revolving credit facility effective December 31, 2015review and do not have current plans to enter into a replacement facility.
If we require additional financing, we will evaluate all availablepursue external funding sources including, but therenot 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 financing 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;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 and control or revocation provisions, which are not acceptable to management or our Boardboard of Directors;directors; and
the current environment in capital markets, as well as global health risks, combined with our capital constraints may prevent us from being able to obtain adequate debt financing.
If we fail to obtain required additional financing to growsustain our business before we wouldare able to produce levels of revenue to meet our financial needs, we will need to delay, or scale back or eliminate our business plan and further reduce our operating costs or reduce ourand headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition. A lack of additional financing 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.
Our independent registered public accounting firm’s opinion on our audited financial statements for the fiscal year ended December 31, 2019, included in this annual report on Form 10-K, contains a modification relating to our ability to continue as a going concern.
Our independent registered public accounting firm’s opinion on our audited financial statements for the year ended December 31, 2019 includes a modification stating that our losses and negative cash flows from operations and uncertainty in generating sufficient cash to meet our obligations and sustain our operations raise substantial doubt about our ability to continue as a going concern. In addition, Note 3 to our financial statements for the year ended December 31, 2019 includes disclosure describing the existence of conditions that raise substantial doubt about our ability to continue as a going concern for a reasonable period of time.
While we continue to pursue funding sources and transactions that could raise capital, there can be no assurances that we will be successful in these efforts or will be able to resolve our liquidity issues or eliminate our operating losses. If we are unable to generate enough cash or obtain additional sufficient funding, we would need to scale back or eliminate our business plan, further reduce our operating costs and headcount, or discontinue or curtail our operations. Accordingly, our business, prospects, financial condition and results of operations could be materially and adversely affected, and we may be unable to continue as a going concern. If we are unable to continue as a going concern, we may have to liquidate our assets and may receive less than the value at which those assets are carried on our audited consolidated financial statements, and it is likely that investors will lose all or a part of their investment. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We have a history of operating losses and will incur losses in the future as we continue our efforts to grow sales and streamline our operations at a profitable level.
We have incurred substantial losses in the past and reported net losses from operations of $7.4 million, $9.1 million and $11.3 million for the years ended December 31, 2019, 2018 and 2017, respectively. As of December 31, 2019, we had an accumulated deficit of $124.9 million and cash of approximately $0.4 million.
In order for us to operate our business profitably, we need to grow our sales, maintain cost control discipline while balancing development of our new product pipeline and potential long-term revenue growth, continue our efforts to reduce product cost, drive further operating efficiencies and develop and execute a strategic product pipeline for profitable and compelling energy-efficient and smart LED lighting and control products. There is a risk that our strategy to return to profitability may not be as successful as we envision. We might require additional financing in the near-term and, if our operations do not achieve, or we experience an unanticipated delay in achieving, our intended level and pace of profitability, we will continue to need additional funding, none of which may be available on favorable terms or at all and could require us to sell certain assets or discontinue or curtail our operations.
We derive a significant portion of our revenue from a few customers and the loss of one of these customers, or a reduction in their demand for our products, could adversely affect our business, financial condition, results of operations, and prospects.
Historically our customer base has been highly concentrated and one or a few customers have represented a substantial portion of our net sales. In 2019, two customers accounted for 45% of net sales and total sales to distributors to the U.S. Navy represented 23% of net sales. In 2018, one customer, a distributor for the U.S. Navy, accounted for 42% of net sales. In 2017, two commercial customers, a major northeastern Ohio hospital system and a large regional retrofit company located in Texas, accounted for 18.3 percent,18% and 12.8 percent13% of net sales, respectively, while sales to a distributor to the U.S. Navy accounted for 17% of net sales. Total sales to distributors to the U.S. Navy represented 22.0 percent22% of net sales. sales in 2017.
We generally do not have long-term contracts with our customers that commit them to purchase any minimum amount of our products or require them to continue to do business with us. We could lose business from any one of our significant customercustomers for a variety of reasons, many of which are outside of our control, including, changes in levels of government funding and rebate programs, our inability to comply with government contracting laws and regulations, changes in customers’ procurement strategies or their lighting retrofit plans, changes in product specifications, additional competitors entering particular markets, our failure to keep pace with technological advances and cost reductions, and damage to our professional reputation, among others.
We are attempting to expand and diversify our customer base reducingand reduce the dependence on one or a few customers, through the implementationaddition of our agency drivendirect to customer sales channel strategy. Although as of December 31, 2017, we had effectively
transitioned our sales force to an agency driven sales channel, expanding our sales coverage to the entire U.S. through six geographic regions and 30 sales agents, our efforts to expand our customer base are generally in the early stages, andstrategy but we cannot provide any assurance wethat our efforts will be successful. We anticipate that a limited number of customers could continue to comprise a substantial portion of our revenue for the foreseeable future. If we continue to do business with our significant customers, our concentration can cause variability in our results because we cannot control the timing or amounts of their purchases. If a significant customer ceases to do or drastically reduces its business with us, these events can occur with little or no notice and could adversely affect our results of operations and cash flows in particular periods.
Our inability to diversify our customer base could adversely impact our business and operating results, and expanding to new target markets may open us up to additional risks and challenges.
Our efforts to penetrate additional markets are generally in the early stages, andHistorically, we cannot provide any assurance we will be successful. Our initial sales cycle ishave experienced long generally six to twelve months or more, and each targeted market may require us to develop different expertise and sales, supply, or distribution channels. We may dedicate significant resources to a targeted customer or industry before we achieve meaningful results or are able to effectively evaluate our success. As we targetsales-cycles, as well as slow ramp-up by new customers to purchase large amounts of LED products from us. Given the fiercely competitive lighting market in which we operate, we are constantly trying to balance pricing with the quality-premium our products command both in brand reputation and industries, we will also face different technological, pricing, supply, regulatory and competitive challenges that we may not have experience with, or that may evolve more rapidly than we can address.performance. As a result, adding new customers could generally be a slow process, and getting their sales increased to more significant levels usually takes a long period of time. As we continue to develop more customer-centric new products such as EnFocus™, we hope to both add new customers more quickly and have our efforts to expand tocustomers scale their purchasing levels more quickly. However this is no guarantee of faster customer acceptance or performance of this new markets may not succeed, may divert management resources from our existing operations and may require significant financial commitments to unproven areas of our business, all of which may harm our financial performance.product or any other that has been or is being developed.
If we are unable to implement plans to increase sales and control expenses to manage future growth effectively, our profitability goals and liquidity couldwill be adversely affected.
Our ability to achieve our desired growth depends on the adoption of LEDs and related controls within the general lighting market and our ability to affect and adapt to this rate of adoption. The pace of continued growth in this market is uncertain, and in order to grow our sales, we may need to:
manage organizational complexity and communication;
expand the skills and capabilities of our current management and sales team;
add experienced senior level managers;
attract, retain and retainadequately compensate qualified employees;
adequately maintain and adjust the operational and financial controls that support our business;
expand research and development, sales and marketing, technical support, distribution capabilities, manufacturing planning and administrative functions;
maintain or establish additional manufacturing facilities and equipment, as well as secure sufficient third-party manufacturing resources, to adequately meet customer demand; and
manage an increasingly complex supply chain that has the ability to maintain a sufficient supply of materials and deliver on time to our manufacturing facilities.
These efforts to grow our business, both in terms of size and in diversity of customer bases served, may put a significant strain on our resources. During 2017, 2018 and 2019, we implemented comprehensive cost-saving initiatives to reduce our net loss and mitigate doubt about our ability to continue as a going concern. These initiatives have improved efficiency and streamlined our operations, but we may need additional funding and further cost-cutting may be needed to manage liquidity and future growth may exceed our current capacity and require rapid expansion in certain functional areas.
We may lack sufficient funding to appropriately expand or incur significant expenses as we attempt to scale our resources and make investments in our business that we believe are necessary to achieve short-term and long-term growth goals. Such investments take time to become fully operational, and we may not be able to expand quickly enough to exploit targeted market opportunities. In addition to our own manufacturing capacity, we are increasingly utilizing contract manufacturers and original design manufacturers (“ODMs”) to produce our products for us. There are also inherent execution risks in expanding product lines and production capacity, whether through our facilities or that of a third-party manufacturer, that could increase costs and reduce our operating results, including design and construction cost overruns, poor production process yields and reduced quality control. If we are unable to fund any necessary expansion or manage our growth effectively, we may not be able to adequately meet demand, our expenses could increase without a proportionate increase in revenue, our margins could decrease, and our business and results of operations could be adversely affected.
Our results of operations, financial condition and business could be harmed if we are unable to balance customer demand and capacity.
As customer demand for our products changes, we must be able to adjust our production capacity to meet demand. We are continually taking steps to address our manufacturing capacity needs for our products. If we are not able to increase or decrease
our production capacity at our targeted rate or if there are unforeseen costs associated with adjusting our capacity levels or there are unanticipated interruptions in our supply chain from such possibilities as the corona-virus outbreak, we may not be able to achieve our financial targets. In addition, as we introduce new products and further develop product generations, we must balance the production and inventory of prior generation products with the production and inventory of new generation products, whether manufactured by us or our contract manufacturers, to maintain a product mix that will satisfy customer demand and mitigate the risk of incurring cost write-downs on the previous generation products, related raw materials and tooling.
If customer demand does not materialize at the rate forecasted, we may not be able to scale back our manufacturing expenses or overhead costs to correspond to the demand. This could result in lower margins, write-downs of our inventory and adversely impact our business and results of operations. Additionally, if product demand decreases or we fail to forecast demand accurately, our results may be adversely impacted due to higher costs resulting from lower factory utilization, causing higher fixed costs per unit produced. In addition, our efforts to improve quoted delivery lead-time performance may result in corresponding reductions in order backlog. A decline in backlog levels could result in more variability and less predictability in our quarter-to-quarter net sales and operating results.
Our operating results may fluctuate dueIf we are not able to factors that are difficult to forecastcompete effectively against companies with lower cost structures or greater resources, and not withinnew competitors who enter our control.target markets, our sales will be adversely affected.
Our past operating results may not be accurate indicators of future performance, and you should not rely on such results to predict our future performance. Our operating results have fluctuated significantly inThe lighting industry is highly competitive. In the past, and could fluctuate in the future. Factors that may contribute to fluctuations include:
changes in aggregate capital spending, cyclicality and other economic conditions, or domestic and international demand in the industries;
the timing of large customer orders to which we may have limited visibility and cannot control;
competition for our products, including the entry of new competitors and significant declines in competitive pricing;
our ability to effectively manage our working capital;
our ability to generate increased demand in our targetedhigh-performance lighting markets particularly those in which we have limited experience;
sell our abilityadvanced lighting systems, our products compete with lighting products utilizing traditional lighting technology provided by many vendors. For sales of military maritime markets (“MMM”) products, we compete with a small number of qualified military lighting lamp and fixture suppliers. In certain commercial applications, we typically compete with LED systems produced by large lighting companies. Our primary competitors include Philips, Osram Sylvania, LED Smart, Revolution Lighting Technologies, Orion Energy Systems, Green Creative and Keystone Technologies. Some of these competitors offer products with performance characteristics similar to satisfy consumer demands in a timelythose of our products. Many of our competitors are larger, more established companies with greater resources to devote to research and cost-effective manner;
development, manufacturing and marketing, as well as greater brand recognition. In addition, larger competitors who purchase greater unit volumes from component suppliers may be able to negotiate lower bill of material costs, thereby enabling them to offer lower pricing and availability of labor and materials;
quality testing and reliability of new products;
our inability to adjust certain fixed costs and expenses for changes in demandend customers. Moreover, the relatively low barriers to entry into the lighting industry and the timinglimited proprietary nature of many lighting products also permit new competitors to enter the industry easily and significancewith lower costs.
In each of expendituresour markets, we also anticipate the possibility that LED manufacturers, including those that currently supply us with LEDs, may seek to compete with us. Our competitors’ lighting technologies and products may be incurredmore readily accepted by customers than our products will be. Moreover, if one or more of our competitors or suppliers were to facilitate our growth;
seasonal fluctuations in demand and our revenue; and
disruption in component supply from foreign vendors.
Depressed general economic conditions may adversely affect our operating results and financial condition.
Our business is sensitive to changes in general economic conditions, both inside and outsidemerge, the United States. Slow growthchange in the economy or an economic downturn, particularly one affecting construction and building renovation, or that cause end-users to reduce or delay their purchases of lighting products, services, or retrofit activities, would have a material adverse effect on our business, cash flows, financial condition and results of operations. LED lighting retrofit projects, in particular, tend to require a significant capital commitment, which is offset by cost savings achieved over time. As such, a lack of available capital, whether due to economic factors or conditions in the capital or debt markets, could have the effect of reducing demand for our products. A decrease in demandcompetitive landscape could adversely affect our abilitycompetitive position. Additionally, to meetthe extent that competition in our working capital requirements and growth objectives, or could otherwise adversely affect our business, financial condition, and results of operations.
Customersmarkets intensifies, we may be unablerequired to obtain financing to make purchases from us.
Some offurther reduce our customers require financingprices in order to purchaseremain competitive. If we do not compete effectively, or if we reduce our productsprices without making commensurate reductions in our costs, our net sales, margins, and the initial investment is higher than is required with traditional lighting products. The potential inability of these customers to access the capital needed to finance purchases ofprofitability and our products and meet their payment obligations to us could adversely impact the appeal of our products relative to those with lower upfront costs and have a negative impact on our financial condition and results of operations. There canfuture prospects for success may be no assurance that third party finance companies will provide capital to our customers.harmed.
AWe work with independent agents and sales representatives for a portion of our business is dependent uponnet sales, and the existencefailure to incentivize, retain and manage our relationships with these third parties, or the termination of government funding, whichthese relationships, could cause our net sales to decline and harm our business.
In the past, we pursued an agency driven sales channel strategy in order to expand our market presence throughout the United States. As a result, at that time we had increased our reliance on independent sales agent channels to market and sell our products. In addition, these parties provide technical sales support to end-users. The current agreements with our agents are generally non-exclusive, meaning they can sell products of our competitors. Any such agreements we enter into in the future may be on similar terms. Our agents may not be available intomotivated to or successfully pursue the future and could result in a reduction in sales and harm to our business.
Some of our customers are dependent on governmental funding, including foreign allied navies and U.S. military bases. If any of these other target customers abandon, curtail, or delay planned LED lighting retrofit projects as a result of the levels of fundingopportunities available to them, or changesthey may prefer to sell or be more familiar with the products of our competitors. If our agents do not achieve our sales objectives or these relationships take significant time to develop, our revenue may decline, fail to grow or not increase as rapidly as we intend in budget priorities, it wouldorder to achieve profitability and grow our business. During 2019 we significantly reduced our reliance on agencies for a substantial portion of our sales, and instead paired down our agency relationships to focus only on those relationships that were both mutually beneficial and strategically important. Meanwhile, during 2019 we began to rely much
more significantly on a direct sales go-to-market strategy using internal sales personnel and select channel partners to drive a substantial portion of our sales. However, we remain reliant on independent agents and sales representatives for a portion of our sales.
Furthermore, our agency agreements are generally short-term and can be cancelled by either party without significant financial consequence. The termination of or the inability to negotiate extensions of these contracts on acceptable terms could adversely affectimpact sales of our opportunities to generate product sales.products. Additionally, we cannot be certain that we or end-users will be satisfied by their performance. If these agents significantly change their terms with us, or change their end-user relationships, there could be an impact on our net sales and profits.
If LED lighting technology fails to gain widespread market acceptance or we are unable to respond effectively as new lighting technologies and market trends emerge, our competitive position and our ability to generate revenue, and profits may be harmed.
To be successful, we depend on continued market acceptance of our existing LED technology. Although adoption of LED lighting continues to grow, the use of LED lighting products for general illumination is in its early stages, is still limited, and faces significant challenges. Potential customers may be reluctant to adopt LED lighting products as an alternative to traditional lighting technology because of its higher initial cost or perceived risks relating to its novelty, reliability, usefulness, light quality and cost-effectiveness when compared to other established lighting sources available in the market. Changes in economic and market conditions may also make traditional lighting technologies more appealing. For example, declining energy prices in certain regions or countries may favor existing lighting technologies that are less energy-efficient, reducing the rate of adoption for LED lighting products in those areas. Notwithstanding continued performance improvements and cost reductions of LED lighting, limited customer awareness of the benefits of LED lighting products, lack of widely accepted standards governing LED lighting products and customer unwillingness to adopt LED lighting products could significantly limit the demand for LED lighting products. Even potential customers that are inclined to adopt energy-efficient lighting technology may defer investment as LED lighting products continue to experience rapid technological advances. Any of the foregoing could adversely impact our results of operations and limit our market opportunities.
In addition, we will need to keep pace with rapid changes in LED technology, changing customer requirements, new product introductions and cost reductions by competitors and evolving industry standards, any of which could render our existing products obsolete if we fail to respond in a timely manner. The development, introduction, and acceptance of new, re-designed or reduced cost products incorporating advanced technology is a complex process subject to numerous uncertainties, including:
available funding to sustain adequate development efforts;
achievement of technology breakthroughs required to make commercially viable devices;devices, and in turn protecting those breakthroughs through intellectual property;
the accuracy of our predictions for market requirements;
our ability to predict, influence, and/or react to evolving standards;
acceptance of our new product designs;
acceptance of new technologies in certain markets;
the combination of other desired technological advances with lighting products, such as controls;
the availability of qualified research and development personnel;
our timely completion of product designs and development;
our ability to develop repeatable processes to manufacture new products in sufficient quantities, with the desired specifications, and at competitive costs;
our ability to effectively transfer products and technology from development to manufacturing; and
market acceptance of our products.
We could experience delays in the introduction of newthese products. We could also devote substantial resources to the development of new technologies or products that are ultimately not successful.
If effective new sources of light other than LEDs are discovered and commercialized, our current products and technologies could become less competitive or obsolete. If others develop innovative proprietary lighting technology that is superior to ours, or if we fail to accurately anticipate technology, pricing and market trends, respond on a timely basis with our own development of new and reliable products and enhancements to existing products, and achieve broad market acceptance of these products and enhancements, our competitive position may be harmed and we may not achieve sufficient growth in our net sales to attain or sustain profitability.
If we are not ableunable to compete effectively against companies with greater resources,attract or retain qualified personnel, our prospects forbusiness and product development efforts could be harmed.
We are highly dependent on our senior management and other key personnel due to our very lean organizational structure. Our future success will depend on our ability to attract, retain, develop and motivate qualified technical, sales, marketing, and management personnel, for whom competition is very intense. As we attempt to rapidly grow our business, it could be jeopardized.especially difficult to attract, retain and adequately compensate qualified personnel, especially in light of our lean cost-structure. The loss of, or failure to attract, hire, and retain any such persons could delay product development cycles, disrupt our operations, increase our costs, or otherwise harm our business or results of operations. We also do not maintain “key person” insurance policies on any of our officers or our other employees.
We may be subject to legal claims against us or claims by us which could have a significant impact on our resulting financial performance.
At any given time, we may be subject to litigation or claims related to our products, intellectual property, suppliers, customers, employees, stockholders, distributors, sales representatives, intellectual property, and sales of our assets, among other things, the disposition of which may have an adverse effect upon our business, financial condition, or results of operation. The lighting industryoutcome of litigation is highly competitive. Indifficult to assess or quantify. Lawsuits can result in the high-performance lightingpayment of substantial damages by defendants. If we are required to pay substantial damages and expenses as a result of these or other types of lawsuits, our business and results of operations would be adversely affected. Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from our operations. Insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims could adversely affect our business and the results of our operations.
Our operating results may fluctuate due to factors that are difficult to forecast and not within our control.
Our past operating results may not be accurate indicators of future performance, and you should not rely on such results to predict our future performance. Our operating results have fluctuated significantly in the past and could fluctuate in the future. Factors that may contribute to fluctuations include:
changes in aggregate capital spending, cyclicality and other economic conditions, or domestic and international demand in the industries;
the timing of large customer orders to which we may have limited visibility and cannot control;
competition for our products, including the entry of new competitors and significant declines in competitive pricing;
our ability to effectively manage our working capital;
our ability to generate increased demand in our current and targeted markets, particularly those in which we sell have limited experience;
our advancedability to satisfy consumer demands in a timely and cost-effective manner;
pricing and availability of labor and materials;
quality testing and reliability of new products;
our inability to adjust certain fixed costs and expenses for changes in demand and the timing and significance of expenditures that may be incurred to facilitate our growth;
macroeconomic, geopolitical and health concerns, including the corona-virus outbreak;
seasonal fluctuations in demand and our revenue; and
disruption in component supply from foreign vendors.
Depressed general economic conditions may adversely affect our operating results and financial condition.
Our business is sensitive to changes in general economic conditions, both inside and outside the United States. Slow growth in the economy or an economic downturn, particularly one affecting construction and building renovation, or that causes end-users to reduce or delay their purchases of lighting systems,products, services, or retrofit activities, would have a material adverse effect on our business, cash flows, financial condition and results of operations. LED lighting retrofit projects, in particular, tend to require a significant capital commitment, which is offset by cost savings achieved over time. As such, a lack of available capital, whether due to economic factors or conditions in the capital or debt markets, could have the effect of reducing demand for our products. A decrease in demand could adversely affect our ability to meet our working capital requirements and growth objectives, or could otherwise adversely affect our business, financial condition, and results of operations.
Customers may be unable to obtain financing to make purchases from us.
Some of our customers require financing in order to purchase our products competeand the initial investment is higher than is required with lighting products utilizing traditional lighting technology provided by many vendors. Forproducts. The potential inability of these customers to access the capital needed to finance purchases of our products and meet their payment obligations to us could adversely impact the appeal of our products relative to those with lower upfront costs and have a negative impact on our financial condition and results of operations. There can be no assurance that third party finance companies will provide capital to our customers.
A significant portion of our business is dependent upon the existence of government funding, which may not be available into the future and could result in a reduction in sales and harm to our business.
Some of our customers are dependent on governmental funding, including foreign allied navies and U.S. military maritimebases. If any of these other target customers abandon, curtail, or delay planned LED lighting retrofit projects as a result of the levels of funding available to them or changes in budget priorities, it would adversely affect our opportunities to generate product sales.
If critical components and finished products that we compete withcurrently purchase from a small number of qualified military lighting lampthird-party suppliers become unavailable or increase in price, or if our suppliers or delivery channels fail to meet our requirements for quality, quantity, and fixture suppliers. In certain commercial applications, we typically compete with LED systems produced by large lighting companies. Our primary competitors include Royal Philips, CREE, Inc., Osram Sylvania, LED Smart, Revolution Lighting Technologiestimeliness, our revenue and Orion Energy Systems, Inc. Some of these competitors offer products with performance characteristics similar to those ofreputation in the marketplace could be harmed, which would damage our business.
products. ManyIn an effort to reduce manufacturing costs, we have outsourced the production of our competitors are larger, more established companies with greater resources to devote to researchcertain parts and development, manufacturing and marketing,components, as well as greater brand recognition. In addition, larger competitors whofinished goods in our product lines, to a small number of vendors in various locations throughout the world, primarily in the United States, Malaysia, Taiwan and China. We generally purchase greater unit volumes from component suppliers may be able to negotiate lower bill of material costs, thereby enabling them to offer lower pricing to end customers. Moreover, the relatively low barriers to entry into the lighting industrythese sole or limited source items with purchase orders, and thewe have limited proprietary nature of many lighting products also permit new competitors to enter the industry easily andguaranteed supply arrangements with lower costs.
In each of our markets,such suppliers. While we also anticipate the possibility that LED manufacturers, including those that currently supply us with LEDs, may seek to compete with us. Our competitors’ lighting technologiesbelieve alternative sources for these components and products are available, we have selected these particular suppliers based on their ability to consistently provide the best quality product at the most cost-effective price, to meet our specifications, and to deliver within scheduled time frames. We do not control the time and resources that these suppliers devote to our business, and we cannot be sure that these suppliers will perform their obligations to us. If our suppliers fail to perform their obligations in a timely manner or at satisfactory quality levels, we may be more readily accepted by customers thansuffer lost sales, reductions in revenue and damage to our products will be. Moreover, if one or more of our competitors or suppliers were to merge, the changereputation in the competitive landscape couldmarket, all of which would adversely affect our competitive position. Additionally,business. We are monitoring the potential impact of the corona-virus outbreak. This includes evaluating the impact on our customers, suppliers, and logistics providers as well as evaluating governmental actions being taken to curtail the extentspread of the virus. The significance of the impact on us is yet uncertain; however, a material adverse effect on our customers, suppliers, or logistics providers could significantly impact our operating results. As our demand for our products fluctuates and can be hard to predict, we may not need a sustained level of inventory, which may cause financial hardship for our suppliers or they may need to divert production capacity elsewhere. In the past, we have had to purchase quantities of certain components that competitionare critical to our product manufacturing and were in excess of our markets intensifies,estimated near-term requirements as a result of supplier delivery constraints and concerns over component availability, and we may need to do so in the future. As a result, we have had, and may need to continue, to devote additional working capital to support a large amount of component and raw material inventory that may not be used over a reasonable period to produce saleable products, and we may be required to increase our excess and obsolete inventory reserves to provide for these excess quantities, particularly if demand for our products does not meet our expectations.
We may be vulnerable to unanticipated price increases and payment term changes. Significant increases in the prices of sourced components and products could cause our product prices to increase, which may reduce demand for our pricesproducts or make us more susceptible to competition. Furthermore, in orderthe event that we are unable to remain competitive. If we do not compete effectively, or if we reducepass along increases in operating costs to our prices without making commensurate reductions in our costs, our net sales,customers, margins and profitability and our future prospects for success may be harmed.adversely affected. Accordingly, the loss of all or one of these suppliers could have a material adverse effect on our operations until such time as an alternative supplier could be found.
Additionally, consolidation in the lighting industry could result in one or more current suppliers being acquired by a competitor, rendering us unable to continue purchasing key components and products at competitive prices. We may be subject to various import duties and tariffs applicable to materials manufactured in foreign countries and may be affected by various other import and export restrictions, as well as other considerations or developments impacting upon international trade, including economic or political instability, tariffs, shipping delays and product quotas. These international trade factors will, under certain circumstances, have an impact on the cost of components, which will have an impact on the cost to us of the manufactured product and the wholesale and retail prices of our products.
We rely on arrangements with independent shipping companies for the delivery of our products from vendors abroad. The failure or inability of these shipping companies to deliver products or the unavailability of shipping or port services, even temporarily, could have a material adverse effect on our business. We may also be adversely affected by an increase in freight surcharges due to rising fuel costs and added security costs.
Our products could contain defects, or they may be installed or operated incorrectly, which could reduce sales of those products or result in claims against us.
Despite product testing, defects may be found in our existing or future products. This could result in, among other things, a delay in the recognition or loss of net sales, the write-down or destruction of existing inventory, insurance recoveries that fail to cover the full costs associated with product recalls, significant warranty, support, and repair costs, diversion of the attention of our engineering personnel from our product development efforts, and damage to our relationships with our customers. The occurrence of these problems could also result in reputational and brand damage or the delay or loss of market acceptance of our lighting products and would likely harm our business. In addition, our customers may specify quality, performance, and reliability standards that we must meet. If our products do not meet these standards, we may be required to replace or rework the products. In some cases, our products may contain undetected defects or flaws that only become evident after shipment. Even if our products meet standard specifications, our customers may attempt to use our products in applications for which they were not designed or in products that were not designed or manufactured properly, resulting in product failures and creating customer satisfaction issues.
Some of our products use line voltages (such as 120 or 240 AC), which involve enhanced risk of electrical shock, injury or death in the event of a short circuit or other malfunction. Defects, integration issues or other performance problems in our lighting products could result in personal injury or financial or other damages to end-users or could damage market acceptance of our products. Our customers and end-users could also seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend and the adverse publicity generated by such a claim against us or others in our industry could negatively impact our reputation.
We provide warranty periods generally ranging from one to ten years on our products. The standard warranty on nearly all of our new LED lighting products, which now represent the majority of our revenue, is ten years. Although we believe our reserves are appropriate, we are making projections about the future reliability of new products and technologies, and we may experience increased variability in warranty claims. Increased warranty claims could result in significant losses due to a rise in warranty expense and costs associated with customer support.
If we are unable to obtain and adequately protect our intellectual property rights or are subject to claims that our products infringe on the intellectual property rights of others, our ability to commercialize our products could be substantially limited.
We consider our technology and processes proprietary. If we are not able to adequately protect or enforce the proprietary aspects of our technology, competitors may utilize our proprietary technology. As a result, our business, financial condition, and results of operations could be adversely affected. We protect our technology through a combination of patent, copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements, and similar means. Despite our efforts, other parties may attempt to disclose, obtain, or use our technologies. Our competitors may also be able to independently develop products that are substantially equivalent or superior to our products or slightly modify our products. In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States. As a result, we may not be able to protect our proprietary rights adequately in the United States or abroad. Furthermore, there can be no assurance that we will be issued patents for which we have applied or obtain additional patents, or that we will be able to obtain licenses to patents or other intellectual property rights of third parties that we may need to support our business in the future. The inability to obtain certain patents or rights to third-party patents and other intellectual property rights in the future could have a material adverse effect on our business.
Our industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which may result in protracted and expensive litigation. We have engaged in litigation in the past and litigation may be necessary in the future to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation may also be necessary to defend against claims of infringement or invalidity by others. Additionally, we could be required to defend against individuals and groups who have been purchasing intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from companies like ours. Litigation could delay development or sales efforts and an adverse outcome in litigation, or any similar proceedings could subject us to significant liabilities, require us to license disputed rights from others or require us to cease marketing or using certain products or technologies. We may not be able to obtain any licenses on acceptable terms, if at all, and may attempt to redesign those products that contain allegedly infringing intellectual property, which may not be possible. We also may have to indemnify certain customers if it is determined that we have infringed upon or misappropriated another party’s intellectual property. The costs of addressing any intellectual property litigation claim, including legal fees and expenses and the diversion of management resources, regardless of whether the claim is valid, could be significant and could materially harm our business, financial condition, and results of operations.
From time to time, we have been and may in the future be subject to claims or allegations that we infringe upon or have misappropriated the intellectual property of third parties. Defending against such claims is costly and intellectual property litigation often involves complex questions of fact and law, with unpredictable results. We may be forced to acquire rights to such third-party intellectual property on unfavorable terms (if rights are made available at all), pay damages, modify accused products to be non-infringing, or stop selling the applicable product altogether.
We may be subject to confidential information theft or misuse, which could harm our business and results of operations.
We face attempts by others to gain unauthorized access to our information technology systems on which we maintain proprietary and other confidential information. Our security measures may be breached as the result of industrial or other espionage actions of outside parties, employee error, malfeasance or otherwise, and as a result, an unauthorized party may obtain access to our systems. Additionally, outside parties may attempt to access our confidential information through other means, for example by fraudulently inducing our employees to disclose confidential information. We actively seek to prevent, detect and investigate any unauthorized access, which occasionally occurs despite our best efforts. We might be unaware of any such access or unable to determine its magnitude and effects. The theft, corruption and/or unauthorized use or publication of our trade secrets and other confidential business information as a result of such an incident could adversely affect our competitive position and the value of our investment in research and development could be reduced. Our business could be subject to significant disruption, widespread negative publicity and a loss of customers, and we could suffer legal liabilities and monetary or other losses.
If critical components and finished products that we currently purchase from a small number of third-party suppliers become unavailable or increase in price, or if our suppliers or delivery channels fail to meet our requirements for quality, quantity, and timeliness, our revenue and reputation in the marketplace could be harmed, which would damage our business.
In an effort to reduce manufacturing costs, we have outsourced the production of certain parts and components, as well as finished goods in our product lines, to a small number of vendors in various locations throughout the world, primarily in the United States, Taiwan and China. We generally purchase these sole or limited source items with purchase orders, and we have limited guaranteed supply arrangements with such suppliers. While we believe alternative sources for these components and products are available, we have selected these particular suppliers based on their ability to consistently provide the best quality product at the most cost-effective price, to meet our specifications, and to deliver within scheduled time frames. We do not control the time and resources that these suppliers devote to our business, and we cannot be sure that these suppliers will perform their obligations to us. If our suppliers fail to perform their obligations in a timely manner or at satisfactory quality levels, we may suffer lost sales, reductions in revenue and damage to our reputation in the market, all of which would adversely affect our business. As our demand for our products fluctuates and can be hard to predict, we may not need a sustained level of inventory, which may cause financial hardship for our suppliers or they may need to divert production capacity elsewhere. In the past, we have had to purchase quantities of certain components that are critical to our product manufacturing and were in excess of our estimated near-term requirements as a result of supplier delivery constraints and concerns over component availability, and we may need to do so in the future. As a result, we have had, and may need to continue, to devote additional working capital to support a large amount of component and raw material inventory that may not be used over a reasonable period to produce saleable products, and we may be required to increase our excess and obsolete inventory reserves to provide for these excess quantities, particularly if demand for our products does not meet our expectations.
We may be vulnerable to unanticipated price increases and payment term changes. Significant increases in the prices of sourced components and products could cause our product prices to increase, which may reduce demand for our products or make us more susceptible to competition. Furthermore, in the event that we are unable to pass along increases in operating costs to our customers, margins and profitability may be adversely affected. Accordingly, the loss of all or one of these suppliers could have a material adverse effect on our operations until such time as an alternative supplier could be found.
Additionally, consolidation in the lighting industry could result in one or more current suppliers being acquired by a competitor, rendering us unable to continue purchasing key components and products at competitive prices. We may be subject to various import duties applicable to materials manufactured in foreign countries and may be affected by various other import and export restrictions, as well as other considerations or developments impacting upon international trade, including economic or political instability, shipping delays and product quotas. These international trade factors will, under certain circumstances, have an impact on the cost of components, which will have an impact on the cost to us of the manufactured product and the wholesale and retail prices of our products.
We rely on arrangements with independent shipping companies for the delivery of our products from vendors abroad. The failure or inability of these shipping companies to deliver products or the unavailability of shipping or port services, even
temporarily, could have a material adverse effect on our business. We may also be adversely affected by an increase in freight surcharges due to rising fuel costs and added security costs.
We depend on independent agents and sales representatives for a substantial portion of our net sales, and the failure to manage our relationships with these third parties, or the termination of these relationships, could cause our net sales to decline and harm our business.
Our 2017 restructuring initiative included the transition to an agency driven sales channel strategy in order to expand our market presence throughout the U.S. As of December 31, 2017, we had effectively transitioned our sales force to an agency driven sales channel, expanding our sales coverage to the entire U.S. through six geographic regions and 30 sales agents. As a result, we have increased our reliance on independent sales agent channels to market and sell our products. In addition, these parties provide technical sales support to end-users. The current agreements with our agents are generally non-exclusive, meaning they can sell products of our competitors. Any such agreements we enter into in the future may be on similar terms. Our agents may not be motivated to or successfully pursue the sales opportunities available to them, or they may prefer to sell or be more familiar with the products of our competitors. If our agents do not achieve our sales objectives or these relationships take significant time to develop, our revenue may decline, fail to grow or not increase as rapidly as we intend in order to achieve profitability and grow our business.
Furthermore, our agreements are generally short-term, and can be cancelled by either party without significant financial consequence. The termination of or the inability to negotiate extensions of these contracts on acceptable terms could adversely impact sales of our products. Additionally, we cannot be certain that we or end-users will be satisfied by their performance. If
these agents significantly change their terms with us, or change their end-user relationships, there could be a significant impact on our net sales and profits.
Our products could contain defects or they may be installed or operated incorrectly, which could reduce sales of those products or result in claims against us.
Despite product testing, defects may be found in our existing or future products. This could result in, among other things, a delay in the recognition or loss of net sales, the write-down or destruction of existing inventory, insurance recoveries that fail to cover the full costs associated with product recalls, significant warranty, support, and repair costs, diversion of the attention of our engineering personnel from our product development efforts, and damage to our relationships with our customers. The occurrence of these problems could also result in reputational damage or the delay or loss of market acceptance of our lighting products, and would likely harm our business. In addition, our customers may specify quality, performance, and reliability standards that we must meet. If our products do not meet these standards, we may be required to replace or rework the products. In some cases, our products may contain undetected defects or flaws that only become evident after shipment. Even if our products meet standard specifications, our customers may attempt to use our products in applications for which they were not designed or in products that were not designed or manufactured properly, resulting in product failures and creating customer satisfaction issues.
Some of our products use line voltages (such as 120 or 240 AC), which involve enhanced risk of electrical shock, injury or death in the event of a short circuit or other malfunction. Defects, integration issues or other performance problems in our lighting products could result in personal injury or financial or other damages to end-users or could damage market acceptance of our products. Our customers and end-users could also seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend and the adverse publicity generated by such a claim against us or others in our industry could negatively impact our reputation.
We provide warranty periods ranging from one to ten years on our products. The standard warranty on nearly all of our new LED lighting products, which now represent the majority of our revenue, is ten years. Although we believe our reserves are appropriate, we are making projections about the future reliability of new products and technologies, and we may experience increased variability in warranty claims. Increased warranty claims could result in significant losses due to a rise in warranty expense and costs associated with customer support.
We may be subject to legal claims against us or claims by us which could have a significant impact on our resulting financial performance.
At any given time, we may be subject to litigation or claims related to our products, suppliers, customers, employees, stockholders, distributors, sales representatives, intellectual property, and sales of our assets, among other things, the disposition of which may have an adverse effect upon our business, financial condition, or results of operation. The outcome of litigation is difficult to assess or quantify. Lawsuits can result in the payment of substantial damages by defendants. If we are required to pay substantial damages and expenses as a result of these or other types of lawsuits our business and results of operations would be adversely affected. Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from our operations. Insurance may not be available at all or in sufficient amounts to cover any liabilities with respect to these or other matters. A judgment or other liability in excess of our insurance coverage for any claims could adversely affect our business and the results of our operations.
Our business may suffer if we fail to comply with government contracting laws and regulations.
We derive a significant portion of our revenues from direct and indirect sales to U.S., state, local and foreign governments and their respective agencies. Contracts with government customers are subject to various procurement laws and regulations, business prerequisites to qualify for such contracts, accounting procedures, intellectual property process, and contract provisions relating to their formation, administration and performance, which may provide for various rights and remedies in favor of the governments that are not typically applicable to or found in commercial contracts. Failure to comply with these laws, regulations, or provisions in our government contracts could result in litigation, the imposition of various civil and criminal penalties, termination of contracts, forfeiture of profits, suspension of payments, or suspension from future government contracting. If our government contracts are terminated, if we are suspended from government work, or if our ability to compete for new contracts is adversely affected, our business could suffer due to, among other factors, lost sales, the costs of any government action or penalties, damages to our reputation and the inability to recover our investment in developing and marketing products for military maritimeMMM use.
The ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
We have significant U.S. net operating loss and tax credit carryforwards (the “Tax Attributes”). Under federal tax laws, we can carry forward and use our Tax Attributes to reduce our future U.S. taxable income and tax liabilities until such Tax Attributes expire in accordance with the Internal Revenue Code of 1986, as amended (the “IRC”). Section 382 and Section 383 of the IRC provide an annual limitation on our ability to utilize our Tax Attributes, as well as certain built-in-losses, against future U.S. taxable income in the event of a change in ownership, as defined under the IRC. Share issuances in connection with our past financing transactions or other future changes in our stock ownership, which may be beyond our control, could result in changes in ownership for purposes of the IRC. Such changes in ownership could further limit our ability to use our Tax Attributes. Accordingly, any such occurrences could adversely affect our financial condition, operating results and cash flows.
The cost of compliance with environmental, health, safety, and other laws and regulations could adversely affect our results of operations or financial condition.
We are subject to a broad range of environmental, health, safety, and other laws and regulations. These laws and regulations impose increasingly stringent environmental, health, and safety protection standards and permit requirements regarding, among other things, air emissions, wastewater storage, treatment, and discharges, the use and handling of hazardous or toxic materials, waste disposal practices, the remediation of environmental contamination, and working conditions for our employees. Some environmental laws, such as Superfund, the Clean Water Act, and comparable laws in U.S. states and other jurisdictions world-wide, impose joint and several liability for the cost of environmental remediation, natural resource damages, third party claims, and other expenses, without regard to the fault or the legality of the original conduct, on those persons who contributed to the release of a hazardous substance into the environment. We may also be affected by future laws or regulations, including those imposed in response to energy, climate change, geopolitical, or similar concerns. These laws may impact the sourcing of raw materials and the manufacture and distribution of our products and place restrictions and other requirements on the products that we can sell in certain geographical locations.
We have international operations and are subject to risks associated with operating in international markets.
We outsource the production of certain parts and components, as well as finished goods in certain product lines, to a small number of vendors in various locations outside of the United States, including Malaysia, Taiwan and China. Although we do not currently generate significant sales from customers outside the United States, we are targeting foreign allied navies as a potential opportunity to generate additional sales of our military products.MMM products as well as a limited number of foreign geographic markets which we expect to expand over time.
International business operations are subject to inherent risks, including, among others:
difficulty in enforcing agreements and collecting receivables through foreign legal systems;
unexpected changes in regulatory requirements, tariffs, and other trade barriers, restrictions or restrictions;disruptions;
potentially adverse tax consequences;
health epidemics or pandemics or other contagious outbreaks, such as the recent corona-virus outbreak;
the burdens of compliance with the U.S. Foreign Corrupt Practices Act, similar anti-bribery laws in other countries, and a wide variety of other laws;
import and export license requirements and restrictions of the United States and each other country in which we operate;
exposure to different legal standards and reduced protection for intellectual property rights in some countries;
currency fluctuations and restrictions; and
political, social, and economic instability, including war and the threat of war, acts of terrorism, pandemics, boycotts, curtailment of trade, or other business restrictions.
If we do not anticipate and effectively manage these risks, these factors may have a material adverse impact on our business operations.
If we are unable to attract or retain qualified personnel, our business and product development efforts could be harmed.
To a large extent, our future success will depend on the continued contributions of certain employees, such as our current Executive Chairman, Chief Executive Officer and President and Chief Financial Officer. We have had significant turnover in our management team and other employees since 2013 and cannot be certain that these and other key employees will continue in their respective capacities for any period of time, and these employees may be difficult to replace. Our future success will also depend on our ability to attract and retain qualified technical, sales, marketing, and management personnel, for whom competition is very intense. As we attempt to rapidly grow our business, it could be especially difficult to attract and retain
sufficient qualified personnel, especially in light ofOur net sales might be adversely impacted if our lean cost-structure. The loss of, or failure to attract, hire, and retain any such persons could delay product development cycles, disrupt our operations, increase our costs, or otherwise harm our business or results of operations.
We believe thatlighting systems do not meet certain certification and compliance issues are critical to adoption of our lighting systems, and failure to obtain such certification or compliance would harm our business.standards.
We are required to comply with certain legal requirements governing the materials in our products. Although we are not aware of any efforts to amend any existing legal requirements or implement new legal requirements in a manner with which we cannot comply, our net sales might be adversely affected if such an amendment or implementation were to occur.
Moreover, although not legally required to do so, we strive to obtain certification for substantially all our products. In the United States, we seek certification on substantially all of our products from UL®, Intertek Testing Services (ETL®), or DesignLights Consortium (DLC™). Where appropriate in jurisdictions outside the United States and Europe, we seek to obtain other similar national or regional certifications for our products. Although we believe that our broad knowledge and experience with electrical codes and safety standards have facilitated certification approvals, we cannot ensure that we will be able to obtain any such certifications for our new products or that, if certification standards are amended, that we will be able to maintain such certifications for our existing products. Moreover, although we are not aware of any effort to amend any existing certification standard or implement a new certification standard in a manner that would render us unable to maintain certification for our existing products or obtain ratification for new products, our net sales might be adversely affected if such an amendment or implementation were to occur.
As a public reporting company, we are subject to complexvarious regulations concerning corporate governance and public disclosure that require us to incur significant expenses, divert management resources, and expose us to risks of non-compliance.
We are faced with complicatedsubject to complex and evolving laws, regulations and standards relating to corporate governance and public disclosure. To comply with these requirements and operate as a public company, we incur legal, financial, accounting and administrative costs and other related expenses. As a smaller reporting company, these expenses may be significant to our financial results. In addition, due to our limited internal resources, we must devote substantial management and other resources to compliance efforts. As we attempt to rapidly grow our business, compliance efforts could become more complex and put additional strain on our resources. Despite our efforts, we cannot guarantee that we will effectively meet all of the requirements of these laws and regulations. If we fail to comply with any of the laws, rules and regulations applicable to U.S. public companies, or with respect to publicly-traded stock, we may be subject to regulatory scrutiny, possible sanctions or higher risks of shareholder litigation, all of which could harm our reputation, lower our stock price or cause us to incur additional expenses.
Any
We have identified a significant deficiency, and have in the past experienced a material weakness, in our internal controls over financial reporting, and if we fail to remediate this significant deficiency or experience additional material weaknesses in our internal control overthe future or to otherwise maintain effective financial reporting could, if not remediated, result in material misstatements insystems and processes, we may be unable to accurately and timely report our financial statements.results or comply with the requirements of being a public company, which could cause the price of our common stock to decline and harm our business.
As a public company reporting to the Securities and Exchange Commission,SEC, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and the Sarbanes-Oxley Act of 2002, including sectionSection 404(a) that requires that we annually evaluate and report on our systems of internal controls. If
We identified a significant deficiency in our internal control over financial reporting as of December 31, 2019, which has not been remediated. The significant deficiency was primarily due to the sufficiency of supervision and review by employees for non-routine accounting and related financial reporting matters. This significant deficiency relates to the same subject of the material weakness we had during the first three quarters of 2019. We continue implementing our remediation plan for this significant deficiency. We cannot assure you that the measures we have taken to date, and are continuing to implement, will be sufficient to avoid potential future material weaknesses or significant deficiencies. Moreover, we cannot be certain that we will not in the future have additional significant deficiencies or material weaknesses in our internal controls are discoveredcontrol over financial reporting, or occur inthat we will successfully remediate any that we find. In addition, the future, our financial statementsprocesses and systems we have developed to date may containnot be adequate. Accordingly, there could continue to be a reasonable possibility that the significant deficiency we have identified or other material misstatements and we could be required to restate our financial results. Thisweaknesses or deficiencies could result in a decreasemisstatement of our accounts or disclosures that would result in a material misstatement of our financial statements that would not be prevented or detected on a timely basis, or cause us to fail to meet our obligations to file periodic financial reports on a timely basis. Any of these failures could result in adverse consequences that could materially and adversely affect our business, including an adverse impact on the market price of our common stock, potential action by the SEC against us, possible defaults under our debt agreements, shareholder lawsuits, delisting of our stock, price, securities litigation,general damage to our reputation and the diversion of significant management and financial resources.
If we cease to meet the criteria to be considered a “smaller reporting company,” we will also become subject to section 404(b) of the Sarbanes-Oxley Act, which requires an auditor attestation of the effectiveness of our internal controls over financial reporting. This additional requirement will increase our financial, accounting and administrative costs, and other related expenses, which may be significant to our financial results. In addition, due to our limited internal resources, further compliance efforts put additional strain on our resources. Despite our efforts, if our auditors are unable to attest to the effectiveness of our internal controls, we may be subject to regulatory scrutiny and higher risk of shareholder litigation, which could harm our reputation, lower our stock price or cause us to incur additional expenses.
We rely heavily on information technology in our operations and any material failure, weakness, interruption or breach of security could prevent us from effectively operating our business, which could have a material adverse effect on our business, financial condition, and results of operations.
We rely heavily on our information technology systems, including our enterprise resource planning (“ERP”) and customer relationship management (“CRM”) software, across our operations and corporate functions, including for management of our supply chain, payment of obligations, data
warehousing to support analytics, finance systems, accounting systems, and other various processes and procedures, some of which are handled by third parties.parties, as well as lead generation, customer tracking, customer sourcing, etc.
Our ability to efficiently and effectively manage our business depends significantly on the reliability and capacity of these systems. Our business and results of operations may be adversely affected if we experience system usage problems. The failure of these systems to operate effectively, maintenance problems, system conversions, back-up failures, problems or lack of resources for upgrading or transitioning to new platforms or damage or interruption from circumstances beyond our control, including, without limitation, fire, natural disasters, power outages, systems failure, security breaches, cyber-attacks, viruses or human error could result in, among other things, transaction errors, processing inefficiencies, loss of data, inability to generate timely SEC reports, loss of sales and customers and reduce efficiency in our operations. Additionally, we and our customers could suffer financial and reputational harm if customer or Company proprietary information is compromised by such events. Remediation of such problems could result in significant unplanned capital investments and any damage or interruption could have a material adverse effect on our business, financial condition, and results of operations.
Risks associated with an investment in our common stock
As a “thinly-traded” stock with a relatively small public float, the market price of our common stock is highly volatile and may decline regardless of our operating performance.
Our common stock is “thinly-traded” and we have a relatively small public float, which increases volatility in the share price and makes it difficult for investors to buy or sell shares in the public market without materially affecting our share price. Since our listing on the NASDAQ Capital Market in August 2014,beginning of 2019, our market price has ranged from a low of $1.51$0.38 to a high of $29.20$1.32 and continues to experience significant volatility. Broad market and industry factors also may adversely affect the market price of our common stock, regardless of our actual operating performance. Factors that could cause wide fluctuations in our stock price may include, among other things:
actual or anticipated variations in our financial condition and operating results;
general economic conditions and trends;
addition or loss of significant customers and the timing of significant customer purchases;
actual or anticipated variations in our financial condition and operating results;
market expectations following period of rapid growth;
our ability to effectively manageimplement our growth plans and the significance and timing of associated expenses;
unanticipated impairments and other changes that reduce our earnings;
overall conditions or trends in our industry;
the entry or exit of new competitors into our target markets;
any litigation or legal claims;
the terms and amount of any additional financing that we may obtain, if any;
unfavorable publicity;
additions or departures of key personnel;
geopolitical changes, global health concerns and macroeconomic changes;
changes in the estimates of our operating results or changes in recommendations by any securities or industry analysts that elect to follow our common stock;
market expectations following period of rapid growth; and
sales of our common stock by us or our stockholders, including sales by our directors and officers.
Because our common stock is thinly-traded, investors seeking to buy or sell a certain quantity of our shares in the public market may be unable to do so within one or more trading days and it may be difficult for stockholders to sell all of their shares in the market at any given time at prevailing prices. Any attempts to buy or sell a significant quantity of our shares could materially affect our share price. In addition, because our common stock is thinly-traded and we have a relatively small public float, the market price of our shares may be disproportionately affected by any news, commentary or rumors regarding us or our industry, regardless of the source or veracity, which could also result in increased volatility.
In addition, in the past, following periods of volatility in the market price of a company’s securities, securities litigation has often been instituted against these companies. Volatility in the market price of our shares could also increase the likelihood of regulatory scrutiny. Securities litigation, if instituted against us, or any regulatory inquiries or actions that we face could result in substantial costs, diversion of our management’s attention and resources and unfavorable publicity, regardless of the merits of any claims made against us or the ultimate outcome of any such litigation or action.
We could issue additional shares of common stock or preferred stock without stockholder approval.approval, which may adversely affect the market price of our common stock.
We are authorized to issue 30,000,00050,000,000 shares of common stock of which 11,889,51715,892,526 shares were issued and outstanding as of December 31, 2017.March 12, 2020 and 5,000,000 shares of preferred stock, of which 2,709,018 were issued and outstanding as of March 12, 2020. Our Boardboard of Directorsdirectors has the authority, without action or vote of our stockholders, to issue authorized
but unissued shares of common and preferred stock subject to the rules of the NASDAQ Capital Market.Stock Market (“NASDAQ”). In addition, in order to raise additional capital or acquire businesses in the future, we may need to issue securities that are convertible or exchangeable for shares of our common or preferred stock. Any such issuances could be made at a price that reflects a discount to the then-current trading price of our common stock. These issuances could be dilutive to our existing stockholders and cause the market price of our common stock to decline.
If securities analysts do not publish research or reports about our business, or if they downgrade our stock, the price of our stock could decline.
The trading market for our common stock is likely to be influenced by any research and reports that securities or industry analysts publish about us or our business. If one or more of these analysts downgrades our stock or publish unfavorable research about our business, our stock price would likely decline. There are currently a limited number of analysts covering us, which could increase the influence of particular analysts or reports. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease and cause our stock price and trading volume to decline. Any of these effects could be especially significant because our common stock is “thinly-traded” and we have a relatively small public float.
Our failure to comply with the continued listing requirements of the NASDAQ Capital Market could adversely affect the price of our common stock and its liquidity.
We must comply with NASDAQ’s continued listing requirements related to, among other things, stockholders’ equity, market value, minimum bid price, and corporate governance in order to remain listed on the NASDAQ. In January 2019, we received a notice of non-compliance from NASDAQ Capital Market. Althoughindicating that for the prior 30 consecutive business days, the closing bid price for our common stock was below the minimum $1.00 per share required pursuant to NASDAQ Listing Rule 5550(a)(2) (the “Bid Price Rule”).
In accordance with NASDAQ Listing Rule 5810(c)(3)(A), we expecthad an initial period of 180 calendar days to meetregain compliance with the continued listing requirements,Bid Price Rule. Our stock traded above $1.00 for the required number of days within the notice period to regain compliance with the Bid Price Rule. In May 2019, we received another notice of non-compliance from NASDAQ indicating that for the prior 30 consecutive business days, the closing bid price for our common stock was below the minimum $1.00 per share required pursuant to the Bid Price Rule. We did not regain compliance within the initial 180-day compliance period and were granted an extension to regain compliance for another 180 calendar days, or until May 11, 2020 (the “Second Compliance Period”). We are currently evaluating options (including, in the discretion of our board of directors, a reverse stock split of our common stock at a ratio of at least 1-for-2 and up to 1-for-20, which discretionary stock split has been approved by our
stockholders) to regain compliance but there can be no assurance that we will continueregain compliance with the Bid Price Rule. If we fail to do so inregain compliance during the future. IfSecond Compliance Period, or we do not remain compliant with thesethe other continued listing requirements, then we could be delisted.delisted from NASDAQ. If we were delisted, it would be likely to have a negative impact on our stock price and liquidity. For example, in the event our common stock is delisted from NASDAQ, the amount outstanding under the Iliad Note will automatically increase by 15% as of the date of such delisting. The delisting of our common stock could also deter broker-dealers from making a market in or otherwise generating interest in or recommending our common stock, and would adversely affect our ability to attract investors in our common stock. Furthermore, our ability to raise additional capital would be impaired. As a result of these factors, the value of the common stock could decline significantly.
We have never paid dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.
We have never declared or paid dividends on our common stock, nor do we anticipate paying any cash dividends for the foreseeable future. We currently intend to retain future earnings, if any, to finance the operations and expansion of our business. Any future determination to pay cash dividends will be at the discretion of our Boardboard of Directorsdirectors and will be dependent upon the earnings, financial condition, operating results, capital requirements, a capital structure strategy and other factors as deemed necessary by our Boardboard of Directors.directors.
The elimination of monetary liability against our directors under Delaware law and the existence of indemnification rights held by our directors, officers, and employees may result in substantial expenditures by the Company and may discourage lawsuits against our directors, officers, and employees.
Our Certificate of Incorporation eliminates the personal liability of our directors to our Company and our stockholders for damages for breach of fiduciary duty as a director to the extent permissible under Delaware law. Further, our Bylaws provide that we are obligated to indemnify any of our directors or officers to the fullest extent authorized by Delaware law and, subject to certain conditions, advance the expenses incurred by any director or officer in defending any action, suit or proceeding prior to its final disposition. Those indemnification obligations could result in the Company incurring substantial expenditures to cover the cost of settlement or damage awards against our directors or officers, which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against any of our current or former directors or officers for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even though such actions, if successful, might otherwise benefit us or our stockholders.
If securities analysts do not publish research or reports about our business, or if they downgrade our stock, the price of our stock could decline.
The trading market for our common stock is likely to be influenced by any research and reports that securities or industry analysts publish about us or our business. If one or more of these analysts downgrades our stock or publish unfavorable research about our business, our stock price would likely decline. There is currently one analyst covering us, which could increase the influence of this particular analyst or their reports. If this analyst ceases coverage of us or fails to publish reports on us regularly, demand for our stock could decrease and cause our stock price and trading volume to decline. Any of these effects could be especially significant because our common stock is “thinly-traded” and we have a relatively small public float.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our principal executive offices and our manufacturing facility are located in an approximately 117,000 square foot facility in Solon, Ohio, under a lease agreement expiring on June 30, 2022. We believe this facility is adequate to support our current and anticipated operations.
As part of our 2017 restructuring initiatives, we closed our New York, New York, Arlington, Virginia and Rochester, Minnesota offices.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be involved in legal proceedings arising from the normal course of business. See Note 14,15, “Legal Matters,” included in Item 8 of this Annual Report.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Executive officers of the registrant
The following is the name, age, and present position of each of our current executive officers, as well as all prior positions held by each of them during the last five years and when each of them was first elected or appointed as an executive officer:
|
| | | | |
Name | | Age | | Current position and business experience |
| | | | |
Theodore L. Tewksbury III, Ph.D. | | 61 | | Chairman of the Board, Chief Executive Officer and President – February 2017 to present |
| | | | Executive Chairman of the Board – December 2016 to February 2017 |
| | | | Dr. Tewksbury has been Founder and CEO of Tewksbury Partners, LLC, providing strategic consulting, advisory and board services to private and public technology companies, venture capital and private equity firms, since 2013. He had served as President and Chief Executive Officer (from November 2014) and a director (from September 2010) of Entropic Communications, a public company specializing in semiconductor solutions for the connected home, until its sale to MaxLinear, Inc., another public semiconductor company, in April 2015, and he remains a director of MaxLinear, Inc. He is also a director of Jariet Technologies, a private company specializing in digital microwave integrated circuits for wireless infrastructure, backhaul and military applications. From 2008 to 2013, Dr. Tewksbury served as President and Chief Executive Officer and a director of Integrated Device Corporation, a public semiconductor company. |
| | | | |
Michael H. Port | | 53 | | Chief Financial Officer– March 2017 to present
|
| | | | Interim Chief Financial Officer– August 2016 to December 2016
|
| | | | Corporate Controller – July 2015 to March 2017 |
| | | | Mr. Port served as Energy Focus’s Controller from July 2015 to March 2017 and as Interim Chief Financial Officer and Secretary from August to December 2016. From 2010 to July 2015, Mr. Port was a consultant with Resources Global Professionals, a multinational professional services firm, during which time he specialized in filling roles such as Interim CFO, Controller and Director of External Reporting for industrial and manufacturing customers, including interim Controller of the Company from April to July 2015. Prior to joining Resources Global Professionals, Mr. Port held various senior level executive positions at both private and public companies, including Mork Process, Inc., an international manufacturer of industrial cleaning equipment, Oglebay Norton Company, a shipping and industrial minerals company, and Hitachi Medical Systems of America, a distributor of diagnostic imaging products. He began his career at Ernst & Young, focusing on entrepreneurial growth companies. Mr. Port, a certified public accountant, received a B.S.B.A. degree in Accounting from The Ohio State University and earned his Master’s degree in Business Administration from Case Western Reserve University.
|
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock trades on The NASDAQ Capital Market (“NASDAQ”) under the symbol “EFOI.”
The following table sets forth the high and low market sales prices per share for our common stock for the years ended December 31, 2017 and 2016 as reported by NASDAQ:
|
| | | | | | | |
| | High | | Low |
| | | | |
| First quarter 2017 | $ | 5.18 |
| | $ | 3.03 |
|
| Second quarter 2017 | 3.52 |
| | 2.32 |
|
| Third quarter 2017 | 3.24 |
| | 1.51 |
|
| Fourth quarter 2017 | 3.46 |
| | 2.00 |
|
| | | | |
| First quarter 2016 | $ | 13.80 |
| | $ | 6.55 |
|
| Second quarter 2016 | 8.54 |
| | 5.50 |
|
| Third quarter 2016 | 6.32 |
| | 3.61 |
|
| Fourth quarter 2016 | 5.37 |
| | 2.95 |
|
Stockholders
There were approximately 8640 holders of record of our common stock as of February 16, 2018,March 12, 2020, however, a large number of our stockholders hold their stock in “street name” in brokerage accounts. Therefore, they do not appear on the stockholder list maintained by our transfer agent.
Dividends
We have not declared or paid any cash dividends, and do not anticipate paying cash dividends in the near future.
Securitiesauthorized for issuance under equity compensation plans
The following table details information regarding our existing equity compensation plans as of December 31, 2017:
|
| | | | | | | | | | | |
| | | Equity Compensation Plan Information | |
| Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| | | | | | | | |
| Equity compensation plans approved by security holders | | 554,654 |
| | $ | 5.76 |
| (2) | 2,226,130 |
| (1) |
| |
(1) | Includes 427,437 shares available for issuance under the 2013 Employee Stock Purchase Plan and 1,798,693 shares available for issuance under our 2014 Stock Incentive Plan, which may be issued in the form of options, restricted stock, restricted stock units, and other equity-based awards. |
| |
(2) | Does not include 306,142 shares that are restricted stock units and do not have an exercise price. |
ITEM 6. SELECTED FINANCIAL DATA
The Selected Consolidated Financial Data set forth below have been derived from our financial statements. It should be read in conjunction with the information appearing under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this reportAnnual Report and the Consolidated Financial Statements and related notes found in Item 8 of this report.Annual Report.
SELECTED FINANCIAL DATA
(amounts in thousands, except per share data)
| | | | | 2017 | | 2016 | | 2015 | | 2014 | | 2013 | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | | | | | | | | | | | | | | | | | | | | |
| OPERATING SUMMARY | | | | | | | | | | | | | | | | | | | | |
| Net sales | | $ | 19,846 |
| | $ | 30,998 |
| | $ | 64,403 |
| | $ | 22,700 |
| | $ | 9,423 |
| | $ | 12,705 |
| | $ | 18,107 |
| | $ | 19,846 |
| | $ | 30,998 |
| | $ | 64,403 |
|
| Gross profit | | 4,821 |
| | 7,677 |
| | 29,292 |
| | 7,778 |
| | 2,078 |
| | 1,974 |
| | 3,412 |
| | 4,821 |
| | 7,677 |
| | 29,292 |
|
| Loss on impairment | | 185 |
| | 857 |
| | — |
| | — |
| | 608 |
| | — |
| | — |
| | 185 |
| | 857 |
| | — |
|
| Restructuring | | 1,662 |
| | — |
| | — |
| | — |
| | — |
| | 196 |
| | 111 |
| | 1,662 |
| | — |
| | — |
|
| Net (loss) income from continuing operations | | (11,267 | ) | | (16,875 | ) | | 9,471 |
| | (4,246 | ) | | (5,907 | ) | | (7,373 | ) | | (9,111 | ) | | (11,267 | ) | | (16,875 | ) | | 9,471 |
|
| (Loss) income from discontinued operations | | — |
| | (12 | ) | | (691 | ) | | (1,599 | ) | | 3,546 |
| |
| Loss from discontinued operations | | | — |
| | — |
| | — |
| | (12 | ) | | (691 | ) |
| Net (loss) income | | (11,267 | ) | | (16,887 | ) | | 8,780 |
| | (5,845 | ) | | (2,361 | ) | | (7,373 | ) | | (9,111 | ) | | (11,267 | ) | | (16,887 | ) | | 8,780 |
|
| Net (loss) income per share - basic: | | | | | | | | | | | | | | | | | | | | |
| From continuing operations | | $ | (0.95 | ) | | $ | (1.45 | ) | | $ | 0.91 |
| | $ | (0.55 | ) | | $ | (1.24 | ) | | $ | (0.60 | ) | | $ | (0.76 | ) | | $ | (0.95 | ) | | $ | (1.45 | ) | | $ | 0.91 |
|
| From discontinued operations | | — |
| | — |
| | (0.07 | ) | | (0.20 | ) | | 0.74 |
| | — |
| | — |
| | — |
| | — |
| | (0.07 | ) |
| Total | | (0.95 | ) | | (1.45 | ) | | 0.84 |
| | (0.75 | ) | | (0.50 | ) | | (0.60 | ) | | (0.76 | ) | | (0.95 | ) | | (1.45 | ) | | 0.84 |
|
| Net (loss) income per share - diluted: | | | | | | | | | | | | | | | | | | | | |
| From continuing operations | | $ | (0.95 | ) | | $ | (1.45 | ) | | $ | 0.88 |
| | $ | (0.55 | ) | | $ | (1.24 | ) | | $ | (0.60 | ) | | $ | (0.76 | ) | | $ | (0.95 | ) | | $ | (1.45 | ) | | $ | 0.88 |
|
| From discontinued operations | | — |
| | — |
| | (0.06 | ) | | (0.20 | ) | | 0.74 |
| | — |
| | — |
| | — |
| | — |
| | (0.06 | ) |
| Total | | (0.95 | ) | | (1.45 | ) | | 0.82 |
| | (0.75 | ) | | (0.50 | ) | | (0.60 | ) | | (0.76 | ) | | (0.95 | ) | | (1.45 | ) | | 0.82 |
|
| Shares used in net (loss) income per share calculation: | | | | | | | | | | | | | | | | | | | | |
| Basic | | 11,806 |
| | 11,673 |
| | 10,413 |
| | 7,816 |
| | 4,779 |
| | 12,309 |
| | 11,997 |
| | 11,806 |
| | 11,673 |
| | 10,413 |
|
| Diluted | | 11,806 |
| | 11,673 |
| | 10,752 |
| | 7,816 |
| | 4,779 |
| | 12,309 |
| | 11,997 |
| | 11,806 |
| | 11,673 |
| | 10,752 |
|
| FINANCIAL POSITION SUMMARY | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 22,151 |
| | $ | 34,978 |
| | $ | 55,702 |
| | $ | 19,496 |
| | $ | 12,808 |
| | $ | 11,739 |
| | $ | 18,492 |
| | $ | 22,151 |
| | $ | 34,978 |
| | $ | 55,702 |
|
| Cash and cash equivalents | | 10,761 |
| | 16,629 |
| | 34,640 |
| | 7,435 |
| | 1,890 |
| | 350 |
| | 6,335 |
| | 10,761 |
| | 16,629 |
| | 34,640 |
|
| Credit line borrowings | | — |
| | — |
| | — |
| | 453 |
| | — |
| | 715 |
| | 2,219 |
| | — |
| | — |
| | — |
|
| Current maturities of long-term debt | | — |
| | — |
| | — |
| | — |
| | 59 |
| | 2,585 |
| | — |
| | — |
| | — |
| | — |
|
| Long-term debt, net of current maturities | | — |
| | — |
| | — |
| | 70 |
| | 4,011 |
| | 109 |
| | — |
| | — |
| | — |
| | — |
|
| Stockholders' equity | | 19,292 |
| | 29,938 |
| | 45,320 |
| | 9,773 |
| | 2,924 |
| | 3,996 |
| | 11,052 |
| | 19,292 |
| | 29,938 |
| | 45,320 |
|
| Common shares outstanding | | 11,890 |
| | 11,711 |
| | 11,649 |
| | 9,424 |
| | 5,142 |
| | 12,428 |
| | 12,091 |
| | 11,869 |
| | 11,711 |
| | 11,649 |
|
ITEM 7. 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 our Consolidated Financial Statements (“financial statements”) and related notes thereto, included in Item 8 of this Annual Report.
Overview
Energy Focus, Inc. and its subsidiary engageengages in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems.systems and controls. We operate in a single industry segment, developingdevelop, market and selling oursell high quality energy-efficient light-emitting diode (“LED”) lighting products intoand controls in the general commercial industrial and military maritime markets.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 become a trustedbe the retrofit technology and market leader for the most demanding applications where performance, quality and health are considered paramount. We specialize in the LED lighting retrofit market by replacing fluorescent, lamps in institutional buildings and high-intensity discharge (“HID”) lighting and other types of lamps in low-bay and high-bayinstitutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military tubular LED (“TLED”) products.and other LED products and controls.
OverThe LED lighting industry has changed dramatically over the past fewseveral years due to increasing commoditization, competition and price erosion. We have been experiencing these industry forces in both our military business since 2016 and in our commercial segment, where we once commanded significant price premiums for our flicker-free TLEDs with primarily 10-year warranties. Since April 2019, we have exited non-core businesses to focusfocused on redesigning our efforts on TLED products starting with the sale offor lower costs and consolidating our pool lighting products business in 2013. During 2015 we exited our turnkey solutions business operated by our subsidiary, Energy Focus LED Solutions, LLC (“EFLS”), and exited our United Kingdom business through the sale of Crescent Lighting Limited (“CLL”), our wholly-owned subsidiary. As a result, we have reclassified all net sales and expenses associated with both EFLS and CLL from the Consolidated Statements of Operations and have reported the related net income (loss) as discontinued operations. Please refer to Note 4, “Discontinued Operations,”supply chain for more information on our disposition of these businesses.
During 2016, we were impacted by a slowdown in demand from U.S. Navy compared to the rapid pace of 2015 when we experienced record high military maritime sales of $50.1 million. We experienced a year-over-year decrease in military maritime sales of 67.7 percent from 2015 to 2016 and, as a result we re-evaluated the economics of manufacturing components versusstronger purchasing them and ceased using certain specialized manufacturing equipment and software used in the manufacture of our military Intellitube® product. Accordingly, we recorded an impairment loss of $0.9 million to adjust the carrying value of the equipment and software to its net realizable value, as of December 31, 2016. In 2017, we recorded an additional impairment loss of $0.2 million to adjust the carrying value of the equipment and software to the current expected net realizable value. We continue to actively market the equipment and software for sale and expect to complete a sale in the first quarter of 2018.
Additionally, we had initiated an aggressive inventory procurement plan during 2016power where appropriate in order to meet expected commercialprice our products more competitively. Despite these efforts, the pricing of our legacy products remains at a premium to the competitive range and we expect aggressive pricing actions and commoditization to continue to be a headwind until our more differentiated new products ramp in volume. These trends are not unique to Energy Focus as evidenced by the increasing number of industry peers facing challenges, exiting LED lighting, selling assets and even going out of business. In addition to continuous, scheduled cost reductions, our strategy to combat these trends it to move up the value chain, with more innovative and differentiated products and solutions that offer greater, distinct value to our customers. Two specific examples of theseproducts we have recently developed include the RedCap™, our emergency backup battery integrated TLED, and EnFocus™, our new dimmable/tunable lighting and control platform that we are launching in 2020. We do believe our revamped go-to-market strategy that focuses more on direct-sales and listens to the voice of the customer has led to better and more impactful product development efforts and will eventually translate into larger addressable market and greater sales growth which did not materialize. As a result, our gross inventory levels increased $5.0 million as of December 31, 2016 compared to December 31, 2015. In accordance with accounting principles generally accepted in the United States (“U.S. GAAP”), we evaluated our 2016 year-end inventory quantities for excess levels and potential obsolescence after evaluation of historical sales, current economic trends, forecasted sales and product lifecycles and charged $3.3 million to cost of sales from continuing operations for excess and obsolete inventories, as compared to $1.7 million in 2015.
Given the decline in our military maritime business, the changing competitive landscape of the U.S. Navy sales channel and the timing uncertainty of commercial sales growth, we implemented a restructuring initiative during the first quarter of 2017. The intent of the restructuring strategy was to maximize operating cost reductions without sacrificing either our new product pipeline or potential long-term revenue growth and return the Company to profitability. On February 19, 2017, the Board appointed Dr. Ted Tewksbury to serve as the Company’s Chairman of the Board, Chief Executive Officer and President to lead the Company’s restructuring efforts. Dr. Tewksbury, who holds M.S. and Ph.D. degrees in Electrical Engineering from MIT, is a well-seasoned semiconductor industry executive with experience in implementing and managing successful business restructurings.us.
The restructuring initiative implemented in the first quarter of 2017 included a new management team, an organizational consolidation of management functions in order to streamline and better align the Company into a more focused, efficient, and cost-effective organization. The initiative also included the transition fromhybrid sales model, combining our existing historical direct sales model to an agency drivenwith sales channel strategy in orderagencies to expand our market presence throughout the U.S. During 2017 weUnited States. We closed our New York, New York, Arlington, Virginia and Rochester, Minnesota offices, reduced full-time equivalent headcount by 51% and significantly decreased operating expenses from 2016 levels (a net reduction of $8.4 million, which includes $1.8 million in offsetting restructuring and impairment charges). As of December 31, 2017, we had effectively transitioned our sales force to an agency driven sales channel, expandingexpanded our sales coverage to the entire U.S.United States through six geographic regions and 30at the time had 50 sales agents. Asagencies, each of which had, on average, 10 agents representing Energy Focus products. During 2017, we also implemented a strategic sales initiative to sell certain excess inventory that had previously been written-down, as required by U.S. GAAP. This initiative resulted in a net reduction of our excess inventory reserves of $1.4 million in 2017.
In 2018, we made significant strides in expanding and diversifying our new product portfolio. We introduced six new product families, including our commercial fixture family, our double-ended ballast bypass T8 and T5 high-output TLEDs, our Navy retrofit kit, the Invisitube ultra-low EMI TLED and our dimmable industrial downlight. Our new products, including the RedCap™ emergency battery backup tube, introduced in the fourth quarter of 2017, have gained traction, with sales of new products introduced in the past two years growing from less than 1% of total revenue in the fourth quarter of 2017 to 17% in the fourth quarter of 2018, the highest new product revenue in the last two years. Our legacy luminaire product line, including our floods, waterline security lights, globes and berth lights, grew by over 90% from 2017 to 2018 and we saw some return of our military Intellitube® sales as we achieved more competitive pricing through our cost reductions.
Since April 2019 we have experienced significant change at the Company. Prior to James Tu returning as Chief Executive Officer and Chairman at the beginning of April 2019, the Company had experienced significant sales declines, operating losses and increases in its inventory. Immediately upon Mr. Tu returning to the Company significant additional restructuring efforts were undertaken. The Company has since then replaced the entire senior management team, significantly reduced non-critical expenses, minimized the amount of inventory the Company was purchasing, dramatically changed the composition of our
board of directors, as well as adding very selectively to the executive team by hiring Tod Nestor as President and Chief Financial Officer at the beginning of July 2019. The cost savings efforts undertaken included the Company implementing phased actions to reduce costs to minimize cash usage. Our initial actions included the elimination of certain positions, restructuring of the sales organization and incentive plan, flattening of the senior management team, additional operational streamlining, management compensation reductions, and outsourcing of certain functions including certain elements of supply chain and marketing. In connection with these actions, we recorded severance and related benefits charges of $0.1 million during the three months ended March 31, 2019 and $0.1 million during the second quarter of 2019. These additional restructuring charges primarily related to severance and related benefits charges as a result of this transition,eliminating three positions during the first quarter of 2019 and nine positions during the second quarter of 2019, as well as costs associated with closing our offices in San Jose, California and Taipei, Taiwan in the second quarter of 2019. With quarterly sales for the Company leveling off at its low point in the third quarter of 2019 at $2.9 million, we have substantially expanded frombegan to see the impact for our relaunch efforts and restructuring of our sales organization in the fourth quarter achieving sales of $3.5 million, or a primarily Midwestquarter-over-quarter growth rate of 21.1%. In addition, losses were mitigated through the better cost management and a sharp focus to build market presenceon better managing pricing and awareness in other regionsinventory decisions for the last half of the U.S. with significant demand potential, including the Northeast, Southeast and California.2019.
WhileDespite progress in these areas in the last three quarters of 2019, the Company’s results reflect continued challenges due to long and unpredictable sales cycles, unexpected delays in customer retrofit budgets and project starts, continuing aggressive price competition, the challenge of reducing losses in the near term, and an intensely competitive industry going through constant change. The substantial doubt about our ability to continue as a going concern continued to exist atas of December 31, 2017,2019.
During the beginning of 2020 we had $10.8 millioncontinued to see continued benefits from the relaunch efforts undertaken in cash and no debt obligations at the endlast three quarters of 2019. It is our belief that the continued momentum of the year. Consequently, considering both quantitativeefforts undertaken in 2019, along with the launch of new and qualitative information, weinnovative products will continue to believe thatresult in improved sales and bottom-line performance for the combination of our restructuring actions, current financial position, liquid resources, obligations due or anticipated withinCompany, barring significant economic and business impacts from the next year, executive reorganization,corona-virus outbreak. Meanwhile, the Company continues to seek additional external funding alternatives and implementation ofsources and has not yet achieved but continues to strive to achieve profitability. We plan to achieve profitability through growing our sales by continuing to execute on our direct sales strategy, complemented by our marketing outreach campaigns, channel strategy will returnpartnerships, and new sales from an e-commerce platform, which we plan to launch in the first half of 2020, as well as continuing to apply rigorous and economical discipline in our organization, business processes and policies, supply chain and organizational structure.
We are monitoring the potential impact of the corona-virus outbreak. 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 of the impact on us to profitability in 2018 and effectively mitigate the substantial doubt aboutis yet uncertain; however, a material adverse effect on our abilitycustomers, suppliers, or logistics providers could significantly impact our operating results. We also plan to continue as a going concern.to actively follow, assess and analyze the development of the corona-virus outbreak spread 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.
Results of operations
The following table sets forth the percentage of net sales represented by certain items reflected on our Consolidated Statements of Operations for the following periods:
|
| | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| | | | | | | |
| Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of sales | | 75.7 |
| | 75.2 |
| | 54.5 |
|
| Gross profit | | 24.3 |
| | 24.8 |
| | 45.5 |
|
| | | | | | | |
| Operating expenses: | | | | | | |
| Product development | | 14.8 |
| | 11.4 |
| | 4.4 |
|
| Selling, general, and administrative | | 57.0 |
| | 64.9 |
| | 26.1 |
|
| Loss on impairment | | 0.9 |
| | 2.8 |
| | — |
|
| Restructuring | | 8.4 |
| | — |
| | — |
|
| Total operating expenses | | 81.1 |
| | 79.1 |
| | 30.5 |
|
| (Loss) income from operations | | (56.8 | ) | | (54.3 | ) | | 15.0 |
|
| | | | | | | |
| Other expense (income): | | | | | | |
| Interest expense | | — |
| | — |
| | 0.1 |
|
| Other expenses (income) | | 0.4 |
| | — |
| | (0.1 | ) |
| (Loss) income from continuing operations before income taxes | | (57.3 | ) | | (54.3 | ) | | 15.0 |
|
| (Benefit from) provision for income taxes | | (0.5 | ) | | 0.2 |
| | 0.2 |
|
| Net (loss) income from continuing operations | | (56.8 | ) | | (54.5 | ) | | 14.8 |
|
| | | | | | | |
| Discontinued operations: | | | | | | |
| Loss from discontinued operations | | — |
| | — |
| | (0.3 | ) |
| Loss on sale of discontinued operations | | — |
| | — |
| | (0.8 | ) |
| (Loss) income from discontinued operations before income taxes | | — |
| | — |
| | (1.1 | ) |
| Benefit from income taxes | | — |
| | — |
| | — |
|
| Loss from discontinued operations | | — |
| | — |
| | (1.1 | ) |
| | | | | | | |
| Net (loss) income | | (56.8 | )% | | (54.5 | )% | | 13.7 | % |
|
| | | | | | | | | |
| | | 2019 | | 2018 | | 2017 |
| Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of sales | | 84.5 |
| | 81.2 |
| | 75.7 |
|
| Gross profit | | 15.5 |
| | 18.8 |
| | 24.3 |
|
| | | | | | | |
| Operating expenses: | | | | | | |
| Product development | | 10.1 |
| | 14.3 |
| | 14.8 |
|
| Selling, general, and administrative | | 58.6 |
| | 54.1 |
| | 57.0 |
|
| Loss on impairment | | — |
| | — |
| | 0.9 |
|
| Restructuring | | 1.6 |
| | 0.6 |
| | 8.4 |
|
| Total operating expenses | | 70.3 |
| | 69.0 |
| | 81.1 |
|
| Operating loss | | (54.7 | ) | | (50.2 | ) | | (56.8 | ) |
| | | | | | | |
| Other expenses: | | | | | | |
| Interest expense | | 2.5 |
| | — |
| | — |
|
| Other expenses, net | | 0.7 |
| | — |
| | 0.4 |
|
| Net loss before income taxes | | (57.9 | ) | | (50.2 | ) | | (57.3 | ) |
| Provision for (benefit from) income taxes | | 0.1 |
| | 0.1 |
| | (0.5 | ) |
| Net loss | | (58.0 | ) | | (50.3 | ) | | (56.8 | ) |
| | | | | | | |
| Net loss | | (58.0 | )% | | (50.3 | )% | | (56.8 | )% |
Net sales
A further breakdown of our net sales by product line is as follows (in thousands):
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| Commercial | $ | 15,217 |
| | $ | 14,809 |
| | $ | 14,156 |
|
| Military maritime | 4,629 |
| | 16,189 |
| | 50,128 |
|
| R&D Services | — |
| | — |
| | 119 |
|
| Total net sales | $ | 19,846 |
| | $ | 30,998 |
| | $ | 64,403 |
|
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Commercial products | $ | 7,877 |
| | $ | 8,662 |
| | $ | 15,217 |
|
| MMM products | 4,828 |
| | 9,445 |
| | 4,629 |
|
| Total net sales | $ | 12,705 |
| | $ | 18,107 |
| | $ | 19,846 |
|
While ourOur net sales of $19.8$12.7 million in 20172019 decreased 36.0 percent29.8% compared to 2016,2018 mainly driven by a decrease of 48.9% in MMM sales. This is primarily due to two of our products pending evaluation by Defense Logistics Agency (“DLA”), during which time the US Navy is not allowed to purchase these two products and also due to federal government funding restrictions. Net sales of our commercial sales increased 2.8 percent reflecting our continued efforts to penetrate our targeted vertical markets. Overall demand for our military maritime products increased during 2017decreased 9.1% in 2019 as compared to 2016, but our distributor for2018, reflecting fluctuations in the U.S. Navy had the ability to satisfy that demand with inventory they had purchased during 2016 under an exclusive distribution agreement that ended on March 31, 2017. As a result, our 2017 military maritime sales decreased 71.4 percent compared 2016.timing, pace, and size of commercial projects.
Net sales of $31.0$18.1 million in 20162018 decreased 51.9 percent8.8% in comparison to $64.4$19.8 million in 2015, primarily due to a $33.9 million decrease in military maritime sales. This decrease was the result of high-volume sales to distributors for the U.S. Navy during 2015. Commercial2017. MMM product sales increased $0.7 million, or 4.6 percent,by 104.0% in 20162018 as compared to 2015, as we continued2017, driven by higher sales of our efforts to diversifymilitary globe, flood light, fixture, and expandIntellitube® product lines. Net sales of our commercial market. R&D servicesproducts decreased by $0.1 million,43.1% in 2018 as we completed work on research contractscompared to 2017, reflecting fluctuations in the timing, pace, and grantssize of commercial projects, including the implications of the long sales cycle in 2015.our industry.
International sales
With the sale of our United Kingdom subsidiary CLL in 2015, we no longerWe do not generate significant sales from customers outside the United States. International net sales accounted for approximately two percent, four percent, and less than one percent1% of net sales in 2017, 2016,2019, and 2015, respectively. The effectapproximately 2% of changesnet sales in 2018 and 2017. Changes in currency exchange rates wasdid not materialhave an impact on net sales in 2019, 2018 or 2017, 2016, and 2015.as our sales, including international sales, are denominated in U.S. dollars.
Gross profit
Gross profit was $4.8$2.0 million in 2017,2019, compared to $7.7$3.4 million in 2016.2018. The year-over-yeardecline in gross profit was primarily driven by a decline in MMM sales, due to two of our products pending evaluation by DLA, during which time the U.S. Navy was not allowed to purchase and also due to federal government funding restrictions. Our 2019 gross profit as a percent of net sales of 15.5% decreased from our 2018 gross profit as a percent of net sales of 18.8%, particularly due to increases in purchase prices, customs duty and Chinese tariffs, which were partly offset by a benefit of cost of warranty and repair, whereby other cost of sales elements remained relatively flat as compared to 2018.
Gross profit was $3.4 million in 2018, compared to $5 million in 2017. The decline in gross profit was principally driven by lower sales volumes year-over-year, reflecting fluctuations in the timing, pace and changes in mix between oursize of commercial and military maritime products,projects. Our 2018 gross profit as a percent of net sales of 18.8% decreased from our commercial products represented 76.7 percent of total net sales in 2017 compared to 47.8 percent in 2016. Our 2017 gross profit as a percent of net sales of 24.3 percent was comparable with our 201624.3%. This decrease is attributable to higher unfavorable manufacturing variances and absorption in 2018 as compared to 2017, and the impact of selling large volumes of a low gross margin linear tube for military applications in the first quarter of 2018, prior to achieving cost reductions and improved margins on the product by the end of 2018. Additionally, the gross profit as a percent of net sales of 24.8 percent. As a result ofpercentage in 2017 benefited from the reduction in our 2017 restructuring initiative and our efforts to improve operating efficiencies, we were successful in maintaining our manufacturing overheadexcess inventory reserves, as a percentage of net sales to 2016 levels, in spite of lower sales volumes. Additionally, during 2017 we implemented a strategic sales initiative to sell certain excess inventory in 2017 that had previously been written-down in conjunction with our excess inventory reserve analysiswritten down in prior years, as required by U.S. GAAP. This initiative resulted in reduction of our excess inventory reserves of $1.4 million. Our 2016 gross margin was driven by product mix, as our commercial products, which had lower margins than our military maritime products, represented 47.8 percent of total net sales in 2016. The 2016 gross margin was negatively impacted by the recognition of a $3.3 million excess inventory reserve based on our year-end excess inventory reserve analysis.years.
Gross profit in 2016 decreased $21.6 million from the gross profit of $29.3 million in 2015. Gross margins declined 20.7 percentage points as a result of lower sales and changes in product mix, as our commercial products had lower margins than our military maritime products. In addition to the gross margin impact of lower sales and product mix, our 2016 gross margin was negatively impacted by the recognition of a $3.3 million excess inventory reserve based on our year-end excess inventory reserve analysis.
Operating expenses
Product development
Product development expenses include salaries, including stock-based compensation and related benefits, contractor and consulting fees, legal fees, supplies and materials, as well as overhead items, such as depreciation and facilities costs. Product development costs are expensed as they are incurred. Cost recovery represents the combination of revenues and credits from government contracts.
Total gross and net product development spending, including credits from government contracts, is shown in the following table (in thousands):
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| Total gross product development expenses | $ | 2,940 |
| | $ | 3,630 |
| | $ | 3,005 |
|
| Cost recovery through cost of sales | — |
| | — |
| | (25 | ) |
| Cost recovery and other credits | — |
| | (93 | ) | | (170 | ) |
| Net product development expense | $ | 2,940 |
| | $ | 3,537 |
| | $ | 2,810 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Total gross product development expenses | $ | 1,284 |
| | $ | 2,597 |
| | $ | 2,940 |
|
Gross product development expenses were $2.9$1.3 million in 2017,2019, a $0.7 million, or 19.0 percent, decrease of 50.6%, compared to $3.6$2.6 million in 2016.2018. The decrease primarily resulted from restructuring related operating cost reductions of $0.5 million, principally related tolower salaries including stock-based compensation and related benefits of approximately$0.9 million, lower outside testing fees of $0.3 million, and reductionsas well as lower travel costs of $0.1 million. Gross product development expenses were $2.6 million in 2018, a decrease of $0.3 million or 11.7% compared to $2.9 million in 2017. The decrease primarily resulted from lower outside testing and legal fees of approximately $0.2$0.4 million as we focused our efforts on redefining ourdue to the timing of new product road map in light of our restructuring initiative. Gross 2016 product development expenses of $3.6 million increased 20.8 percent compared to $3.0 million in 2015. The increase resulted fromintroductions. This decrease was partially offset by higher salaries including stock-based compensation and related benefits of approximately $0.8$0.1 million partially offset by a reduction in outside testing and legal fees of approximately $0.1 million.due to staffing.
Selling, general, and administrative
Selling, general, and administrative expenses were $11.3$7.4 million, or 57.0 percent,58.6%, of net sales in 2017,2019, compared to $20.1$9.8 million, or 64.9 percent54.1%, of net sales in 2016.2018. Of the year-over-year $8.8$2.4 million decrease, approximately $5.6$1.4 million is attributable to our restructuring initiative, resulting in reduced salaries, including stock-based compensation and related benefits, of $2.9$0.3 million consultingto decrease in severance and benefits, $0.2 million decrease each to commissions and depreciation expense, $0.1 million decrease each to accounting fees, of $1.1 million, recruitingnetwork costs and relocation expenses of $0.6 million, travel and related expenses of $0.5 million and rent and related expenses of $0.5 million. Additionally, our operating cost control initiatives resulted in an additional $1.5 million in operating expense reductions including decreased trade show and marketing expensescosts. Savings were offset by increased consultant costs of $0.8 million and legal and professional fees of $0.6 million in 2017, compared to 2016. Due to the overall lower sales volumes and the November 2016 termination of an outside sales representation agreement related to sales to the U.S. Navy, our 2017 sales commission expense decreased $1.0 million compared to 2016.$0.3 million.
Selling, general, and administrative expenses in 2016 increased2018 decreased by $3.3$1.5 million, or 19.5 percent,13.5%, from $16.8$11.3 million in 2015. The dollar increase resulted from higher2017. Of the decrease, approximately $0.9 million is a result of lower salaries, including stock-based compensation and related benefits, decreases of approximately $1.2$0.2 million tradeshowin each of the following categories: consulting fees, trade show and marketing expenses, of $0.7 million, legal and professional fees of $0.4 million and travel and related expenses, and decreases of $0.2$0.1 million each in rent expense and depreciation expense, as we continued our efforts to diversify and expand our commercial markets. In addition,cost control initiatives. The lower expenses were partially offset by increased severance and related benefits costs increased $0.4of $0.2 million, as a result of the resignation of Jerry Turin, our efforts to align our direct sales force, marketing personnel and administrative talent to support our operations. In October 2015, we began using an outside sales representative who earned a commission on sales for our military maritime products for the U.S. Navy, which resulted in higher sales commissionprior Chief Financial Officer.
Loss on impairment
As a result of the decline in the level of expected future sales of our military maritimeMMM products and reductions in the cost of procuring components from our suppliers, during 2016 we re-evaluated the economics of manufacturing versus purchasing such components and determined that we would no longer use the equipment and software purchased to conduct this
manufacturing. As of December 31, 2016, we evaluated the carrying value of the equipment and software compared to its fair value and determined that the equipment and software were impaired, recording an impairment loss of $0.9 million to adjust the carrying value of the equipment and software to its estimated net realizable value. Due to the specialized nature of this equipment we havewere not been able to find a buyer for this equipment in 2017. As a result, we re-evaluated the carrying value of the equipment and software compared to its fair value and recorded an additional impairment loss of $0.2 million as of December 31, 2017. We completed the sale of this equipment in the first quarter of 2018. Please refer to Note 6, “Property and Equipment,” included in Item 8 of this Annual Report for further information.
Restructuring
In the first quarter of 2017, we announced a restructuring initiative with a goal of significantly reducing our annual operating costs from 2016 levels. This initiative included an organizational consolidation of management and oversight functions in order to streamline and better align the organization into more focused, efficient, and cost-effective reporting relationships.
The actions taken in the first quarter of 2017 includedincluding closing our offices in Rochester, Minnesota, New York, New York, and Arlington, Virginia and impacted 20 employees, primarily located in these offices. During the second quarter of 2017, we fully exited the New York and Arlington facilities and took additional actions to improve our operating efficiencies. These actions impactedeliminated an additional 17 production and administrative employeespositions in our Solon location.
During 2017, we recorded restructuring charges totaling approximately $1.7 million consisting of approximately $0.8 million in severance and related benefits, approximately $0.7 million in facilities costs related to the termination of the Rochester lease obligations and the remaining lease obligations for the former New York and Arlington offices, and $0.2 million in other restructuring costs primarily related to fixed asset and prepaid expenses write-offs.
WeDuring 2018, we recorded restructuring charges totaling approximately $0.2 million, related to the revision of our initial estimates of the costs and offsetting sublease income and accretion expense for the remaining lease obligation for our former New York, New York and Arlington, Virginia offices.
During 2019, we recorded restructuring charges totaling approximately $0.2 million for the accretion expense for the remaining lease obligation for our former New York, New York and Arlington, Virginia offices. The lease on our Arlington, Virginia office ended September 30, 2019.
As of December 31, 2019, we estimated that we would receive a total of approximately $1.2$0.4 million in sublease payments to offset our remaining lease obligations of $0.5 million, which extend until June 2021, of approximately $1.7 million.2021. We expect to incur insignificant additional costs over the remaining life of our lease obligations, but we do not anticipate further major restructuring activities in the near future.obligations. Please refer to Note 3, “Restructuring,” included in Item 8 of this Annual Report for further information.
While substantial doubt about our ability to continue as a going concern that existed at December 31, 2016 remained at December 31, 2017, we had $10.8 million in cash and no debt obligations at the end of the year. In addition, the restructuring actions taken in 2017 resulted in a net decrease in operating expenses of $8.4 million, including restructuring and asset impairment charges of $1.8 million in 2017 and impairment charges of $0.9 million in 2016. The intent of the restructuring strategy was to maximize operating cost reductions without sacrificing either our new product pipeline or potential long-term revenue growth. Consequently, considering both quantitative and qualitative information, we continue to believe that the combination of our restructuring actions, current financial position, liquid resources, obligations due or anticipated within the next year, executive reorganization, and implementation of our sales channel strategy will return us to profitability in 2018 and effectively mitigates the substantial doubt about our ability to continue as a going concern.
Other (expense) incomeexpenses
Interest expense
We incurred $317 thousand in interest expense in 2019, primarily related to interest on borrowings and non-cash amortization of fees related to the revolving credit facility we entered into during December 2018 and under the Iliad Note Purchase Agreement we entered into during November 2019. We incurred $8 thousand in interest expense in 2018, primarily related to borrowings under the revolving credit facility. We incurred $2 thousand in interest expense in 2017. As a result of settling our long term debt obligations during the fourth quarter of 2015, we incurred no interest expense for the year ended December 31, 2016. Interest expense for the year ended December 31, 2015 was $0.1 million.2017 related to an insurance premium financing agreement.
Other expenses, net
We recognized other expenses, net of $0.1 million$91 thousand in 2017,2019, compared to other expenseexpenses, net of $18$7 thousand in 20162018 and other incomeexpenses, net of $0.1 million$99 thousand in 2015. The2017. Other expenses, net in 2019 primarily consisted of $80 thousand of collateral management fees related to the revolving credit facility we entered into during December 2018 and a net loss on the sale and disposal of fixed assets of $24 thousand, partially offset by various refunds of $12 thousand. Other expenses, net in 2018 primarily consisted of the non-cash amortization of fees related to the revolving credit facility of $9 thousand and a net loss on the sale and disposal of fixed assets of $2 thousand, partially offset by a net gain on foreign exchange of $4 thousand. Other expenses in 2017 and 2016 primarily consisted of losses on the disposal of fixed assets partially offset by interest income on our cash balances. The income in 2015 primarily consisted of recognized foreign currency transaction gains partially offset by the non-cash amortization of fees related to our former revolving credit facility.
Income taxes
For the years ended December 31, 20172019, 2018 and 2016,2017, our effective tax rate was 1.02 percent(0.1)%, (0.1)%, and (0.2) percent,1.0%, respectively.
In 2019, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $8.3 million additional federal net operating loss we recognized for the year. In 2018, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $8.7 million additional federal net operating loss we recognized for the year. In 2017, our effective tax rate was lower than the statutory rate due to the remeasurement of our deferred tax assets resulting from the Tax Cuts and Jobs Act of 2017 (the “Act”) and a decrease in the valuation allowance. In 2016, our effective tax rate
was lower than the statutory tax rate due primarily due to an increase in the valuation allowance as a result of $10.6 million of additional net operating loss we recognized for that year.
On December 22, 2017, the Act was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35 percent35% to 21 percent21% effective for tax years beginning after December 31, 2017, repeal of the corporate Alternative Minimum Tax, elimination of certain deductions, and changes to the carryforward period and utilization of Net Operating Losses generated after December 31, 2017. We have calculated our best estimate of the impact of the Act in our year end income tax provision in accordance with our understanding of the Act and guidance available as of the date of this filing. As a result of the Act, we have recorded $0.1 million as additional income tax benefit in the fourth quarter of 2017, the period in which the legislation was enacted. This amount related to the release of the valuation allowance on our Alternative Minimum Tax Credit carry forward, which is expected to be fully refunded by 2021. We remeasured our deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future. The impact of the remeasurement was $5.9 million of additional tax expense, which was offset by a $5.9 million valuation allowance reduction resulting in no net impact to the financial statements. The U.S. Treasury Department, the Internal Revenue Service, and other standard-setting bodies could interpret or issue guidance on how provisions of the Act will be applied or otherwise administered that is different from our interpretation. As we complete our analysis of the Act, collect and prepare necessary data, and interpret any additional guidance, weWe may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are made.
Deferred income tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred income tax assets will not be realized. In considering the need for a valuation allowance, we assess all evidence, both positive and negative, available to determine whether all or some portion of the deferred tax assets will not be realized. Such evidence includes, but is not limited to, recent earnings history, projections of future income or loss, reversal patterns of existing taxable and deductible temporary differences, and tax planning strategies. We have recorded a full valuation allowance against our deferred tax assets at December 31, 20172019 and 2016,2018, respectively. We had no net deferred liabilities at December 31, 20172019 or 2016.2018. We will continue to evaluate the need for a valuation allowance on a quarterly basis.
At December 31, 2017,2019, we had net operating loss carry-forwards of approximately $91.8$108.8 million for federal income tax purposes ($64.5 million for state and local income tax purposes.purposes). However, due to changes in our capital structure, approximately $37.3$54.5 million of this amountthe $108.8 million is available after the application of IRC Section 382 limitations. As a result of the Act, net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income. These net operating loss carry-forwards can no longer be carried back, but they can be carried forward indefinitely. The $8.3 million and $8.7 million in net operating losses generated in 2019 and 2018 will be subject to the new limitations under the Act. If not utilized, thesethe carry-forwards generated prior to December 31, 2017 of $37.3 million will begin to expire in 2021 for federal purposes and have begun to expire for state and local purposes. Please refer to Note 11,12, “Income Taxes,” included in Item 8 of this Annual Report for further information.
Net (loss) income from continuing operationsloss
Despite an $11.2a $5.4 million, or 36.029.8 percent, decline in net sales, our net loss from continuing operations improved $5.6to $7.4 million in 2019 compared to $9.1 million in 2018. The improvement in our loss is primarily due to our continued cost control initiatives, resulting in an additional net decrease in operating expenses of $3.6 million, partially offset by the lower gross margins as discussed previously.
Net loss was $9.1 million in 2018, a decrease of $2.2 million compared to a net loss of $11.3 million in 2017 compared to $16.9 million in 2016. 2017.
The improvement in our loss from continuing operations is the direct result ofin 2018 as compared to 2017 was directly attributable to our restructuring initiative, including efforts to improve operating efficiencies, allowing us to maintain consistent gross margin percentages, and control operating costs, resultinginitiatives, which resulted in a $8.4$3.6 million year-over-year operating expense reduction, including $1.8$0.1 million in restructuring and asset impairment charges. Net loss from continuing operations was $16.9 million in 2016, a decrease of $26.3 million compared to 2016 compared to net income of $9.5 million in 2015. Lower net sales, changes in product mix and investments in corporate infrastructure, charges recorded for excess inventory and the asset impairment on certain manufacturing equipment contributed to the difference in operating results.
Discontinued operations
During 2015 we exited our turnkey solutions business operated by our subsidiary, EFLS. There were no assets disposed as a result of the discontinuation, and we did not recognize a gain or loss on disposal or record an income tax expense or benefit. In August 2015, we sold our wholly-owned United Kingdom subsidiary, CLL. The sale was for nominal consideration under the terms of the agreement. As a result of the transaction and the elimination of this foreign subsidiary, we recorded a one-time loss of $44 thousand, which included a $469 thousand accumulated other comprehensive income reclassification adjustment for foreign currency translation adjustments. Accordingly, we have relcassified all net sales and expenses associated with both EFLS and CLL from the Consolidated Statements of Operations and have reported the related net income (loss) as discontinued operations.
In November 2013, we sold our pool products business. In February 2015, the buyer filed an arbitration claim asserting damages under the Purchase Agreement relating to product development and on March 18, 2016, a settlement agreement was executed for this claim. The legal fees incurred for the arbitration are included in the loss on disposal of discontinued
operations for all periods presented. See Note 14, “Legal Matters,” included in Item 830
Revenues from discontinued operations in 2015 were $1.1 million. See Note 4, “Discontinued Operations,” included in Item 8 of this Annual Report for more information.
Net (loss) income
Net (loss) income includes the results from continuing operations as well as the results from discontinued operations. Net loss was $11.3 million in 2017, a decrease of $5.6 million compared to a net loss of $16.9 million in 2016, as a result of the reasons discussed above. Net loss $16.9 million in 2016 represented a decrease of $25.7 million compared to a net income of $8.8 million in 2015, as a result of the reasons discussed above.
Liquidity and capital resources
General
We generated a net loss of $11.3$7.4 million in 2017,2019, compared to net loss of $16.9$9.1 million in 2016.2018. We have incurred substantial losses in the past, and as of December 31, 2017,2019, we had an accumulated deficit of $108.2$124.9 million.
In order for us to operate our business profitably, we need to continue to expandgrow our market presence to further penetrate our targeted vertical markets,sales, maintain cost control discipline without sacrificing eitherwhile balancing development of our new product pipeline or potentialproducts required for long-term competitiveness and revenue growth, continue our efforts to reduce product cost, and drive further operating efficiencies and develop and execute a strategic product pipeline for profitable and compelling energy-efficient LED lighting products.efficiencies. There is a risk that our strategy to return to profitability may not be as successful as we envision. IfWe will likely require additional financing to achieve our strategic plan and, if our operations do not achieve, or we experience an unanticipated delay in achieving, our intended level and pace of profitability, we will continue to need additional funding, none of which may be available on favorable terms or at all and could require us to discontinue or curtail our operations.
Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to obtain additional external financing, obtain appropriate funding facilities, restructuring actions, current financial position, liquid resources, obligations due or anticipated within the next year, executive and sales reorganization, and implementation of our product development and sales channel strategy, if adequately executed, will provide us with an ability to finance our operations through 2020 and will mitigate the substantial doubt about our ability to continue as a going concern.
Credit Facility
On December 11, 2018, we entered into a $5.0 million revolving line of Credit Facility with Austin Financial Services (“Austin”) as described further below. As of December 31, 2019, our cash was approximately $0.4 million and our outstanding balance was approximately $0.7 million under the Credit Facility. As of December 31, 2019, our availability under the Credit Facility was $1.6 million.
Convertible Notes
On March 29, 2019, we raised $1.7 million (before transaction expenses) from the issuance of $1.7 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 5% per annum until June 30, 2019 and at a rate of 10% 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 and the accumulated interest thereon in the amount of $1,815,041 converted at a conversion price of $0.67 per share into an aggregate of 2,709,018 shares of the Company’s Series A Convertible Preferred Stock, par value $0.0001 per share (“Series A Preferred Stock”), which is convertible on a one-for-one basis into shares of our common stock.
Iliad Note
On November 25, 2019, the Company entered into the Iliad Note Purchase Agreement with Iliad pursuant to which the Company sold and issued to Iliad the Iliad Note in the principal amount of $1.3 million. The Iliad Note was issued with an original issue discount of $142 thousand and Iliad paid a purchase price of $1.1 million for the issuance of the Iliad Note, after deduction of $15 thousand of Iliad’s transaction expenses.
The Iliad Note has a maturity date of November 24, 2021 andaccrues interest at 8% per annum, compounded daily, on the outstanding balance. The Company may prepay the amounts outstanding under the Iliad Note at a premium, which is 15% during the first year and 10% during the second year. Beginning in May 2020, Iliad may require additional funding.the Company to redeem up to $150 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. Each exercise of this deferral right by the Company will increase the amount outstanding under the Note by 1.5%.
We terminatedIn the event our revolving credit facility effective December 31, 2015,common stock is delisted from NASDAQ, the amount outstanding under the Iliad Note will automatically increase by 15% as of the date of such delisting.
Pursuant to the Iliad Note Purchase Agreement and arethe Iliad Note, we have, among other things, agreed that, until the Iliad Note is repaid:
10% 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 actively pursuing securing a new linean event of credit at this time. There can be no assurance thatdefault under the Iliad Note, but will increase the amount then outstanding under the Note by 10%); 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 3% on each occasion the Company exercises its right to make the Restricted Issuance without Iliad’s agreement.
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 5% to 15%, 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 5%. 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 22%, or such lesser rate as permitted under applicable law.
January 2020 Equity Offering
In January of 2020, we retained H.C. Wainwright & Co., LLC to act as our exclusive placement agent in connection with the offer and sale of 3,441,803 shares of our common stock to certain institutional investors, at a purchase price of $0.674 per share, in a registered direct offering. We also sold to the same institutional investors unregistered warrants to purchase up to 3,441,803 shares of common stock at an exercise price of $0.674 per share in a concurrent private placement for a purchase price of $0.125 per warrant. We paid the placement agent commissions of $193 thousand plus $50 thousand in expenses in connection with the registered direct offering and the concurrent private placement, and we also paid clearing fees of $13 thousand. Proceeds to us, before expenses, from the sale of common stock and warrants (the “January 2020 Equity Offering”) were approximately $2.5 million. In accordance with the terms of the Iliad Note, 10% of the gross proceeds from the January 2020 Equity Offering ($275 thousand) were used to make payments on the Iliad Note, a large portion of which was the outstanding principal amount.
Need for Additional Financing
The proceeds from the Convertible Notes, the Note Purchase Agreement and the January 2020 Equity Offering will only continue to provide funding for the near-term and our ability to draw on the Credit Facility is limited based on the amount of qualified accounts receivable, plus a portion of the net realizable value of our eligible inventory. Even with the Credit Facility, we may not generate sufficient cash flows from our operations or be able to borrow sufficient funds under the Credit Facility to sustain our operations and grow our operations or, if necessary, obtain funding on acceptable terms or in a timely fashion or at all.business. As such, we mayexpect to need additional external financing during 2020 and will continue to review and pursue selected external funding sources to execute these objectives including, but not limited to, the following:
obtainobtaining financing from traditional or non-traditional investment capital organizations or individuals; and
obtainobtaining funding from the sale of our common stock or other equity or debt instruments. 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 financing through the above-mentioned mechanisms contains risks, including:
additional equity financing may not be available to us on satisfactory terms and any equity that we are able to issue could lead to dilution of stockholder value for current stockholders;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 and control or revocation provisions, which are not acceptable to management or our Boardboard of Directors or would restrict our growth opportunities;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 generate cashobtain required additional financing to growsustain our business before we wouldare able to produce levels of revenue to meet our financial needs, we will need to delay, or scale back or eliminate our business plan orand further reduce our operating costs orand headcount, each of which couldwould have a material adverse effect on our business, future prospects, and financial condition. A lack of additional financing could also result in our inability to continue as a going concern and force us to sell certain assets or discontinue or curtain our operations and, as a result, investors in the Company could lose their entire investment.
See Note 9. “Debt” and Note 16 “Subsequent Events” in Item 8 of this Annual Report for more information.
Cash and cash equivalents and debt
At December 31, 2017,2019, our cash and cash equivalents balance was $10.8$0.4 million, compared to $16.6$6.3 million at December 31, 2016. The balances at December 31, 2017 and 2016 included restricted cash of $0.3 million, which represents a letter of credit requirement under our New York office lease obligation. The restricted cash balance of $0.1 million at December 31, 2015 relates to funds to be used exclusively for a research and development project with the National Shipbuilding Research Program.2018.
On September 11, 2015, we announced the pricing of a registered underwritten follow-on offering of shares of our common stock by us and certain of our stockholders (the “Selling Stockholders”). We sold 1,500,000 shares of our common stock at a price to the public of $17.00 per share and the Selling Stockholders sold an additional 1,500,000 shares of our common stock on the same terms and conditions.
The offering closed on September 16, 2015 and we received $23.6 million in net proceeds from the transaction, after giving effect to underwriting discounts and commissions and estimated expenses. We have used the net proceeds from the offering to finance our growth efforts, for working capital, and other general corporate purposes.
The following is a summary of cash flows from operating, investing, and financing activities, as reflected in the Consolidated Statements of Cash Flows (in thousands):
|
| | | | | | | | | | | | |
| | | 2017 | | 2016 | | 2015 |
| | | | | | | |
| Net cash (used in) provided by operating activities | | $ | (5,874 | ) | | $ | (16,553 | ) | | $ | 4,446 |
|
| | | | | | | |
| Net cash used in investing activities | | $ | (65 | ) | | $ | (1,597 | ) | | $ | (2,242 | ) |
| | | | | | | |
| Proceeds from warrants exercised | | $ | — |
| | $ | — |
| | $ | 2,503 |
|
| Proceeds from issuances of common stock, net | | — |
| | — |
| | 23,574 |
|
| Proceeds from exercise of stock options and purchases through employee stock purchase plan | | 130 |
| | 455 |
| | 346 |
|
| Common stock withheld in lieu of income tax withholding on vesting of restricted stock units | | (49 | ) | | (309 | ) | | — |
|
| Payments on other borrowings | | — |
| | — |
| | (13 | ) |
| Net (repayments) proceeds from credit line borrowings | | — |
| | — |
| | (453 | ) |
| Net cash provided by financing activities | | $ | 81 |
| | $ | 146 |
| | $ | 25,957 |
|
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Net cash used in operating activities | $ | (6,624 | ) | | $ | (6,795 | ) | | $ | (5,874 | ) |
| | | | | | |
| Net cash (used in) provided by investing activities | $ | (129 | ) | | $ | 189 |
| | $ | (65 | ) |
| | | | | | |
| Proceeds from exercise of stock options and purchases through employee stock purchase plan | — |
| | 28 |
| | 130 |
|
| Common stock withheld in lieu of income tax withholding on vesting of restricted stock units | (110 | ) | | (62 | ) | | (49 | ) |
| Loan origination fees | (208 | ) | | — |
| | — |
|
| Principal payments under finance lease obligations | (3 | ) | | — |
| | — |
|
| Proceeds from the Iliad Note | 1,115 |
| | — |
| | — |
|
| Proceeds from convertible notes | 1,700 |
| | — |
| | — |
|
| Net (payments on) proceeds from credit line borrowings | (1,400 | ) | | 2,219 |
| | — |
|
| Net cash provided by financing activities | $ | 1,094 |
| | $ | 2,185 |
| | $ | 81 |
|
Cash (used in) provided byused in operating activities
Net cash used in operating activities of $5.9$6.6 million in 2019 resulted primarily from the net loss incurred of $7.4 million, adjusted for non-cash items, including: depreciation and amortization of $0.3 million and stock-based compensation, net of $0.6 million. Cash used by an increase in accounts receivable of $0.1 million and a decrease in accounts payable mainly for inventory due to the timing of inventory receipts of $2.2 million and a decrease in accrued expenses primarily for accrued payroll and benefits, severance and commissions of $0.5 million further attributed to the cash impact of the net loss incurred. The cash used by these working capital changes was partially offset by cash generated by a net decrease in inventories of $1.9 million as we sold existing inventory and reduced inventory purchasing and prepaid expenses of $0.6 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 operating activities of $6.8 million in 2018 resulted primarily from the net loss incurred of $9.1 million, adjusted for non-cash items, including: depreciation and amortization of $0.5 million and stock-based compensation, net of $0.9 million. Cash generated by a decrease in accounts receivable of $1.4 million and increases in accounts payable for inventory purchases and accrued expenses primarily for severance of $2.0 million and $0.2 million, respectively, further offset the cash impact of the net loss incurred. The cash generated by these working capital changes was partially offset by cash used for increases in inventories of $2.4 million, as we purchased inventory for anticipated demand and new product introductions, and prepaid expenses of $0.5 million, primarily for deposit advances made for future inventory purchases.
Net cash used in operating activities in 2017 of $5.9 million resulted primarily from the net loss incurred of $11.3 million, adjusted for non-cash items, including: depreciation and amortization of $0.7 million, stock-based compensation, net of $0.5 million, and fixed asset impairment and disposal losses of $0.4 million. Cash generated by decreases in inventory and accounts receivable of $5.2 million and $2.2 million, respectively, further offset the cash impact of the net loss incurred. The cash generated by these working capital changes was partially offset by cash used for decreases in trade accounts payable of $1.8 million, primarily related to the timing of inventory purchases and decreased accrued expenses of $0.3$0.6 million, primarily related to lower severance, sales commissions, product warranty, and payroll accruals.
Cash(used in) provided by investing activities
Net cash used by investing activities was $0.1 million in operating activities in 2016 of $16.6 million2019 and resulted primarily from the net loss incurredaddition of $16.9 million, adjusted for non-cash items, including: an adjustmentproperty and equipment tooling to the reserves for slow-moving and obsolete inventoriessupport production operations.
Net cash provided by operatinginvesting activities was $0.2 million in 2015 was $4.4 million. In 2015, the net cash from operating activities2018 and resulted primarily from the net income generatedproceeds we received from the sale of $8.8 million, adjustedcertain equipment previously classified as held for non-cash items, including: an adjustment to the reserves for slow-moving and obsolete inventories of $1.7 million, stock-based compensation of $0.8 million, and depreciation and amortization of $0.3 million. Net cash provided by operating activities in 2015 also included an increase in accrued liabilities and federal and state taxes of $1.7 million. The cash provided by these working capital changes wassale, partially offset by cash used by accounts receivablepurchases of $7.5 millioncomputer equipment, equipment to support production operations, and inventory of $2.6 million.leasehold improvements.
Cash(used in)investing activities
Net cash used in investing activities was $0.1 million in 2017, and resulted primarily from the purchase of software and equipment to support our website and marketing efforts, partially offset by proceeds received from the sale of certain computer
equipment and reimbursements from our landlord for certain leasehold improvements. We do not expect significant capital expenditures in 2018.
In 2016, net cash used in investing activities of $1.6 million resulted from the acquisition and disposal of various office and operating fixed assets implementation of new modules and capabilities of our surface mount technology equipment purchased in 2015 and our licensed enterprise resource planning (ERP) system, as well as the purchase of tradeshow booths to support our sales and marketing initiatives. In 2015, net cash used in investing activities of $2.2 million primarily resulted from the acquisition of property and equipment related to our “Buy American” product initiative.
Cash provided by financing activities
Net cash provided by financing activities for the yearsyear ended December 31, 20172019 of $1.1 million primarily resulted from net proceeds from the Convertible Notes of $1.7 million and 2016the Iliad note of $1.1 million offset by payments to the revolving credit facility of $1.4 million.
Net cash provided by financing activities for the year ended December 31, 2018 of $2.2 million primarily resulted from the proceeds we received on borrowings under our revolving credit facility.
Net cash provided by financing activities for the year ended December 31, 2017 of $0.1 million resulted from activity related to the Company’s equity award and employee stock purchase plans.
Net cash provided by financing activities in 2015 of $26.0 million included the receipt of $23.6 million related to our follow-on stock offering, $2.5 million from the exercises of outstanding warrants and $0.3 million related to the Company’s equity award and employee stock purchase plans, partially offset by $0.5 million in net payments on the Company’s line of credit and other borrowings.
Credit facilities
On December 11, 2018, we entered into a three-year $5.0 million Credit Facility with Austin. The total loan amount available to us under the Credit Facility from time to time is based on the amount of our (i) qualified accounts receivable, which is equal to the lesser of 85% of our net eligible receivables, or $4.5 million, plus (ii) available inventory, which is the lesser of 20% of the net realizable value of eligible inventory, or $500 thousand. The Credit Facility charges interest deeming a minimum borrowing requirement of $1.0 million. As of December 31, 2019, our availability under the Credit Facility was $1.6 million.
The 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 2%. The borrowing rate as of December 31, 2019 was 6.75%. Overdrafts are subject to a 2% fee. Additionally, an annual facility fee of 1% on the entire $5.0 million amount of the Credit Facility is due at the beginning of each of the three years and a 0.5% collateral management fee on the average outstanding loan balance is payable monthly. We paid Austin the first year’s fee when the Credit Facility was signed and the second year’s fee in December of 2019.
The repayment of outstanding advances and interest under the Credit Facility may be accelerated upon an event of default including, but not limited to, failure to make timely payments or breach of any terms set forth in the Credit Facility. The Credit Facility has no financial covenants but charges interest deeming a minimum cash balance of $1.0 million and is subject to customary affirmative and negative operating covenants and defaults, and restricting indebtedness, liens, corporate transactions, dividends, and affiliate transactions, among others. The Credit Facility may be terminated ourby us or by Austin with 90 days written notice. We have not provided such notice to Austin or received such notice from Austin. There are liquidated damages if the Credit Facility is terminated prior to December 10, 2021, as follows: 3% in the first twelve-months, 2% in the second twelve-months, and 1% in the third twelve-months after closing.
Borrowings under the revolving line of credit facilitywere $0.7 million and $2.2 million at December 31, 2019 and 2018, respectively, and are recorded in December 2015. We do not have nor are we actively pursuingthe Consolidated Balance Sheets as a newcurrent liability under the caption, “Credit line borrowings.” Please refer to Note 9, “Debt,” included in Item 8 of credit at this time.Annual Report for further information.
Contractual obligations
The following summarizes our contractual obligations as of December 31, 2017, consisting of minimum lease payments under operating leases (in thousands):
|
| | | | | | | | | | |
| Year ending December 31, | | Non-Cancellable Operating Leases (Gross) | Sublease Income (1) | Non-Cancellable Operating Leases (Net) |
| | | | | |
| 2018 | | $ | 1,259 |
| $ | 428 |
| $ | 831 |
|
| 2019 | | 1,127 |
| 399 |
| 728 |
|
| 2020 | | 960 |
| 267 |
| 693 |
|
| 2021 | | 789 |
| 134 |
| 655 |
|
| 2022 & thereafter | | 309 |
| — |
| 309 |
|
| Total contractual obligations | | $ | 4,444 |
| $ | 1,228 |
| $ | 3,216 |
|
(1) Represents the amount of income expected from sublease agreements executed in 2017 for our former New York, New York and Arlington, Virginia offices.
Off-balance sheet arrangements
We had no off-balance sheet arrangements at December 31, 20172019 or 2016.2018.
Critical accounting policies and estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies, and the reported amounts of net sales and expenses in the financial statements. Material differences may result in the amount and timing of net sales and expenses if different judgments or different estimates were utilized.
Critical accounting policies, judgments, and estimates that we believe have the most significant impact on our financial statements are set forth below:
revenue recognition,
allowances for doubtful accounts, returns and discounts,
impairment of long-lived assets,
valuation of inventories,
accounting for income taxes,
share-based compensation, and
share-based compensation.leases.
Revenue recognition
On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended by subsequently issued additional guidance (together, “ASC 606”) using the modified retrospective method. The adoption of ASC 606 did not have a material impact on our consolidated financial position or results of operations, as our revenue arrangements generally consist of a single performance obligation to transfer promised goods at a fixed price.
Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is recognized when it is realized or realizable, has been earned, and when all of the following have occurred:
persuasive evidence or an arrangement exists (e.g., a sales order, a purchase order, or a sales agreement),
shipment has occurred, with the standard shipping term being F.O.B. ship point, or services provided on a proportional performance basis or installation have been completed,
price to the buyer is fixed or determinable, and
collectability is reasonably assured.
Revenues from our products are generally recognized upon shipping based upon the following:
all sales made by us to our customer base are non-contingent, meaning that they are not tied to that customer’s resale of products,
standard terms of sale contain shipping terms of F.O.B. ship point, meaning that title and risk of loss is transferred when shipping occurs, and
there are no automatic return provisions that allow the customer to return the product in the event that the product does not sell within a defined timeframe.
Revenues from research and development contracts are recognized primarily on the percentage-of-completion method of accounting. Percentage-of-completion is determined by relating the actual cost of the work performed to date to the current estimated total cost of the respective contracts. When the estimate on a contract indicates a loss, our policy is to record the entire loss during the accounting period in which it is estimable. Deferred revenue is recorded for the excess of contract billings overmeasured at the amount of contract costsconsideration 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 profits. Costs in excess of billings, included in prepaid and other assets, are recorded for contract costs in excess of contract billings.
We warrant our products against defects or workmanship issues. We set up allowances for estimated returns, discounts and warranties upon recognition of revenue, and these allowances are adjusted periodically to reflect actual and anticipated returns, discounts and warranty expenses. These allowances are based on past history and historical trends, and contractual terms. The distributors’the customer obtains control over the products. Distributors’ obligations to us are not contingent upon the resale of our productsproducts. 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 suchthe amortization period is less than one year. We do not prohibit revenue recognition.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.
A disaggregation of product net sales is presented in Note 13, “Product and Geographic Information.”
Accounts Receivable
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 very 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 major customers or with particular orders. Accordingly, we do not adjust trade accounts receivable for the effects of financing, as we expect the period between the transfer of product to the customer and the receipt of payment from the customer to be in line with our standard payment terms.
Allowances for doubtful accounts, returns, and discounts
We establish allowances for doubtful accounts and returns for probable losses based on the customers’ loss history with us, the financial condition of the customer, the condition of the general economy and the industry as a whole, and the contractual terms established with the customer. The specific components are as follows:
Allowanceallowance for doubtful accounts for accounts receivable, and
Allowanceallowance for sales returns and discounts.
In 2017,2019 and 2018, the total allowance was $42$28 thousand and $33 thousand, respectively, which was all related to sales returns. In 2016, the total allowance was $236 thousand, with $50 thousand related to accounts receivable and $186 thousand related to sales returns. We review these allowance accounts periodically and adjust them accordingly for current conditions.
Long-lived assets
Property and equipment are stated at cost and include expenditures for additions and major improvements. Expenditures for repairs and maintenance are charged to operations as incurred. We use the straight-line method of depreciation over the estimated useful lives of the related assets (generally two to fifteen years) for financial reporting purposes. Accelerated methods of depreciation are used for federal income tax purposes. When assets are sold or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in the Consolidated Statement of Operations. Refer to Note 5,6, “Property and Equipment,” included in Item 8 of this Annual Report for additional information.
Long-lived assets are reviewed for impairment whenever events or circumstances indicate the carrying amount may not be recoverable. Events or circumstances that would result in an impairment review primarily include operations reporting losses, a significant change in the use of an asset, or the planned disposal or sale of the asset. The asset would be considered impaired when the future net undiscounted cash flows generated by the asset are less than its carrying value. An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value, as determined by quoted market prices (if available) or the present value of expected future cash flows. At December 31, 2017 and 2016, we recorded aan impairment loss on the impairment of $0.9 million related to our surface mount technology equipment. Due to the specialized nature of this equipment we were not able to find a buyer for this equipment in 2017. As a result, we re-evaluated the carrying value of the equipment and software compared to its fair value and recorded an additional impairment loss of $0.2 million and $0.9 million, respectively.as of December 31, 2017. We completed the sale of this equipment in the first quarter of 2018. Refer to Note 6, “Property and Equipment,” included in Item 8 of this Annual Report for additional information.
Valuation of inventories
We state inventories at the lower of standard cost (which approximates actual cost determined using the first-in-first-out method) or net realizable value. We establish provisions for excess and obsolete inventories after evaluation of historical sales, current economic trends, forecasted sales, product lifecycles, and current inventory levels. During 2017, we implemented a strategic sales initiative to sell certain excess inventory that had previously been written-downwritten down in conjunction with our excess inventory reserve analysis in prior years, as required by U.S. GAAP. This initiative resulted in a net reduction of our excess inventory reserves of $1.4 million in 2017. During 2016 and 2015,2018, due to the introduction of new products and technological advancements, we charged $3.3 million and $1.7 million, respectively,$17 thousand to cost of sales from continuing operations for excess and obsolete inventories. During 2019, due to efforts to sell excess and obsolete inventory and better management of inventory orders, we realized a net reduction of our excess inventory reserves of $567 thousand. Adjustments to our estimates, such as forecasted sales and expected product lifecycles, could harm our operating results and financial position. Refer to Note 5, “Inventories,” included in Item 8 of this Annual Report for additional information.
Accounting for income taxes
As part of the process of preparing the Consolidated Financial Statements, we are required to estimate our income tax liability in each of the jurisdictions in which we do business. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as deferred revenues, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheets. We then assess the likelihood of the deferred tax assets being recovered from future taxable income and, to the extent we believe it is more likely than not that the deferred tax assets will not be recovered, or is unknown, we establish a valuation allowance.
Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. At December 31, 20172019 and 2016,2018, we have recorded a full
valuation allowance against our deferred tax assets in the United States due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward. The valuation allowance is based upon our estimates of taxable income by jurisdiction and the period over which our deferred tax assets will be recoverable. In considering the need for a valuation allowance, we assess all evidence, both positive and negative, available to determine whether all or some portion of the deferred tax assets will not be realized. Such evidence includes, but is not limited to, recent earnings history, projections of future income or loss, reversal patterns of existing taxable and deductible temporary differences, and tax planning strategies. We continue to evaluate the need for a valuation allowance on a quarterly basis.
At December 31, 2017,2019, we had net operating loss carry-forwards of approximately $91.8$108.8 million for federal income tax purposes ($64.5 million for state and local income tax purposes.purposes). However, due to changes in our capital structure, approximately $37.3$54.5 million of this amountthe $108.8 million is available after the application of IRC Section 382 limitations. As a result of the Act, net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income. These net operating loss carry-forwards can no longer be carried back, but they can be carried forward indefinitely. The $8.3 million and $8.7 million in federal net operating losses generated in 2019 and 2018 will be subject to the new limitations under the Act. If not utilized, thesethe carry-forwards generated prior to December 31, 2017 of $37.3 million will begin to expire in 2021 for federal purposes and have begun to expire for state and local purposes. Please refer to Note 11,12, “Income Taxes,” included in Item 8 of this Annual Report for further information.
Share-based payments
The cost of employee and director stock options and restricted stock units, as well as other share-based compensation arrangements, is reflected in the Consolidated Financial Statements based on the estimated grant date fair value method under the authoritative guidance. Management applies the Black-Scholes option pricing model to options issued to employees and
directors to determine the fair value of stock options and apply judgment in estimating key assumptions that are important elements of the model in expense recognition. These elements include the expected life of the option, the expected stock-price volatility, and expected forfeiture rates. The assumptions used in calculating the fair value of share-based awards under Black-Scholes represent our best estimates, but these estimates involve inherent uncertainties and the application of management judgment. Although we believe the assumptions and estimates we have made are reasonable and appropriate, changes in assumptions could materially impact our reported financial results. Restricted stock units and stock options issued to non-employees are valued based upon the intrinsic value of the award. See Note 10,11, “Stockholders’ Equity,” included in Item 8 of this Annual Report for additional information.
Recently issued accounting pronouncements
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-09, Compensation—Stock Compensation: Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award would require an entity to apply modification accounting. This standard is effective for fiscal years beginning after December 15, 2017. We have evaluated the accounting guidance and determined that there is no material impact to our consolidated financial position or results of operations.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flow. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, but any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The new standard must be adopted retrospectively. We have evaluated the accounting guidance and determined that there is no material impact to our consolidated financial position or results of operations.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice by making eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and will require adoption on a retrospective basis. We have evaluated the accounting guidance and determined that there is no material impact to our consolidated financial position or results of operations.
In June 2016, the FASB issued 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. This standard will be effective for interim and annual periods beginning after December 15, 2019, and will generally require adoption on a modified retrospective basis. We are in the process of evaluating the impact of the standard.Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the current lease accounting requirements. ThisAdditionally, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which simplifies adoption of Topic 842 by allowing an additional transition method that will not require restatement of prior periods and providing a new practical expedient for lessors to avoid separating lease and non-lease components within a contract if certain criteria are met (provisions of which must be elected upon adoption of Topic 842). The new standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months. In addition, this standardIt also requires lessees to disclose certain key information about lease transactions. Upon implementation, a company’san entity’s lease payment obligations will be recognized at their estimated present value along with a corresponding right-of-use asset. Lease expense recognition will be generally consistent with current practice.
The Company adopted this guidance as of January 1, 2019 using the required modified retrospective method with the non-comparative transition option. The Company applied the transitional package of practical expedients allowed by the standard to not reassess the identification, classification and initial direct costs of leases commencing before this ASU’s effective date. The Company also applied the lease term and impairment hindsight transitional practical expedients. The Company has chosen to apply the following accounting policy practical expedients: to not separate lease and non-lease components to new leases as well as existing leases through transition; and the election to not apply recognition requirements of the guidance to short-term leases.
The results for reporting periods beginning on or after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and continue to be reported in accordance with legacy generally accepted accounting principles.
On adoption, we recognized additional operating lease liabilities of approximately $2.9 million as of January 1, 2019, with corresponding right-of-use assets based on the present value of the remaining minimum rental payments for our existing operating leases. The operating lease right-of-use assets recorded upon adoption were offset by the carrying value of liabilities previously recorded under Accounting Standards Codification (“ASC”) Topic 420, Exit or Disposal Cost Obligations (“Topic
420”) and impairment charges totaling $0.3 million and $0.2 million, respectively. Refer to Note 4, “Leases,” included in Item 8 of this Annual Report for additional disclosures relating to the Company’s leasing arrangements.
Recently issued accounting pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-15, Intangibles--Goodwill and Other--Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs in a cloud computing service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. This standard will beis effective for interim and annual periods beginning after December 15, 2018, and will require2019. We do not expect the adoption of this guidance to have a significant impact on a modified retrospective basis. We are in the process of evaluating the impact of the standard.
In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which amends certain aspects of the recognition, measurement, presentation and disclosure of financial instruments. This amendment requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under the equity method of accounting or those that result in the consolidation of the investee). This standard will be effective for interim and annual periods beginning after December 15, 2017, and will require adoption on a prospective basis with a cumulative-effect adjustment to the beginning balance sheet. We have evaluated the accounting guidance and determined that there is no material impact to our consolidated financial position, or results of operations.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended by ASU 2015-14, 2016-08, 2016-10, 2016-12, and 2016-20, which is a comprehensive revenue recognition standard which supersedes nearly all of the existing revenue recognition guidance under U.S. GAAP. This standard requires an entity to recognize revenue when it transfers promised goodsoperations, or services to customers in amounts that reflect the consideration the entity expects forcash flows.
receive in exchange for those goods or services. Entities will need to use more judgments and estimates than under the current guidance, including estimating the amount of variable revenue to recognize for each performance obligation. Additional disclosures regarding the nature, amount, and timing of revenues and cash flows from contracts will also be required. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period, using either a full retrospective or a modified retrospective approach. We will adopt the standard on January 1, 2018, as required, using the modified retrospective approach. We have evaluated the accounting guidance and determined that there is no material impact to our consolidated financial position or results of operations, as our revenue arrangements generally consist of a single performance obligation to transfer promised goods. We continue to evaluate the impact the guidance in this ASU will have on our disclosures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
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ReportReports of Independent Registered Public Accounting FirmFirms | |
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Consolidated Balance Sheets as of December 31, 20172019 and 20162018 | |
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Consolidated Statements of Operations for the years ended December 31, 2017, 2016,2019, 2018, and 20152017 | |
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Consolidated Statements of Comprehensive (Loss) IncomeLoss for the years ended December 31, 2017, 2016,2019, 2018, and 20152017 | |
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Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016,2019, 2018, and 20152017 | |
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Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016,2019, 2018, and 20152017 | |
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| Notes to Consolidated Financial Statements | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
Energy Focus, Inc.
Solon, Ohio
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Energy Focus, Inc. (the “Company”) as of December 31, 2019, the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2019, and the related notes and Schedule II (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Continuation as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring losses from operations and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Change in Accounting Method Related to Leases
As discussed in Notes 2 and 4 to the consolidated financial statements, the Company has changed its method for accounting for leases as of January 1, 2019 due to the adoption of ASU No. 2016-02, Leases, as amended.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ GBQ Partners, LLC
We have served as the Company's auditor since 2019.
Columbus, Ohio
March 24, 2020
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Energy Focus, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheetssheet of Energy Focus, Inc. and its subsidiaries (collectively the Company)(the “Company”) as of December 31, 2017 and 2016,2018, the related consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the years in the three-yeartwo-year period ended December 31, 2017,2018, and the related notes and schedule appearing under Schedule II (collectively referred to as the financial statements)“financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016,2018 and the results of its operations and its cash flows for each of the years in the three-yeartwo-year period ended December 31, 2017,2018, in conformity with accounting principles generally accepted in the United States of America.
Continuation as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring losses from operations that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)(“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2009.from 2009 to 2019.
/s/ Plante & Moran, PLLC
Cleveland, Ohio
February 21, 2018April 1, 2019
ENERGY FOCUS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(amounts in thousands except share data)
| | | | 2017 | | 2016 | 2019 | | 2018 |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 10,761 |
| | $ | 16,629 |
| |
| Trade accounts receivable, less allowances of $42 and $236, respectively | 3,595 |
| | 5,640 |
| |
| Cash | | $ | 350 |
| | $ | 6,335 |
|
| Trade accounts receivable, less allowances of $28 and $33, respectively | | 2,337 |
| | 2,201 |
|
| Inventories, net | 5,718 |
| | 9,469 |
| 6,168 |
| | 8,058 |
|
| Prepaid and other current assets | 596 |
| | 882 |
| 479 |
| | 1,094 |
|
| Assets held for sale | 225 |
| | — |
| |
| Total current assets | 20,895 |
| | 32,620 |
| 9,334 |
| | 17,688 |
|
| | | | | |
| Property and equipment, net | 1,097 |
| | 2,325 |
| 389 |
| | 610 |
|
| Operating lease, right-of-use asset | | 1,289 |
| | — |
|
| Restructured lease, right-of-use asset | | 322 |
| | — |
|
| Other assets | 159 |
| | 33 |
| 405 |
| | 194 |
|
| Total assets | $ | 22,151 |
| | $ | 34,978 |
| $ | 11,739 |
| | $ | 18,492 |
|
| | | | | | | |
| LIABILITIES | | | | | | |
| Current liabilities: | | | | | | |
| Accounts payable | $ | 1,630 |
| | $ | 3,257 |
| $ | 1,340 |
| | $ | 3,606 |
|
| Accrued liabilities | 992 |
| | 1,676 |
| 179 |
| | 73 |
|
| Accrued legal and professional fees | | 215 |
| | 160 |
|
| Accrued payroll and related benefits | | 360 |
| | 435 |
|
| Accrued sales commissions | | 32 |
| | 115 |
|
| Accrued severance | | 7 |
| | 188 |
|
| Accrued restructuring | | 24 |
| | 156 |
|
| Accrued warranty reserve | | 195 |
| | 258 |
|
| Deferred revenue | 5 |
| | — |
| 18 |
| | 30 |
|
| Operating lease liabilities | | 550 |
| | — |
|
| Restructured lease liabilities | | 319 |
| | — |
|
| Finance lease liabilities, net of current portion | | 3 |
| | — |
|
| Credit line borrowings | | 715 |
| | 2,219 |
|
| Convertible notes | | 1,700 |
| | — |
|
| Iliad note, net of discount and loan origination fees | | 885 |
| | — |
|
| Total current liabilities | 2,627 |
| | 4,933 |
| 6,542 |
| | 7,240 |
|
| | | | | |
| Other liabilities | 232 |
| | 107 |
| 14 |
| | 200 |
|
| Operating lease liabilities, net of current portion | | 906 |
| | — |
|
| Restructured lease liabilities, net of current portion | | 168 |
| | — |
|
| Finance lease liabilities | | 4 |
| | — |
|
| Iliad note, net of current maturities | | 109 |
| | — |
|
| Total liabilities | 2,859 |
| | 5,040 |
| 7,743 |
| | 7,440 |
|
| | | | | | | |
| STOCKHOLDERS’ EQUITY | | | | | | |
| Preferred stock, par value $0.0001 per share: | | | | | | |
| Authorized: 2,000,000 shares in 2017 and 2016 | | | | |
| Issued and outstanding: no shares in 2017 and 2016 | — |
| | — |
| |
| Authorized: 2,000,000 shares in 2019 and 2018 | | | | |
| Issued and outstanding: no shares in 2019 and 2018 | | — |
| | — |
|
| Common stock, par value $0.0001 per share: | | | | | | |
| Authorized: 30,000,000 shares in 2017 and 2016 | | | | |
| Issued and outstanding: 11,868,896 at December 31, 2017 and 11,710,549 at December 31, 2016 | 1 |
| | 1 |
| |
| Additional paid-in capital | 127,493 |
| | 126,875 |
| |
| Accumulated other comprehensive loss | 2 |
| | (1 | ) | |
| Accumulated deficit | (108,204 | ) | | (96,937 | ) | |
| Total stockholders' equity | 19,292 |
| | 29,938 |
| |
| Total liabilities and stockholders' equity | $ | 22,151 |
| | $ | 34,978 |
| |
| Authorized: 30,000,000 shares in 2019 and 2018 | | | | |
|
| | | | | | | |
| Issued and outstanding: 12,428,418 at December 31, 2019 and 12,090,695 at December 31, 2018 | 1 |
| | 1 |
|
| Additional paid-in capital | 128,872 |
| | 128,367 |
|
| Accumulated other comprehensive loss | (3 | ) | | (1 | ) |
| Accumulated deficit | (124,874 | ) | | (117,315 | ) |
| Total stockholders' equity | 3,996 |
| | 11,052 |
|
| Total liabilities and stockholders' equity | $ | 11,739 |
| | $ | 18,492 |
|
The accompanying notes are an integral part of these consolidated financial statements.
ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
(amounts in thousands except per share data)
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| Net sales | $ | 19,846 |
| | $ | 30,998 |
| | $ | 64,403 |
|
| Cost of sales | 15,025 |
| | 23,321 |
| | 35,111 |
|
| Gross profit | 4,821 |
| | 7,677 |
| | 29,292 |
|
| | | | | | |
| Operating expenses: | | | | | |
| Product development | 2,940 |
| | 3,537 |
| | 2,810 |
|
| Selling, general, and administrative | 11,315 |
| | 20,113 |
| | 16,830 |
|
| Loss on impairment | 185 |
| | 857 |
| | — |
|
| Restructuring | 1,662 |
| | — |
| | — |
|
| Total operating expenses | 16,102 |
| | 24,507 |
| | 19,640 |
|
| (Loss) income from operations | (11,281 | ) | | (16,830 | ) | | 9,652 |
|
| | | | | | |
| Other expense (income): | | | | | |
| Interest expense | 2 |
| | — |
| | 85 |
|
| Other expenses (income) | 99 |
| | 18 |
| | (53 | ) |
| | | | | | |
| (Loss) income from continuing operations before income taxes | (11,382 | ) | | (16,848 | ) | | 9,620 |
|
| (Benefit from) provision for income taxes | (115 | ) | | 27 |
| | 149 |
|
| Net (loss) income from continuing operations | $ | (11,267 | ) | | $ | (16,875 | ) | | $ | 9,471 |
|
| | | | | | |
| Discontinued operations: | | | | | |
| Loss from discontinued operations | — |
| | — |
| | (167 | ) |
| Loss on sale of discontinued operations | — |
| | (12 | ) | | (534 | ) |
| | | | | | |
| (Loss) income from discontinued operations before income taxes | — |
| | (12 | ) | | (701 | ) |
| Benefit from income taxes | — |
| | — |
| | (10 | ) |
| (Loss) from discontinued operations | $ | — |
| | $ | (12 | ) | | $ | (691 | ) |
| | | | | | |
| Net (loss) income | $ | (11,267 | ) | | $ | (16,887 | ) | | $ | 8,780 |
|
| | | | | | |
| Net (loss) income per share - basic: | | | | | |
| Net (loss) income from continuing operations | $ | (0.95 | ) | | $ | (1.45 | ) | | $ | 0.91 |
|
| Net loss from discontinued operations | — |
| | — |
| | (0.07 | ) |
| Net (loss) income | $ | (0.95 | ) | | $ | (1.45 | ) | | $ | 0.84 |
|
| | | | | | |
| Net (loss) income per share - diluted: | | | | | |
| Net (loss) income from continuing operations | $ | (0.95 | ) | | $ | (1.45 | ) | | $ | 0.88 |
|
| Net loss from discontinued operations | $ | — |
| | $ | — |
| | $ | (0.06 | ) |
| Net (loss) income | $ | (0.95 | ) | | $ | (1.45 | ) | | $ | 0.82 |
|
| | | | | | |
| Weighted average common shares outstanding: | | | | | |
| Basic | 11,806 |
| | 11,673 |
| | 10,413 |
|
| Diluted | 11,806 |
| | 11,673 |
| | 10,752 |
|
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Net sales | $ | 12,705 |
| | $ | 18,107 |
| | $ | 19,846 |
|
| Cost of sales | 10,731 |
| | 14,695 |
| | 15,025 |
|
| Gross profit | 1,974 |
| | 3,412 |
| | 4,821 |
|
| | | | | | |
| Operating expenses: | | | | | |
| Product development | 1,284 |
| | 2,597 |
| | 2,940 |
|
| Selling, general, and administrative | 7,449 |
| | 9,789 |
| | 11,315 |
|
| Loss on impairment | — |
| | — |
| | 185 |
|
| Restructuring | 196 |
| | 111 |
| | 1,662 |
|
| Total operating expenses | 8,929 |
| | 12,497 |
| | 16,102 |
|
| Loss from operations | (6,955 | ) | | (9,085 | ) | | (11,281 | ) |
| | | | | | |
| Other expenses: | | | | | |
| Interest expense | 317 |
| | 8 |
| | 2 |
|
| Other expenses | 91 |
| | 7 |
| | 99 |
|
| | | | | | |
| Loss from operations before income taxes | (7,363 | ) | | (9,100 | ) | | (11,382 | ) |
| Provision for (benefit from) income taxes | 10 |
| | 11 |
| | (115 | ) |
| Net loss | $ | (7,373 | ) | | $ | (9,111 | ) | | $ | (11,267 | ) |
| | | | | | |
| Net loss per share - basic and diluted: | | | | | |
| Net loss | $ | (0.60 | ) | | $ | (0.76 | ) | | $ | (0.95 | ) |
| | | | | | |
| Weighted average common shares outstanding: | | | | | |
| Basic and diluted | 12,309 |
| | 11,997 |
| | 11,806 |
|
The accompanying notes are an integral part of these consolidated financial statements.
ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOMELOSS
FOR THE YEARS ENDED DECEMBER 31,
(amounts in thousands)
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| Net (loss) income | $ | (11,267 | ) | | $ | (16,887 | ) | | $ | 8,780 |
|
| | | | | | |
| Other comprehensive (loss) income: | | | | | |
| Foreign currency translation adjustments | 3 |
| | (1 | ) | | (469 | ) |
| Reclassification of foreign currency translation adjustments | — |
| | — |
| | 469 |
|
| Comprehensive (loss) income | $ | (11,264 | ) | | $ | (16,888 | ) | | $ | 8,780 |
|
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Net loss | $ | (7,373 | ) | | $ | (9,111 | ) | | $ | (11,267 | ) |
| | | | | | |
| Other comprehensive (loss) income: | | | | | |
| Foreign currency translation adjustments | (2 | ) | | (3 | ) | | 3 |
|
| Comprehensive loss | $ | (7,375 | ) | | $ | (9,114 | ) | | $ | (11,264 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2017, 2016,2019, 2018, AND 20152017
(amounts in thousands)
| | | | | | | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
Income | | | | | | | | | Additional
Paid-in
Capital | | Accumulated
Other
Comprehensive
(Loss) Income | | | | |
| | Common Stock | Accumulated
Deficit | | Common Stock | Accumulated
Deficit | |
| | Shares | | Amount | Total | | Shares | | Amount | Total | |
| Balance at December 31, 2014 | 9,424 |
| | $ | 1 |
| | $ | 98,133 |
| | $ | 469 |
| | $ | (88,830 | ) | | $ | 9,773 | |
| | | | | | | | | | | | | |
| Issuance of common stock under registered follow-on offering, net | 1,500 |
| | | | 23,574 |
| | | | | | 23,574 |
| |
| Issuance of common stock under employee stock option and stock purchase plans | 77 |
| | | | 346 |
| | | | | | 346 |
| |
| Stock-based compensation | 10 |
| | | | 813 |
| | | | | | 813 |
| |
| Warrants exercised | 638 |
| | | | 2,503 |
| | | | | | 2,503 |
| |
| Reclassification of foreign currency adjustments | | | | | | | (469 | ) | | | | (469 | ) | |
| Net income | | | | | | | | | 8,780 |
| | 8,780 |
| |
| Balance at December 31, 2015 | 11,649 |
| | $ | 1 |
| | $ | 125,369 |
| | $ | — |
| | $ | (80,050 | ) | | $ | 45,320 |
| |
| | | | | | | | | | | | | |
| Issuance of common stock under employee stock option and stock purchase plans | 113 |
| | | | $ | 455 |
| | | | | | $ | 455 |
| |
| Common stock withheld to satisfy exercise price and income tax withholding on option exercises | (51 | ) | | | | $ | (309 | ) | | | | | | $ | (309 | ) | |
| Stock-based compensation | | | | | $ | 1,360 |
| | | | | | $ | 1,360 |
| |
| Foreign currency translation adjustment | | | | | | | $ | (1 | ) | | | | $ | (1 | ) | |
| Net loss | | | | | | | | | $ | (16,887 | ) | | $ | (16,887 | ) | |
| Balance at December 31, 2016 | 11,711 |
| | $ | 1 |
| | $ | 126,875 |
| | $ | (1 | ) | | $ | (96,937 | ) | | $ | 29,938 |
| 11,711 |
| | $ | 1 |
| | $ | 126,875 |
| | $ | (1 | ) | | $ | (96,937 | ) | | $ | 29,938 |
|
| | | | | | | | | | | | | |
| Issuance of common stock under employee stock option and stock purchase plans | 173 |
| | | | $ | 130 |
| | | | | | $ | 130 |
| 173 |
| | — |
| | 130 |
| | — |
| | — |
| | 130 |
|
| Common stock withheld in lieu of income tax withholding on vesting of restricted stock units | (15 | ) | | | | $ | (49 | ) | | | | | | $ | (49 | ) | (15 | ) | | — |
| | (49 | ) | | — |
| | — |
| | (49 | ) |
| Stock-based compensation | | | | | $ | 807 |
| | | | | | $ | 807 |
| — |
| | — |
| | 807 |
| | — |
| | — |
| | 807 |
|
| Stock-based compensation reversal | | | | | $ | (270 | ) | | | | | | $ | (270 | ) | — |
| | — |
| | (270 | ) | | — |
| | — |
| | (270 | ) |
| Foreign currency translation adjustment | | | | | | | $ | 3 |
| | | | $ | 3 |
| — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
|
| Net loss | | | | | | | | | $ | (11,267 | ) | | $ | (11,267 | ) | — |
| | — |
| | — |
| | — |
| | (11,267 | ) | | (11,267 | ) |
| Balance at December 31, 2017 | 11,869 |
| | $ | 1 |
| | $ | 127,493 |
| | $ | 2 |
| | $ | (108,204 | ) | | $ | 19,292 |
| 11,869 |
| | $ | 1 |
| | $ | 127,493 |
| | $ | 2 |
| | $ | (108,204 | ) | | $ | 19,292 |
|
| Issuance of common stock under employee stock option and stock purchase plans | | 249 |
| | — |
| | 28 |
| | — |
| | — |
| | 28 |
|
| Common stock withheld in lieu of income tax withholding on vesting of restricted stock units | | (27 | ) | | — |
| | (62 | ) | | — |
| | — |
| | (62 | ) |
| Stock-based compensation | | — |
| | — |
| | 908 |
| | — |
| | — |
| | 908 |
|
| Foreign currency translation adjustment | | — |
| | — |
| | — |
| | (3 | ) | | — |
| | (3 | ) |
| Net loss | | — |
| | — |
| | — |
| | — |
| | (9,111 | ) | | (9,111 | ) |
| Balance at December 31, 2018 | | 12,091 |
| | $ | 1 |
| | $ | 128,367 |
| | $ | (1 | ) | | $ | (117,315 | ) | | $ | 11,052 |
|
| Adjustment to beginning accumulated deficit upon adoption of Topic 842 | | — |
| | — |
| | — |
| | — |
| | (186 | ) | | (186 | ) |
| Issuance of common stock under employee stock option and stock purchase plans | | 387 |
| | — |
| | 5 |
| | — |
| | — |
| | 5 |
|
| Common stock withheld in lieu of income tax withholding on vesting of restricted stock units | | (50 | ) | | — |
| | (116 | ) | | — |
| | — |
| | (116 | ) |
| Stock-based compensation | | — |
| | — |
| | 616 |
| | — |
| | — |
| | 616 |
|
| Foreign currency translation adjustment | | — |
| | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
| Net loss | | — |
| | — |
| | — |
| | — |
| | (7,373 | ) | | (7,373 | ) |
| Balance at December 31, 2019 | | 12,428 |
|
| $ | 1 |
|
| $ | 128,872 |
|
| $ | (3 | ) |
| $ | (124,874 | ) |
| $ | 3,996 |
|
The accompanying notes are an integral part of these consolidated financial statements.
ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
(amounts in thousands)
| | | | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities: | | | | | | | | | | |
| Net (loss) income | $ | (11,267 | ) | | $ | (16,887 | ) | | $ | 8,780 |
| |
| Loss from discontinued operations | $ | — |
| | $ | (12 | ) | | $ | (691 | ) | |
| (Loss) income from continuing operations | $ | (11,267 | ) | | $ | (16,875 | ) | | $ | 9,471 |
| |
| Adjustments to reconcile net (loss) income to net cash from operating activities: | | | | | | |
| Net loss | | $ | (7,373 | ) | | $ | (9,111 | ) | | $ | (11,267 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | |
| Loss on impairment | 185 |
| | 857 |
| | — |
| — |
| | — |
| | 185 |
|
| Depreciation | 681 |
| | 805 |
| | 266 |
| 326 |
| | 522 |
| | 681 |
|
| Stock-based compensation | 807 |
| | 1,360 |
| | 813 |
| 616 |
| | 908 |
| | 807 |
|
| Stock-based compensation reversal | (270 | ) | | — |
| | — |
| — |
| | — |
| | (270 | ) |
| Provision for doubtful accounts receivable | (194 | ) | | 156 |
| | 39 |
| (5 | ) | | (9 | ) | | (194 | ) |
| Provision for slow-moving and obsolete inventories | (1,400 | ) | | 3,281 |
| | 1,739 |
| 14 |
| | 17 |
| | (1,400 | ) |
| Provision for warranties | (157 | ) | | 170 |
| | 255 |
| 78 |
| | 51 |
| | 196 |
|
| Amortization of discounts on the Iliad Note | | 6 |
| | — |
| | — |
|
| Amortization of loan origination fees | — |
| | — |
| | 40 |
| 102 |
| | 4 |
| | — |
|
| Loss (gain) on dispositions of property and equipment | 203 |
| | 38 |
| | 3 |
| |
| Loss on dispositions of property and equipment | | 24 |
| | 2 |
| | 203 |
|
| Change in operating assets and liabilities: | | | | | | | | | | |
| Accounts receivable | 2,240 |
| | 4,313 |
| | (7,493 | ) | (131 | ) | | 1,403 |
| | 2,240 |
|
| Inventories | 5,151 |
| | (5,018 | ) | | (2,602 | ) | 1,876 |
| | (2,356 | ) | | 5,151 |
|
| Prepaid and other assets | 161 |
| | (123 | ) | | 146 |
| 611 |
| | (538 | ) | | 161 |
|
| Accounts payable | (1,759 | ) | | (4,035 | ) | | 135 |
| (2,214 | ) | | 2,047 |
| | (1,759 | ) |
| Accrued and other liabilities | (260 | ) | | (1,389 | ) | | 1,674 |
| (542 | ) | | 240 |
| | (613 | ) |
| Deferred revenue | 5 |
| | (93 | ) | | (40 | ) | (12 | ) | | 25 |
| | 5 |
|
| Total adjustments | 5,393 |
| | 322 |
| | (5,025 | ) | 749 |
| | 2,316 |
| | 5,393 |
|
| Net cash (used in) provided by operating activities | (5,874 | ) | | (16,553 | ) | | 4,446 |
| |
| Net cash used in operating activities | | (6,624 | ) | | (6,795 | ) | | (5,874 | ) |
| | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | |
| Acquisitions of property and equipment | (162 | ) | | (1,624 | ) | | (2,242 | ) | (132 | ) | | (57 | ) | | (162 | ) |
| Proceeds from the sale of property and equipment | 97 |
| | 27 |
| | — |
| 3 |
| | 246 |
| | 97 |
|
| Net cash used in investing activities | (65 | ) | | (1,597 | ) | | (2,242 | ) | |
| Net cash (used in) provided by investing activities | | (129 | ) | | 189 |
| | (65 | ) |
| | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | |
| Proceeds from warrants exercised | — |
| | — |
| | 2,503 |
| |
| Proceeds from issuances of common stock, net | — |
| | — |
| | 23,574 |
| |
| Proceeds from exercise of stock options and purchases through employee stock purchase plan | 130 |
| | 455 |
| | 346 |
| — |
| | 28 |
| | 130 |
|
| Principal payments under finance lease obligations | | (3 | ) | | — |
| | — |
|
| Common stock withheld in lieu of income tax withholding on vesting of restricted stock units | (49 | ) | | — |
| | — |
| (110 | ) | | (62 | ) | | (49 | ) |
| Common stock withheld to satisfy exercise price and income tax withholding on option exercises | — |
| | (309 | ) | | — |
| |
| Payments on other borrowings | — |
| | — |
| | (13 | ) | |
| Net (repayments) proceeds from credit line borrowings | — |
| | — |
| | (453 | ) | |
| Loan origination fees | | (208 | ) | | — |
| | — |
|
| Proceeds from the Iliad Note | | 1,115 |
| | — |
| | — |
|
| Proceeds from convertible notes | | 1,700 |
| | — |
| | — |
|
| Net (payments on) proceeds from credit line borrowings | | (1,400 | ) | | 2,219 |
| | — |
|
| Net cash provided by financing activities | 81 |
| | 146 |
| | 25,957 |
| 1,094 |
| | 2,185 |
| | 81 |
|
| | | | | | | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | (10 | ) | | 5 |
| | — |
| |
| Effect of exchange rate changes on cash | | 16 |
| | (5 | ) | | (10 | ) |
| | | | | | | | | | | |
| Net cash (used in) provided by continuing operations | (5,868 | ) | | (17,999 | ) | | 28,161 |
| |
(continued on the following page)
The accompanying notes are an integral part of these consolidated financial statements.
ENERGY FOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31,
(amounts in thousands)
|
| | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| Cash flows of discontinued operations: | | | | | |
| Operating cash flows, net | — |
| | (12 | ) | | (691 | ) |
| Investing cash flows, net | — |
| | — |
| | 181 |
|
| Financing cash flows, net | — |
| | — |
| | (446 | ) |
| Net cash used in discontinued operations | — |
| | (12 | ) | | (956 | ) |
| | | | | | |
| Net (decrease) increase in cash and cash equivalents | (5,868 | ) | | (18,011 | ) | | 27,205 |
|
| Cash and cash equivalents, beginning of year | 16,629 |
| | 34,640 |
| | 7,435 |
|
| Cash and cash equivalents, end of year | $ | 10,761 |
| | $ | 16,629 |
| | $ | 34,640 |
|
| | | | | | |
| Classification of cash and cash equivalents: | | | | | |
| Cash and cash equivalents | $ | 10,419 |
| | $ | 16,287 |
| | $ | 34,527 |
|
| Restricted cash held | 342 |
| | 342 |
| | 113 |
|
| Cash and cash equivalents, end of year | $ | 10,761 |
| | $ | 16,629 |
| | $ | 34,640 |
|
| | | | | | |
| Supplemental information: | | | | | |
| Cash paid in year for interest | $ | 2 |
| | $ | 5 |
| | $ | 84 |
|
| Cash paid in year for income taxes | $ | 14 |
| | $ | 51 |
| | $ | 200 |
|
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Net decrease in cash and restricted cash | (5,643 | ) | | (4,426 | ) | | (5,868 | ) |
| Cash and restricted cash, beginning of year | 6,335 |
| | 10,761 |
| | 16,629 |
|
| Cash and restricted cash, end of year | $ | 692 |
| | $ | 6,335 |
| | $ | 10,761 |
|
| | | | | | |
| Classification of cash and restricted cash: | | | | | |
| Cash | $ | 350 |
| | $ | 6,335 |
| | $ | 10,761 |
|
| Restricted cash held in other assets | 342 |
| | — |
| | — |
|
| Cash and restricted cash | $ | 692 |
| | $ | 6,335 |
| | $ | 10,761 |
|
| | | | | | |
| Supplemental information: | | | | | |
| Cash paid in year for interest | $ | 215 |
| | $ | 4 |
| | $ | 2 |
|
| Cash paid in year for income taxes | $ | 15 |
| | $ | 7 |
| | $ | 14 |
|
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF OPERATIONS
Energy Focus, Inc. and its subsidiary engageengages in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems.systems and controls. We operate in a single industry segment, developingdevelop, market and selling oursell high quality energy-efficient light-emitting diode (“LED”) lighting products intoand controls in the general commercial industrial and military maritime markets.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 become a trustedbe the retrofit technology and market leader for the most demanding applications where performance, quality and health are considered paramount. We specialize in the LED lighting retrofit market by replacing fluorescent, lamps in institutional buildings and high-intensity discharge (“HID”) lighting and other types of lamps in low-bay and high-bayinstitutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military tubular LED (“TLED”) products.and other LED products and controls.
OverThe LED lighting industry has changed dramatically over the past fewseveral years due to increasing commoditization, competition and price erosion. We have been experiencing these industry forces in both our military business since 2016 and in our commercial segment, where we once commanded significant price premiums for our flicker-free TLEDs with primarily 10-year warranties. Since April 2019, we have exited non-core businessesfocused on redesigning our products for lower costs and consolidating our supply chain for stronger purchasing power where appropriate in order to focusprice our products more competitively. Despite these efforts, on TLED products, starting with the salepricing of our pool lightinglegacy products businessremains at a premium to the competitive range and we expect aggressive pricing actions and commoditization to continue to be a headwind until our more differentiated new products ramp in 2013. During 2015 we exited our turnkey solutions business operated by our subsidiary,volume. These trends are not unique to Energy Focus as evidenced by the increasing number of industry peers facing challenges, exiting LED Solutions, LLC (“EFLS”),lighting, selling assets and exitedeven going out of business. In addition to continuous, scheduled cost reductions, our United Kingdom business throughstrategy to combat these trends it to move up the salevalue chain, with more innovative and differentiated products and solutions that offer greater, distinct value to our customers. Two specific examples of Crescent Lighting Limited (“CLL”)these more innovated and differentiated products we have recently developed include the RedCap™, our wholly-owned subsidiary. Asemergency backup battery integrated TLED, and EnFocus™, our new dimmable/tunable lighting and control platform that we are launching in 2020. We do believe our revamped go-to-market strategy that focuses more on direct-sales and listens to the voice of the customer has led to better and more impactful product development efforts and will eventually translate into larger addressable market and greater sales growth for us.
Since April 2019 we experienced significant change at the Company. Prior to James Tu returning as Chief Executive Officer and Chairman at the beginning of April 2019, the Company had experienced significant sales declines, operating losses and increases in its inventory. Immediately upon Mr. Tu returning to the Company, significant additional restructuring efforts were undertaken. The Company has since then replaced the entire senior management team, significantly reduced non-critical expenses, minimized the amount of inventory the company was purchasing, dramatically changed the composition of our board of directors, as well as adding very selectively to the executive team by hiring Tod Nestor as President and Chief Financial Officer at the beginning of July. The cost savings efforts undertaken included the Company implementing phased actions to reduce costs to minimize cash usage. Our initial actions included the elimination of certain positions, restructuring of the sales organization and incentive plan, flattening of the senior management team, additional operational streamlining, management compensation reductions, and outsourcing of certain functions including certain elements of supply chain and marketing. In connection with these actions, we recorded severance and related benefits charges of $0.1 million during the three months ended March 31, 2019 and $0.1 million during the second quarter of 2019. These additional restructuring charges primarily related to severance and related benefits charges as a result we have reclassified all net sales and expenses associated with both EFLS and CLL from the Consolidated Statements of Operations and have reported the related net income (loss) as discontinued operations. Please refer to Note 4, “Discontinued Operations,” for more information on our disposition of these businesses.
Given the decline in our military maritime business, the changing competitive landscape of the U.S. Navy sales channel and the timing uncertainty of commercial sales growth, we implemented a restructuring initiativeeliminating three positions during the first quarter of 2017. The intent2019 and nine positions during the second quarter of 2019, as well as costs associated with closing our offices in San Jose, California and Taipei, Taiwan in the restructuring strategy was to maximize operating cost reductions without sacrificing either our new product pipeline or potential long-term revenue growth and returnsecond quarter of 2019. With quarterly sales for the Company leveling off at its low point in the third quarter of 2019 at $2.9 million, we began to profitability. On February 19, 2017,see the Board appointed Dr. Ted Tewksbury to serve asimpact for our relaunch efforts and restructuring of our sales organization in the Company’s Chairmanfourth quarter achieving sales of $3.5 million, or a quarter-over-quarter growth rate of 21.1%. In addition, losses were mitigated through the Board, Chief Executive Officerbetter cost management and President to leada sharp focus on better managing pricing and inventory decisions for the Company’s restructuring efforts. Dr. Tewksbury, who holds M.S. and Ph.D. degrees in Electrical Engineering from MIT, is a well-seasoned semiconductor industry executive with experience in implementing and managing successful business restructurings.last half of 2019.
The restructuring initiative implemented in the first quarter of 2017 included a new management team, an organizational consolidation of management functions in order to streamline and better align the Company into a more focused, efficient, and cost-effective organization. The initiative also included the transition fromhybrid sales model, combining our existing historical direct sales model to an agency drivenwith sales channel strategy in orderagencies to expand our market presence throughout the U.S. During 2017 weUnited States. We closed our New York, New York, Arlington, Virginia and Rochester, Minnesota offices, reduced full-time equivalent headcount by 51 percent51% and significantly decreased operating expenses from 2016 levels (a net reduction of $8.4 million, which includes $1.8 million in offsetting restructuring and impairment charges). As of December 31, 2017, we had effectively transitioned our sales force to an agency driven sales channel, expandingexpanded our sales coverage to the entire U.S.United States through six geographic regions and 30at the time had 50 sales agents. Asagencies, each of which had, on average, 10 agents representing Energy Focus products. During 2017, we also implemented a resultstrategic sales initiative to sell certain excess inventory that had previously been written-down, as required by U.S. GAAP. This initiative resulted in a net reduction of this transition,our excess inventory reserves of $1.4 million in 2017.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 2018, we have substantially expanded from a primarily Midwest focus to build market presencemade significant strides in expanding and awareness in other regions ofdiversifying our new product portfolio. We introduced six new product families, including our commercial fixture family, our double-ended ballast bypass T8 and T5 high-output TLEDs, our Navy retrofit kit, the U.S. with significant demand potential,Invisitube ultra-low EMI TLED and our dimmable industrial downlight. Our new products, including the Northeast, SoutheastRedCap™ emergency battery backup tube, introduced in the fourth quarter of 2017, have gained traction, with sales of new products introduced in the past two years growing from less than one percent of total revenue in the fourth quarter of 2017 to 17% in the fourth quarter of 2018, the highest new product revenue in the last two years. Our legacy luminaire product line, including our floods, waterline security lights, globes and California.berth lights, grew by over 90% from 2017 to 2018 and we saw some return of our military Intellitube® sales as we achieved more competitive pricing through our cost reductions.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of our Company, which are summarized below, are consistent with U.S. GAAP and reflect practices appropriate to the business in which we operate.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods presented. Estimates include, but are not limited to, the establishment of reserves for accounts receivable, sales returns, inventory excess and obsolescence reserve and warranty claims;claims, the useful lives for property equipment, and intangible assets;equipment 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.
Reclassifications
Certain prior year amounts have been reclassified within the Consolidated Financial Statements and related notes thereto, to be consistent with current year presentation.
ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Basis of presentation
The Consolidated Financial Statements include the accounts of the Company and, until the 2013 disposition of our pool products business and the 2015 dispositions of its subsidiaries EFLS in Solon, Ohio, and CLL in the United Kingdom.Company. All significant inter-company balances and transactions have been eliminated. Therefore, the results of operations and financial position of EFLS, CLL, and the pool products business are included in the Consolidated Financial Statements as Discontinued operations and previously reported financial information for the current and prior years have been adjusted. Unless indicated otherwise, the information in the Notes to Consolidated Financial Statements relates to our continuing operations.
Revenue recognition
Revenue is recognized when it is realized or realizable, has been earned, and when all of the following have occurred:
persuasive evidence or an arrangement exists (e.g., aNet sales order, a purchase order, or a sales agreement),
shipment has occurred, with the standard shipping term being F.O.B. ship point, or services provided on a proportional performance basis or installation have been completed,
price to the buyer is fixed or determinable, and
collectability is reasonably assured.
Revenuesinclude revenues from sales of our products are generally recognized uponand shipping based upon the following:
all sales made by us to our customer base are non-contingent, meaning that they are not tied to that customer’s resaleand handling charges, net of products,
standard terms of sale contain shipping terms of F.O.B. ship point, meaning that title and risk of lossestimates for product returns. Revenue is transferred when shipping occurs, and
there are no automatic return provisions that allow the customer to return the product in the event that the product does not sell within a defined timeframe.
Revenues from research and development contracts are recognized primarily on the percentage-of-completion method of accounting. Deferred revenue is recorded for the excess of contract billings overmeasured at the amount of contract costsconsideration 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 profits. Costs in excess of billings, included in prepaid and other assets, are recorded for contract costs in excess of contract billings.
We warrant our products against defects or workmanship issues. We set up allowances for estimated returns, discounts and warranties upon recognition of revenue, and these allowances are adjusted periodically to reflect actual and anticipated returns, discounts and warranty expenses. These allowances are based on past history, historical trends, and contractual terms. The distributors’the customer obtains control over the products. Distributors’ obligations to us are not contingent upon the resale of our productsproducts. 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 suchthe amortization period is less than one year. We do not prohibit revenue recognition.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.
A disaggregation of product net sales is presented in Note 13, “Product and Geographic Information.”
Cash and restricted cash equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 20172019 and 2016,2018, we had $10.8cash and restricted cash of $0.7 million and $16.6$6.3 million, respectively, in cash on deposit with financial institutions located in the United States. AtThe $0.7 million of cash includes restricted cash of $0.3 million which is presented within Other assets in the accompanying Consolidated Balance Sheets at December 31, 2017 and 2016, $0.3 million of the cash balance amount was designated as restricted cash and relates to a standby letter of credit agreement for the lease of our New York, New York office.2019. Please refer to Note 9, “Commitments and Contingencies,3, “Restructuring,” for additional information.
Inventories
We state inventories at the lower of standard cost (which approximates actual cost determined using the first-in-first-out method) or net realizable value. We establish provisions for excess and obsolete inventories after evaluation of historical sales,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
current economic trends, forecasted sales, product lifecycles, and current inventory levels. During 2017, we implemented a strategic sales initiative to sell certain excess inventory that had previously been written-down in conjunction with our excess inventory reserve analysis in prior years, as required by U.S. GAAP. This initiative resulted in a net reduction of our excess inventory reserves of $1.4 million in 2017. During 2016 and 2015,2018, due to the introduction of new products and technological advancements, we charged $3.3 million, and $1.7 million, respectively,$17 thousand to cost of sales from continuing operations for excess and obsolete inventories. During 2019, due to efforts to sell excess and obsolete inventory and better management of inventory orders, we realized a net reduction of $567 thousand of our excess and obsolete reserves. Adjustments to our estimates, such as forecasted sales and expected product lifecycles, could harm our operating results and financial position. Please refer to Note 5, “Inventories,” for additional information.
ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounts receivable
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 servicesproducts. Credit is extended to customers based on an evaluation of the customer’s financial condition and products. Typical credit terms require payment within 30 to 60 days from the dateamounts due are stated at their estimated net realizable value. During the first eleven months of delivery or service. We evaluate2019 we evaluated and monitormonitored the creditworthiness of each customer on a case-by-case basis. However, during December 2019 we transitioned to an account receivables insurance program with a very 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 also providemaintain allowances for sales returns and doubtful accounts receivable to provide for the estimated amount 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 continuing evaluation of our customers’ ongoing requirements and credit risk. We write-off accounts receivable when we deem that theyinternal collection efforts have become uncollectiblebeen 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 major customers or with particular orders. Accordingly, we do not adjust trade accounts receivable for the effects of financing, as we expect the period between the transfer of product to the customer and the receipt of payment from the customer to be in line with our standard payment terms.
Income taxes
As part of the process of preparing the Consolidated Financial Statements, we are required to estimate our income tax liability in each of the jurisdictions in which we do business. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items, such as deferred revenues, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our Consolidated Balance Sheet.Sheets. We then assess the likelihood that theseof the deferred tax assets will bebeing recovered from future taxable income and, to the extent that we believe that it is more likely than not that the deferred tax assets will not be recovered, or is unknown, we establish a valuation allowance.
Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against our deferred tax assets. At December 31, 20172019 and 2016,2018, we hadhave recorded a full valuation allowance recorded against our net deferred tax assets in the United States due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward. The valuation allowance is based upon our estimates of taxable income by jurisdiction and the period over which our deferred tax assets will be recoverable. In considering the need for a valuation allowance, we assess all evidence, both positive and negative, available to determine whether all or some portion of the deferred tax assets will not be realized. Such evidence includes, but is not limited to, recent earnings history, projections of future income or loss, reversal patterns of existing taxable and deductible temporary differences, and tax planning strategies. We continue to evaluate the need for a valuation allowance on a quarterly basis.
At December 31, 2017,2019, we had net operating loss carry-forwards of approximately $91.8$108.8 million for U.S. federal tax purposes ($64.5 million for state, and local income tax purposes.purposes). However, due to changes in our capital structure, approximately $37.3$54.5 million of this amountthe $108.8 million is available to offset future taxable income after the application of IRCthe limitations found under Section 382 limitations. In 2018,of the IRC. As a result of this limitation, in 2019, we expect to have approximately $37.3$54.5 million of the net operating loss carry-forward available for use. As a result of the Act, net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income. These net operating loss carry-forwards can no longer be carried back, but they can be carried forward indefinitely. The $8.3 million and $8.7 million in net operating losses generated in 2019 and 2018, respectively, will be subject to the new limitations under the Act. If not utilized, thesethe carry-forwards
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
generated prior to December 31, 2017 of $37.3 million will begin to expire in 2021 for federal purposes and have begun to expire for state and local purposes. Please refer to Note 11,12, “Income Taxes,” included in Item 8 for additionalfurther information.
The IRC imposes restrictions on the utilization of various carry-forward tax attributes in the event of a change in ownership, as defined by IRC Section 382. During 2015, we completed an IRC Section 382 review and the results of this review indicate ownership changes have occurred which would cause a limitation on the utilization of carry-forward attributes. Our net operating loss carry-forwards and research and development credits are all subject to limitation. Under these tax provisions, the limitation is applied first to any capital losses, next to any net operating losses, and then to any general business credits. The Section 382 limitation is currently estimated to result in the expiration of $54.5 million of net operating loss carry-forwards and $0.3 million of research and development credits. A valuation allowance has been established to reserve for the potential benefits of the remaining net operating loss carry-forwards in the consolidated financial statements to reflect the uncertainty of future taxable income required to utilize available tax loss carry-forwards.
Fair value measurements
Fair value is defined as the price that would be received to sell an asset or would be paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value of financial assets and liabilities are measured on a recurring or non-recurring basis. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs.
We utilize valuation techniques that maximize the use of available market information and generally accepted valuation methodologies. We assess the inputs used to measure fair value using a three-tier hierarchy. The hierarchy indicates the extent to which pricing inputs used in measuring fair value are observable in the market. Level 1 inputs include unadjusted quoted prices for identical assets or liabilities and are the most observable. Level 2 inputs include unadjusted quoted prices for similar assets and liabilities that are either directly or indirectly observable, or other observable inputs such as interest rates, foreign currency exchange rates, commodity rates, and yield curves. Level 3 inputs are not observable in the market and include our own judgments about the assumptions market participants would use in pricing the asset or liability.
The carrying amounts of certain financial instruments including cash, and equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to their short maturities. Based on borrowing rates currently available to us for loans with similar terms, the carrying value of borrowings under our revolving credit facility and convertible note also approximates fair value. Due to the proximity of issuance to December 31, 2019 the fair value of the Iliad Note approximates carrying value.
Long-lived assets
Property and equipment are stated at cost and include expenditures for additions and major improvements. Expenditures for repairs and maintenance are charged to operations as incurred. We use the straight-line method of depreciation over the estimated useful lives of the related assets (generally 2 to 15 years) for financial reporting purposes. Accelerated methods of depreciation are used for federal income tax purposes. When assets are sold or otherwise disposed of, the cost and accumulated
ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
depreciation are removed from the accounts and any gain or loss is reflected in the Consolidated Statement of Operations. Refer to Note 6, “Property and Equipment,” for additional information.
Long-lived assets are reviewed for impairment whenever events or circumstances indicate the carrying amount may not be recoverable. Events or circumstances that would result in an impairment review primarily include operations reporting losses, a significant change in the use of an asset, or the planned disposal or sale of the asset. The asset would be considered impaired when the future net undiscounted cash flows generated by the asset are less than its carrying value. An impairment loss would be recognized based on the amount by which the carrying value of the asset exceeds its fair value, as determined by quoted market prices (if available) or the present value of expected future cash flows. At December 31, 2016, we recorded an impairment loss of $0.9 million related to our surface mount technology equipment. Due to the specialized nature of this equipment we were not able to find a buyer for this equipment in 2017. As a result, we re-evaluated the carrying value of the equipment and software compared to its fair value and recorded an additional impairment loss of $0.2 million as of December 31, 2017. We continue to actively market the equipment and software for sale and expect to complete a sale in the first quarter of 2018. Refer to Note 6, “Property and Equipment,” for additional information.
Certain risks and concentrations
Historically our products were sold through a direct sales model, which included a combination of direct sales employees, electrical and lighting contractors, and distributors. The 2017 restructuring initiative included the transition to an agency driven sales channel strategy in order to expand our market presence throughout the U.S. We performUp until December of 2019, we performed ongoing credit evaluations of our customers, but in December 2019 converted to the use of a third-party accounts receivable insurance and generally do not require collateral.credit assessment company. Although we maintain allowances for potential credit losses that we believe to be adequate, a payment default on a significant sale could materially and adversely affect our operating results and financial condition.condition, although we have mitigated this risk somewhat through the accounts receivable insurance program we now have.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We have certain customers whose net sales individually represented 10 percent10% or more of our total net sales, or whose net trade accounts receivable balance individually represented 10 percent10% or more of our total net trade accounts receivable, as follows:
Consistent with our efforts to diversify our customer base, threeIn 2019, two customers accounted for 48.4 percent,45% of net sales in 2017, comparedand total sales to two customers accounting for 47.4 percentdistributors to the U.S. Navy represented 23% of net sales in 2016.sales. In 2018, one customer, a distributor to the U.S. Navy, accounted for 42% of net sales. In 2017, two commercial customers, a major northeastern Ohio hospital system and a large regional retrofit company located in Texas, accounted for 18.3 percent,18% and 12.8 percent13% of net sales, respectively, while sales to a distributor to the U.S. Navy accounted for 17% of net sales. Total sales to distributors to the U.S. Navy represented 22.0 percent22% of net sales.sales in 2017.
In 2016, two customers,At December 31, 2019, a distributor to the U.S. Navy and a major Northeast Ohio hospital, accounted for 36.5 percent and 10.9 percent9.8% of our net sales, respectively. Including sales pursuant to an indefinite duration, indefinite quantity (“IDIQ”) supply contract we were awarded in 2011, total sales of products for the U.S. Navy accounted for 43.1 percent of net sales. This IDIQ contract expired on August 1, 2016. For 2015, two distributors to the U.S. Navy accounted for approximately 59.0 percent and 15.8 percent of our 2016 net sales. Including sales pursuant to the IDIQ contract, total sales of products for the U.S. Navy accounted for 79.7 percent of our 2015 net sales.
At December 31, 2017, two commercial customers, a major Northeast Ohio hospital systemtrade accounts receivable and a large regional retrofit company located in Texas accounted for 21.0 percent and 17.4 percent41.0% of our net trade accounts receivable, respectively. In addition,receivable. At December 31, 2018, a distributor to the U.S. Navy accounted for 39.0 percent40.4% of our net trade accounts receivable at December 31, 2017. At December 31, 2016, two customers, a distributor to the U.S. Navy and a major Northeast Ohio hospital system, accounted for approximately 63.3 percent and 10.1 percent of our net trade accounts receivable, respectively.receivable.
We require substantial amounts of purchased materials from selected vendors. With specific materials, all of our purchases are from a single vendor. Substantially all of the materials we require are in adequate supply. However, the availability and costs of materials may be subject to change due to, among other things, new laws or regulations, suppliers’ allocation to other purchasers, interruptions in production by suppliers, global health issues such as the corona-virus outbreak, and changes in exchange rates and worldwide price and demand levels. Our inability to obtain adequate supplies of materials for our products at favorable prices could have a material adverse effect on our business, financial position, or results of operations by decreasing our profit margins and by hindering our ability to deliver products to our customers on a timely basis.
Product development
Product development expenses include salaries, contractor and consulting fees, supplies and materials, as well as costs related to other overhead items such as depreciation and facilities costs. Research and development costs are expensed as they are incurred.
ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net (loss) incomeloss per share
Basic (loss) incomeloss per share is computed by dividing the net (loss) incomeloss available to common stockholders by the weighted average number of common shares outstanding for the period, excluding the effects of any potentially dilutive securities. Diluted (loss) incomeloss per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of incremental shares upon exercise of stock options and warrants, unless the effect would be anti-dilutive.
The following table presents a reconciliation of basic and diluted (loss) incomeloss per share computations (in thousands, except per share amounts):
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Numerator: | | | | | |
| (Loss) income from continuing operations | $ | (11,267 | ) | | $ | (16,875 | ) | | $ | 9,471 |
|
| Loss from discontinued operations | — |
| | (12 | ) | | (691 | ) |
| Net (loss) income | $ | (11,267 | ) | | $ | (16,887 | ) | | $ | 8,780 |
|
| | | | | | |
| Denominator: | | | | | |
| Basic weighted average common shares outstanding | 11,806 |
| | 11,673 |
| | 10,413 |
|
| Potential common shares from options and warrants | — |
| | — |
| | 339 |
|
| Diluted weighted average shares | 11,806 |
| | 11,673 |
| | 10,752 |
|
|
| | | | | | | | | | | |
| | For the years ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Numerator: | | | | | |
| Net loss | $ | (7,373 | ) | | $ | (9,111 | ) | | $ | (11,267 | ) |
| | | | | | |
| Denominator: | | | | | |
| Basic and diluted weighted average common shares outstanding | 12,309 |
| | 11,997 |
| | 11,806 |
|
As a result of the net loss we incurred for the years ended December 31, 20172019, 2018 and 2016,2017, options, warrants and convertible securities representing approximately27,883, 59,180 and 60,434 and 139,595 shares of common stock were excluded from the loss per share calculation, respectively, because their inclusion would have been anti-dilutive.
Stock-based compensation
We recognize compensation expense based on the estimated grant date fair value under the authoritative guidance. Management applies the Black-Scholes option pricing model to value stock options issued to employees and directors and applies judgment in estimating key assumptions that are important elements of the model in expense recognition. These elements include the expected life of the option, the expected stock-price volatility, and expected forfeiture rates. Compensation expense is generally amortized on a straight-line basis over the requisite service period, which is generally the vesting period. See Note 10, “Stockholders’11,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
“Stockholders’ Equity,” for additional information. Common stock, stock options, and warrants issued to non-employees that are not part of an equity offering are accounted for under the applicable guidance under ASCAccounting Standards Codification 505-50, “Equity-Based Payments to Non-Employees,” and are generally re-measured at each reporting date until the awards vest.
Foreign currency translation
Our product development center in Taiwan uses local currency as its functional currency. Included within “Accumulated other comprehensive income”loss” within the Consolidated Statements of Stockholders’ Equity is the effect of foreign currency translation related to our Taiwan operations.
Until its disposition, our international subsidiary used its local currency as its functional currency. Assets and liabilities were translated at exchange rates This operation was shut down in 2019, the effect at the balance sheet date and income and expense accounts were translated at average exchange rates during the year. Resulting translation adjustments were recorded directlyof which was not material to “Accumulated other comprehensive income” within the Consolidated Statements of Stockholders’ Equity. With the sale of CLL in August 2015, the translation adjustments recorded within the Consolidated Statements of Stockholders’ Equity in 2015 were reclassified and are recorded as a component of the “Loss on disposal of discontinued operations” within the Consolidated Statements of Operations. See Note 4, “Discontinued Operations,” for additional information.Financial Statements.
Advertising expenses
ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Advertising expenses are charged to operations in the period incurred. They consist of costs for the placement of our advertisements in various media and the costs of demos provided to potential distributors of our products. Advertising expenses from continuing operations were $0.5$0.2 million, $1.4$0.3 million and $0.7$0.5 million for the years ended December 31, 2019, 2018 and 2017, 2016, and 2015, respectively.
Shipping and handling costs
We include shipping and handling revenues in net sales, and shipping and handling costs in cost of sales.
Product warranties
We warrantThrough March 31, 2016, we warranted finished goods against defects in material and workmanship under normal use and service for periods generally between one and five years. Beginning April 1, 2016, we warrant our commercial LEDFL Tubular LED Lamps (excluding Battery Backup TLED), the troffer luminaires, and certain Globe Lights for a period of ten years and all other LED Products for five years. SettlementBeginning in October 2019, LEDFL Tubular LED Lamps (excluding RedCap™) are warranted for ten years and the warranty for all of our other products is five years. Warranty settlement costs consist of actual amounts expensed for warranty, coverage, which are largely a result of the cost of replacement products.products provided to our customers. A liability for the estimated future costs under product warranties is maintained for products outstanding under warranty based on the actual claims incurred to date and is includedthe 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 “Accrued liabilities” inthe future. We continuously review the assumptions related to the adequacy of our Consolidated Balance Sheets.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. The following table summarizes warranty activity for the respective years is as followsperiods presented (in thousands):
| | | | At December 31, | | | | | |
| | 2017 | | 2016 | At December 31, |
| | | | | 2019 | | 2018 |
| Balance at the beginning of the year | $ | 331 |
| | $ | 314 |
| $ | 258 |
| | $ | 174 |
|
| Accruals for warranties issued | 196 |
| | 170 |
| 78 |
| | 51 |
|
| Adjustments to existing warranties | (87 | ) | | (95 | ) | (91 | ) | | 103 |
|
| Settlements made during the year (in kind) | (266 | ) | | (58 | ) | (50 | ) | | (70 | ) |
| Accrued warranty expense | $ | 174 |
| | $ | 331 |
| $ | 195 |
| | $ | 258 |
|
RecentRecently issued accounting standards and pronouncements
In May 2017,August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-15, Intangibles--Goodwill and Other--Internal-Use Software (Subtopic 350-40): Customer’s Accounting Standards Update (“ASU”) No. 2017-09, Compensation—Stock Compensation: Scope of Modification Accountingfor Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which provides guidance about which changes toaligns the terms or conditions ofrequirements for capitalizing implementation costs in a share-based payment award would requirecloud computing service contract with the requirements for capitalizing implementation costs incurred for an entity to apply modification accounting.internal-use software license. This standard iswill be effective for fiscal years beginninginterim and annual periods starting after December 15, 2017.2019. We do not expect the adoption of this guidance to have evaluated the accounting guidance and determined that there is no materiala significant impact toon our consolidated financial position, or results of operations.
In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash, which requires entities to show the changes in the total ofoperations, or cash cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flow. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, but any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. The new standard must be adopted retrospectively. We have evaluated the accounting guidance and determined that there is no material impact to our consolidated financial position or results of operations.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice by making eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and will require adoption on a retrospective basis. We have evaluated the accounting guidance and determined that there is no material impact to our consolidated financial position or results of operations.
In June 2016, the FASB issued 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
rather than incurred losses. This standard will be effective for interim and annual periods beginningstarting after December 15, 2019,2022 and will generally require adoption on a modified retrospective basis. We are in the process of evaluating the impact of the standard.
ENERGY FOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Adoption of recent accounting pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the current lease accounting requirements. ThisAdditionally, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which simplifies adoption of Topic 842 by allowing an additional transition method that will not require restatement of prior periods and providing a new practical expedient for lessors to avoid separating lease and non-lease components within a contract if certain criteria are met (provisions of which must be elected upon adoption of Topic 842). The new standard requires a lessee to record on the balance sheet the assets and liabilities for the rights and obligations created by leases with lease terms of more than 12 months. In addition, this standardIt also requires lessees to disclose certain key information about lease transactions. Upon implementation, an entity’s lease payment obligations will be recognized at their estimated present value along with a corresponding right-of-use asset. Lease expense recognition will be generally consistent with current practice. This standard will be effective for interim and annual periods beginning after December 15, 2018, and will require adoption on a modified retrospective basis. We are in the process of evaluating the impact of the standard.
InThe Company adopted this guidance as of January 2016,1, 2019 using the FASB issued ASU No. 2016-01, Recognitionrequired modified retrospective method with the non-comparative transition option. The Company applied the transitional package of practical expedients allowed by the standard to not reassess the identification, classification and Measurementinitial direct costs of Financial Assetsleases commencing before this ASU’s effective date. The Company also applied the lease term and Financial Liabilities, which amends certain aspectsimpairment hindsight transitional practical expedients. The Company has chosen to apply the following accounting policy practical expedients: to not separate lease and non-lease components to new leases as well as existing leases through transition; and the election to not apply recognition requirements of the recognition, measurement, presentationguidance to short-term leases.
The results for reporting periods beginning on or after January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and disclosure of financial instruments. This amendment requires all equity investmentscontinue to be measured at fair valuereported in accordance with changes in the fair value recognized through net income (other than those accounted for under the equity method oflegacy generally accepted accounting or those that result in the consolidation of the investee). This standard will be effective for interim and annual periods beginning after December 15, 2017, and will require adoption on a prospective basis with a cumulative-effect adjustment to the beginning balance sheet. We have evaluated the accounting guidance and determined that there is no material impact to our consolidated financial position or results of operations.principles.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as amended by ASU 2015-14, 2016-08, 2016-10, 2016-12, and 2016-20, which is a comprehensive revenue recognition standard which supersedes nearly allOn adoption, we recognized additional operating lease liabilities of the existing revenue recognition guidance under U.S. GAAP. This standard requires an entity to recognize revenue when it transfers promised goods or services to customers in amounts that reflect the consideration the entity expects for receive in exchange for those goods or services. Entities will need to use more judgments and estimates than under the current guidance, including estimating the amount of variable revenue to recognize for each performance obligation. Additional disclosures regarding the nature, amount, and timing of revenues and cash flows from contracts will also be required. This ASU is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period, using either a full retrospective or a modified retrospective approach. We will adopt the standardapproximately $2.9 million on January 1, 2018, as required, using2019, with corresponding right-of-use assets based on the modified retrospective approach. We have evaluatedpresent value of the accounting guidanceremaining minimum rental payments for our existing operating leases. The operating lease right-of-use assets recorded upon adoption were offset by the carrying value of liabilities previously recorded under ASC Topic 420, Exit or Disposal Cost Obligations (“Topic 420”) and determined that there is no material impactimpairment charges totaling$0.3 million and $0.2 million, respectively. Refer to our consolidated financial position or results of operations, as our revenue arrangements generally consist of a single performance obligationNote 4, “Leases” below for additional disclosures relating to transfer promised goods. We continue to evaluate the impact the guidance in this ASU will have on our disclosures.Company’s leasing arrangements.
NOTE 3. RESTRUCTURING
In 2016 and 2017, we were not able to sustain the level of sales and profitability recognized in 2015. Due to our financial performance in 20162017, 2018, and 2017,2019, including net losses of $16.9$11.3 million, $9.1 million, and $11.3$7.4 million, respectively, and total cash used of $18.0$5.9 million, $4.4 million, and $5.9$5.6 million, respectively, we believe that substantial doubt about our ability to continue as a going concern existed at December 31, 2016 and 2017.2019.
As a result of such determination, as of December 31, 2016, we evaluated actions to mitigate the substantial doubt about our ability to continue as a going concern. Our evaluation considered both quantitative and qualitative information, including our current financial position and liquid resources, and obligations due or anticipated within the next year. With $16.6 million in cash and no debt obligations as of December 31, 2016, we focused our efforts on reducing our overall operating expenses in an effort to return to profitability. Consequently, in February 2017, we announced a corporate restructuring initiative with a goal of significantly reducing annual operating costs from 2016 levels. The initiative included an organizational consolidation of management and oversight functions in order to streamline and better align the organization into more focused, efficient, and cost-effective reporting relationships, and involved headcount reductions and office closures. This initiative was designed to return the Company to profitability and mitigate the substantial doubt that existed at December 31, 2016 about our ability to continue as a going concern. The restructuring actions taken in 2017 resulted in a net decrease in operating expenses through December 31, 2017 of $8.4 million, including restructuring and asset impairment charges of $1.8 million in 2017 and impairment charges of $0.9 million in 2016.
While the substantial doubt about our ability to continue as a going concern continued to exist at December 31, 2017, we had $10.8 million in cash and no debt obligations at the end of the year. Consequently, considering both quantitative and qualitative information, we continue to believe that the combination of our restructuring actions, current financial position, liquid resources, obligations due or anticipated within the next year, executive reorganization, and implementation of our sales channel strategy will return us to profitability in 2018 and effectively mitigates the substantial doubt about our ability to continue as a going concern.
The actions taken in the first quarter of 2017 included closing our offices in Rochester, Minnesota, New York, New York, and Arlington, Virginia and reducedreducing our staff by 20 employees, primarily located in these offices. During the second quarter of 2017, we fully exited the New York and Arlington facilities and took additional actions to improve our operating efficiencies. These actions reduced our staff by an additional 17 production and administrative employees in our Solon location.
During the year endedThese restructuring actions resulted in a net decrease in operating expenses through December 31, 2017 we recorded netof $8.4 million, including restructuring expenses totaling approximately $1.7and asset impairment charges of $1.8 million, consisting of approximately $0.8 million for severance and related benefits, approximately $0.7 million related to the facility closings, and approximately $0.2$0.1 million primarily related to fixed asset and prepaid expenses write-offs.write-offs and approximately $0.2 million in asset impairment charges.
During the year ended December 31, 2018, we recorded restructuring charges totaling approximately $0.1 million, related to the revision of our initial estimates of the costs and offsetting sublease income and accretion expense for the remaining lease
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
obligation for our former New York, New York and Arlington, Virginia offices. Our continued cost control initiatives in 2018 resulted in an additional net decrease in operating expenses of $3.6 million, which includes restructuring and asset impairment charges of $0.1 million.
Since April 2019 we experienced significant change at the Company. Prior to James Tu returning as Chief Executive Officer and Chairman at the beginning of April 2019, the Company had experienced significant sales declines, operating losses and increases in its inventory. Immediately upon Mr. Tu returning to the Company significant additional restructuring efforts were undertaken. The company has since then replaced the entire senior management team, significantly reduced non-critical expenses, minimized the amount of inventory the company was purchasing, dramatically changed the composition of our board of directors, as well as adding very selectively to the executive team by hiring Tod Nestor as President and Chief Financial Officer at the beginning of July. The cost savings efforts undertaken included the Company implementing phased actions to reduce costs to minimize cash usage. Our initial actions included the elimination of certain positions, restructuring of the sales organization and incentive plan, flattening of the senior management team, additional operational streamlining, management compensation reductions, and outsourcing of certain functions including certain elements of supply chain and marketing. In connection with these actions, we recorded severance and related benefits charges of $0.1 million during the three months ended March 31, 2019 and $0.1 million during the second quarter of 2019. These additional restructuring charges primarily related to severance and related benefits charges as a result of eliminating three positions during the first quarter of 2019 and nine positions during the second quarter of 2019, as well as costs associated with closing our offices in San Jose, California and Taipei, Taiwan in the second quarter of 2019. With quarterly sales for the Company leveling off at its low point in the third quarter of 2019 at $2.9 million, we began to see the impact for our relaunch efforts and restructuring of our sales organization in the fourth quarter achieving sales of $3.5 million, or a quarter-over-quarter growth rate of 21.1%. In addition, losses were mitigated through the better cost management and a sharp focus on better managing pricing and inventory decisions for the last half of 2019.
Our restructuring liabilities consist of one-time termination costs for severance and benefits to former employees and estimated ongoing costs related to long-term operating lease obligations. The recorded value ofobligations, which the termination severance and benefits to employees approximates fair value, as the remaining obligation is based on the arrangements made with the former employees, and these obligations will be completely satisfied in less than 12 months.Company has exited. The recorded value of the ongoing lease obligations is based on the remaining lease term and payment amount, net of estimated sublease income, 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-freerisk free rate that was used to measure the restructuring liabilities initially. The current portion of the ongoing lease obligations isPlease also refer to Note 4, “Leases” as certain amounts formerly included within the caption, “Accrued liabilities” and the long term portion of the ongoing lease obligations comprises the caption, “Other liabilities”below in the Consolidated Balance Sheetsrestructuring reserve as of December 31, 2017. We estimated that we would receive a total of approximately $1.2 million2018, have been reclassified on the balance sheet to be shown netted against the restructured lease, right-of-use asset in sublease payments to offset our remaining lease obligations, which extend until June 2021, of approximately $1.7 million. We expect to incur insignificant additional costs over the remaining life of our lease obligations, but we do not anticipate further major restructuring activities in the near future. accordance with Topic 842.
The following is a reconciliation of the beginning and ending balances of our restructuring liability:
liability as it relates to the 2017 restructuring plan (in thousands):
| | | | Severance and Related Benefits | | Facilities | | Other | | Total | Restructuring Liability |
| Balance at January 1, 2017 | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
| Additions | $ | 770 |
| | $ | 830 |
| | $ | 186 |
| | $ | 1,786 |
| |
| Balance at December 31, 2017 | | $ | 402 |
|
| Accretion of lease obligations | $ | — |
| | $ | 31 |
| | $ | — |
| | $ | 31 |
| 21 |
|
| Adjustment of lease obligations | | | $ | (155 | ) | | $ | — |
| | $ | (155 | ) | 90 |
|
| Write-offs | | | $ | 9 |
| | $ | (95 | ) | | $ | (86 | ) | |
| Payments | $ | (708 | ) | | $ | (375 | ) | | $ | (91 | ) | | $ | (1,174 | ) | (163 | ) |
| Balance at December 31, 2017 | $ | 62 |
| | $ | 340 |
| | $ | — |
| | $ | 402 |
| |
| Balance at December 31, 2018 | | 350 |
|
| Accretion of lease obligations | | 4 |
|
| Reclassification upon adoption of Topic 842 | | (273 | ) |
| Payments | | (43 | ) |
| Balance at December 31, 2019 | | $ | 38 |
|
The following is a reconciliation of the ending balance of our restructuring liability at December 31, 2019 to the balance sheet:
|
| | | |
| | Restructuring Liability |
| Balance at December 31, 2019 | $ | 38 |
|
| Less, short-term restructuring liability | 24 |
|
| Long-term restructuring liability, included in other liabilities | $ | 14 |
|
NOTE 4.DISCONTINUED OPERATIONS
EFLSNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As part of the strategy to align our resources with developing and selling our energy-efficient LED products into the
commercial and military maritime markets, we completed the exit of our turnkey solutions business, operated by EFLS during the third quarter of 2015. During 2014, we shifted our focus away from the turnkey solutions business. We stopped accepting new projects and completed all outstanding solutions-based projects in the first quarter of 2015. As of September 30, 2015, the exit of our turnkey solutions business was complete. Accordingly, the operating results related to EFLS have been included as discontinued operations in the Consolidated Statements of Operations for all periods presented. There were no assets disposed as a result of the disposition, and we did not recognize a gain or loss on disposal or record an income tax expense or benefit. We do not anticipate any significant continuing involvement related to this discontinued operation.
CLL
In August 2015, we sold our wholly-owned United Kingdom subsidiary, CLL. The sale was for nominal consideration under the terms of the agreement. As a result of the transactionrestructuring 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
substantial doubt about our ability to continue as a going concern continues to exist at December 31, 2019.
Since the elimination of this foreign subsidiary consolidated under the equity method of accounting,executive transition on April 1, 2019, we recorded a one-time loss of $44 thousand,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 direct sales strategy, complemented by our marketing outreach campaigns, channel partnerships, and new sales from an e-commerce platform, which included a $469 thousand accumulated other comprehensive income reclassification adjustment for foreign currency translation adjustments. The loss was recordedwe plan to launch in the Consolidated Statementsfirst half of Operations under2020, as well as continuing to apply rigorous and economical discipline in our organization, business processes and policies, supply chain and organizational structure. The restructuring and cost cutting initiatives implemented during 2019 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 caption “Loss on disposallong 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 discontinued operations.” We dointroductions of additional new products, significant competition, and potential volatility given our customer concentration, 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 anticipate any significant continuing involvement relatedlimited to, this discontinued operation.the following:
obtaining financing from traditional or non-traditional investment capital organizations or individuals;
Pool Products Business
On November 26, 2013, we announcedobtaining funding from the sale of our pool productscommon 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 business plan and further reduce our operating costs and headcount, each of which would have a cash purchasematerial 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, restructuring actions, current financial position, liquid resources, obligations due or anticipated within the next year, executive reorganization, development and implementation of an excess inventory plan, and implementation of our product development and sales channel/go-to-market strategy, if adequately executed, will provide us with an ability to finance our operations through 2020 and will mitigate the substantial doubt about our ability to continue as a going concern.
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 $5.2 million. Underour common stock had closed below the terms$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 and is evaluating options to regain compliance.
NOTE 4. LEASES
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 lease in 2022. The lease term consists of the Purchase Agreement, we sold substantially allnon-cancellable period of the assets associatedlease, periods covered by options to extend the lease if the Company is reasonably certain to exercise
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 7.25%, which was the Company’s borrowing rate on the revolving credit agreement signed on December 11, 2018. The weighted average remaining lease term for operating, restructured and finance leases is 2.6 years, 1.5 years, and 2.3 years, respectively.
The Company had two restructured leases with sub-lease components for the pool products businessNew York, New York and Arlington, Virginia offices that were closed in 2017. The New York, New York lease expires in 2021 and the buyer assumed certain related liabilities. In connectionArlington, Virginia lease expired in September 2019. At the “cease use” date in 2017, the Company recorded the present value of the future minimum payments under the leases and costs that continue to be incurred with no economic benefit to the sale, we and the buyerCompany in accordance with Topic 420. The Company entered into a transition services agreement that continued until April 30, 2014, under which we provided services to transitionsub-leases for both offices and included the pool products businessestimated sub-lease payments as an offset to the buyer.remaining lease obligations, as required by Topic 420 at that time. In addition,adopting Topic 842, the Purchase Agreement contains representations, warranties and covenants of us and the buyer and prohibits us from competing with the buyer in the pool business for a period of five years following the closing. The Purchase Agreement also provided for an escrow of $500 thousandcarrying value of the purchase price to secure customary indemnification obligations with respect to our representations, warranties, covenants and other obligations under the Purchase Agreement. Under the termsaforementioned net liabilities has been reclassified as a reduction of the Purchase Agreement,restructured lease, right-of-use asset, which totaled $0.3 million as of January 1, 2019. As part of the first of five $100 thousand scheduled escrow releases commenced on March 25, 2014, and was to continuelease agreement for the New York, New York office, there is $0.3 million in restricted cash in other long-term assets on the 25th dayaccompanying Consolidated Balance Sheets as of eachDecember 31, 2019 which represents collateral against the related Letter of the next four subsequent months.Credit issued as part of this agreement. As of December 31, 20152018, the $0.3 million in restricted cash is included in cash on the Consolidated Balance Sheet.
The restructured leases and 2014, $200 thousandsub-leases were not scoped out of the cash heldrequirements of Topic 842 and were evaluated for impairment in escrow hadaccordance 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 December 31, 2019. The Company continues to carry certain immaterial operating expenses associated with these leases as restructuring liabilities and will continue to accrete those liabilities in accordance with Topic 420, as has been released to us and $300 thousand remaineddone since the cease use date in escrow subject2017.
Due to the resolution of outstanding buyer claims that werecontinued net losses, going concern, and 2019 restructuring actions discussed in Note 3, “Restructuring,” the subject of an arbitration claim filed by the buyer in February 2015. At December 31, 2015, we offset the full escrow amount by the expected costs to settle this claim, as we had reached an agreement in principle with the buyer. On March 18, 2016, a settlement agreement was executedCompany also evaluated its Solon, Ohio operating lease right-of-use asset for this claim and the funds in the escrow account, plus the interest earned on the account, were released to the buyer. The legal fees incurred for the arbitration are included in the loss on disposal of discontinued operations for all periods presented. For additional information on the status of the remaining cash in escrow, please refer to Note 14, “Legal Matters.”
potential impairment under Topic 360. As a result of exiting EFLS and selling CLL andthis evaluation, the pool products businesses, we have reclassified all net sales and expenses associated with this business fromCompany determined that the Consolidated Statements of Operations, and have reported the net (loss) income from those activities as discontinued operations in the Consolidated Statements of Operations for all years presented.
The following table summarizes the components included in loss from discontinued operations in our Consolidated Statements of Operationsoperating lease right-of-use asset for the periods presentedSolon, Ohio operating lease was impaired upon the adoption of Topic 842. Therefore, the Company recorded an impairment of this right-of-use asset of approximately $0.2 million, with a corresponding offset to accumulated deficit as of January 1, 2019.
Components of the operating, restructured and finance lease costs recognized in net loss during the year ended December 31, 2019, were as follows (in thousands): |
| | | |
| | For the year ended December 31, |
| | 2019 |
| Operating lease cost (income) | |
| Sublease income | $ | (100 | ) |
| Lease cost | 628 |
|
| Operating lease cost, net | 528 |
|
| | |
| Restructured lease cost (income) | |
| Sublease income | (403 | ) |
| Lease cost | 385 |
|
| Restructured lease income, net | (18 | ) |
| | |
| Finance lease cost | |
| Interest on lease liabilities | 1 |
|
| Finance lease cost, net | 1 |
|
| | |
| Total lease cost, net | $ | 511 |
|
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| Net sales | $ | — |
| | $ | 1,078 |
|
| Cost of sales | — |
| | 588 |
|
| Gross Profit | — |
| | 490 |
|
| | | | |
| Operating expenses of discontinued operations | — |
| | 657 |
|
| Other expenses | — |
| | — |
|
| Loss on disposal of discontinued operations | (12 | ) | | (534 | ) |
| Loss from discontinued operations before income taxes | (12 | ) | | (701 | ) |
| Benefit from income taxes | — |
| | (10 | ) |
| Loss from discontinued operations | $ | (12 | ) | | $ | (691 | ) |
The following table shows the components of the loss from discontinued operations by business for the periods presented (in thousands):NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Consolidated Balance Sheet information related to the Company’s operating and finance leases as of December 31, 2019 are as follows (in thousands): |
| | | |
| | December 31, |
| | 2019 |
| Operating Leases | |
| Operating lease right-of-use assets | $ | 1,289 |
|
| Restructured lease right-of-use assets | 322 |
|
| Operating lease right-of-use assets, total | 1,611 |
|
| | |
| Operating lease liabilities | 1,480 |
|
| Restructured lease liabilities | 488 |
|
| Operating lease liabilities, total | 1,968 |
|
| | |
| Finance Leases | |
| Property and equipment | 13 |
|
| Allowances for depreciation | (5 | ) |
| Finance lease assets, net | 8 |
|
| | |
| Finance lease liabilities | 6 |
|
| Total finance lease liabilities | $ | 6 |
|
Future minimum lease payments required under operating, restructured and finance leases for each of the years 2020 through 2024 are as follows (in thousands): |
| | | | | | | | | | | | |
| | Operating Leases | Restructured Leases | Restructured Leases Sublease Payments | Finance Lease |
| 2020 | $ | 636 |
| $ | 342 |
| $ | (273 | ) | $ | 3 |
|
| 2021 | 636 |
| 171 |
| (136 | ) | 3 |
|
| 2022 | 328 |
| — |
| — |
| — |
|
| 2023 | 15 |
| — |
| — |
| — |
|
| 2024 | 1 |
| — |
| — |
| — |
|
| Total future undiscounted lease payments | 1,616 |
| 513 |
| (409 | ) | 6 |
|
| Less imputed interest | (136 | ) | (25 | ) | 20 |
| — |
|
| Total lease obligations | $ | 1,480 |
| $ | 488 |
| $ | (389 | ) | $ | 6 |
|
Supplemental cash flow information related to leases for the year ended December 31, 2019, was as follows (in thousands): |
| | | |
| | Year ended December 31, |
| | 2019 |
| Supplemental cash flow information | |
| Cash paid, net, for amounts included in the measurement of lease liabilities: | |
| Operating cash flows from operating leases | $ | 536 |
|
| Operating cash flows from restructured leases | $ | 87 |
|
| Financing cash flows from finance leases | $ | 3 |
|
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2015 |
| CLL | — |
| | (138 | ) |
| EFLS | — |
| | (29 | ) |
| Pool products business | — |
| | — |
|
| Loss from operations of discontinued operations | — |
| | (167 | ) |
| | | | |
| CLL | — |
| | (44 | ) |
| Pool products business | (12 | ) | | (490 | ) |
| Loss on disposal of discontinued operations | (12 | ) | | (534 | ) |
| | | | |
| Loss from discontinued operations before income taxes | (12 | ) | | (701 | ) |
| | | | |
| Benefit from income taxes | — |
| | (10 | ) |
| | | | |
| Loss from discontinued operations | $ | (12 | ) | | $ | (691 | ) |
NOTE 5. INVENTORIES
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 consists of the following (in thousands):
| | | | At December 31, | | | | | |
| | 2017 | | 2016 | At December 31, |
| | | | | 2019 | | 2018 |
| Raw materials | $ | 3,316 |
| | $ | 5,049 |
| $ | 4,064 |
| | $ | 4,041 |
|
| Finished goods | 6,598 |
| | 10,016 |
| 5,749 |
| | 8,229 |
|
| Reserve for excess, obsolete, and slow moving inventories | (4,196 | ) | | (5,596 | ) | |
| Reserve for excess, obsolete, and slow-moving inventories | | (3,645 | ) | | (4,212 | ) |
| Inventories, net | $ | 5,718 |
| | $ | 9,469 |
| $ | 6,168 |
| | $ | 8,058 |
|
During 2017, we2019, management implemented a strategic salespurchasing freeze and cost-cutting measures resulting in lower procurement in the first half of 2019, with only selective and necessary purchases done in the second half of 2019. During the second half of 2019, management negotiated cost reduction terms with suppliers on certain products. This initiative, to sell certain excess inventory that had previously been written-down in conjunction with, oura price adjustment strategy on products we have in excess inventory, reserve analysis in prior years, as required by U.S. GAAP. This initiative resulted in a net reduction of our gross inventory levels and excess inventory reserves of $5.2$1.9 million and $1.4 million, respectively, in 2017.compared to 2018.
During the first half of 2016 we initiated an aggressive inventory procurement plan in order to meet the expected demand based on the commercial sales growth experienced during the first six months of the year. While we did not achieve this level of demand, we had already committed to inventory purchases into the third quarter due to manufacturing and shipment lead times. As a result, our gross inventory levels increased $5.0 million as of December 31, 2016 compared to December 31, 2015. After evaluation of historical sales, current economic trends, forecasted sales, and product lifecycles, we charged $3.3 million to cost of sales from continuing operations for excess, obsolete, and slow moving inventories in 2016 compared to $1.7 million in 2015.
NOTE 6. PROPERTY AND EQUIPMENT
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):
| | | | At December 31, | | | | | |
| | 2017 | | 2016 | At December 31, |
| | | | | 2019 | | 2018 |
| Equipment (useful life 3 - 15 years) | $ | 1,557 |
| | $ | 2,231 |
| $ | 1,297 |
| | $ | 1,511 |
|
| Tooling (useful life 2 - 5 years) | 371 |
| | 863 |
| 203 |
| | 371 |
|
| Vehicles (useful life 5 years) | 47 |
| | 39 |
| 47 |
| | 47 |
|
| Furniture and fixtures (useful life 5 years) | 137 |
| | 170 |
| 137 |
| | 137 |
|
| Computer software (useful life 3 years) | 1,043 |
| | 977 |
| 1,028 |
| | 1,043 |
|
| Leasehold improvements (the shorter of useful life or lease life) | 201 |
| | 256 |
| 211 |
| | 211 |
|
| Finance lease right-of-use asset | | 13 |
| | — |
|
| Construction in progress | 55 |
| | 154 |
| 48 |
| | 55 |
|
| Property and equipment at cost | 3,411 |
| | 4,690 |
| 2,984 |
| | 3,375 |
|
| Less: accumulated depreciation | (2,314 | ) | | (2,365 | ) | (2,595 | ) | | (2,765 | ) |
| Property and equipment, net | $ | 1,097 |
| | $ | 2,325 |
| $ | 389 |
| | $ | 610 |
|
Depreciation expense was $0.7$0.3 million, $0.8$0.5 million, and $0.3$0.7 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively.
During 2015, the Company invested in certain equipment to be used to increase our capabilities and reduce the cost of components used in our domestic manufacturing processes, as many of our sales opportunities were with respect to products made in the U.S. or meeting “Buy American” standards. These opportunities included our military maritime product line, as well as products for use in government-funded facilities, such as military bases, which must comply with certain domestic preference standards. As a result of the decline in 2016 sales as well as our expectation of limited sales of our military Intellitube® product going forward due to new competition for retrofit products for the U.S. Navy, coupled with the current cost of procuring components from our suppliers for such products, versus manufacturing them at a low volume, at December 31, 2016, we re-evaluated the economics of manufacturing versus purchasing such components from our suppliers. We concluded that we would no longer use the equipment and software purchased to conduct this manufacturing and evaluated the carrying value of the equipment and software compared to its fair value and determined that the equipment and software were impaired. Accordingly, we recorded an impairment loss of $0.9 million, to adjust the carrying value of the equipment and software to its net realizable value as of December 31, 2016. Due to the specialized nature of thisthe equipment and software previously used to manufacture MMM products prior to 2017 we were not able to find a buyer for this equipment in 2017. As a result, we re-evaluated the carrying of the equipment and software compared to its fair value and recorded an additional impairment loss of $0.2 million as of December 31,during 2017. We havecompleted the sale of this equipment in the first quarter of 2018, recognizing net proceeds of approximately $0.2 million and a gain of approximately $15 thousand on the sale. The gain on the sale is classified on our Consolidated Statements of Operations under the caption, “Other expenses.”
In 2019, the Company ceased operations of the Taiwan affiliate and closed the Taiwan office. The net carrying value of thisthe property and equipment as “Assets heldof the office was immaterial. There were no impairment charges for sale” in the accompanying Consolidated Balance Sheets as of December 31, 2017.property and equipment during 2019 and 2018.
NOTE 7. ACCRUEDLIABILITIESPREPAID AND OTHER CURRENT ASSETS
Prepaid and other current assets consisted of the following (in thousands):
|
| | | | | | | |
| | At December 31, |
| | 2019 | | 2018 |
| Prepaid insurance | $ | 140 |
| | $ | 100 |
|
| Prepaid expenses | 133 |
| | 94 |
|
| Prepaid rent | 70 |
| | 4 |
|
| Short-term deposits | 126 |
| | 825 |
|
| Other | 10 |
| | 71 |
|
| Total prepaid and other current assets | $ | 479 |
| | 1,094 |
|
Short-term deposits represent down payment amounts paid to suppliers for material purchases. Certain Asian suppliers require us to pay a deposit equal to a certain percentage of the product ordered prior to manufacturing and/or shipping products to us. The short-term debt acquisition costs for 2019 have been netted with Debt.
NOTE 8. ACCRUED LIABILITIES
Accrued current liabilities consisted of the following (in thousands):
|
| | | | | | | |
| | At December 31, |
| | 2017 | | 2016 |
| | | | |
| Accrued payroll and related benefits | $ | 394 |
| | $ | 522 |
|
| Accrued sales commissions and incentives | 124 |
| | 325 |
|
| Accrued warranty expense | 174 |
| | 331 |
|
| Accrued severance and related benefits | — |
| | 328 |
|
| Accrued restructuring - short-term | 170 |
| | — |
|
| Accrued legal and professional fees | 77 |
| | 63 |
|
| Accrued other expenses | 53 |
| | 107 |
|
| Total accrued liabilities | $ | 992 |
| | $ | 1,676 |
|
|
| | | | | | | |
| | At December 31, |
| | 2019 | | 2018 |
| Accrued legal and professional fees | $ | 215 |
| | $ | 160 |
|
| Accrued payroll and related benefits | 360 |
| | 435 |
|
| Accrued sales commissions | 32 |
| | 115 |
|
| Accrued severance | 7 |
| | 188 |
|
| Accrued restructuring | 24 |
| | 156 |
|
| Accrued warranty reserve | 195 |
| | 258 |
|
| Accrued liabilities | 179 |
| | 73 |
|
| Total accrued liabilities | $ | 1,012 |
| | $ | 1,385 |
|
NOTE 8.9. DEBT
Credit facilities
On December 22, 2011,11, 2018, we entered into a $4.5three-year $5.0 million revolving line of credit (“credit facility”Credit Facility”) with Rosenthal & Rosenthal.Austin. The total loan amount available to us under the lineCredit Facility from time to time is based on the amount of credit wasour (i) qualified accounts receivable, which is equal to 85 percentthe lesser of 85% of our net eligible receivables of, or $4.5 million, plus (ii) available inventory, (50 percentwhich is the lesser of 20% of the lower of cost or marketnet realizable value of eligible inventory of, or $250 thousand, whichever was less).$500 thousand. The credit facility wasCredit Facility charges interest deeming a minimum borrowing requirement of $1.0 million.
The Credit Facility is secured by a lien on our domestic 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 2%. The interestborrowing rate for borrowing on accounts receivableas of December 31, 2019 and 2018 was 8.5 percent, on inventories 10 percent,6.75% and on overdrafts 13 percent.7.75%, respectively. Overdrafts are subject to a 2% fee. Additionally, there was an annual 1 percent facility fee of 1% on the entire $4.5$5.0 million amount of the credit facility payableCredit Facility is due at the beginning of each of the year. three years and a 0.5% collateral management fee on the average outstanding loan balance is payable monthly. We paid Austin the first year’s fee when the Credit Facility was signed and the second year’s fee in December of 2019.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The agreement automatically renewedrepayment of outstanding advances and interest under the Credit Facility may be accelerated upon an event of default including, but not limited to, failure to make timely payments or breach of any terms set forth in the Credit Facility. The Credit Facility has no financial covenants, but is subject to customary affirmative and negative operating covenants and defaults and restricting indebtedness, liens, corporate transactions, dividends, and affiliate transactions, among others. The Credit Facility may be terminated by us or by Austin with 90 days written notice. We have not provided such notice to Austin or received such notice from Austin. There are liquidated damages if the Credit Facility is terminated prior to December 10, 2021, as follows: 3% in the first year, to2% in the second year, afterand 1% in the third year.
Borrowings under the revolving line of credit were $0.7 million and $2.2 million at December 31, 2014, unless we provided2019 and 2018, respectively, are recorded in the requisite notice to Rosenthal. Additionally, Rosenthal hadConsolidated Balance Sheets as a current liability under the right to terminate the agreement by providing 60 days written notice to us. We provided the required advance notice to Rosenthal, and as such, the facility was terminated incaption, “Credit line borrowings.” Outstanding balances include unamortized net issuance costs totaling $0.1 million at December 2015.31, 2019. The balance at December 31, 2018 did not include unamortized net issuance costs.
Convertible Notes
Borrowings
On June 1, 2009,March 29, 2019, we entered intoraised $1.7 million (before transaction expenses) from the issuance of $1.7 million in principal amount of subordinated convertible promissory notes to certain investors (the “Convertible Notes”). The Convertible Notes had a $70 thousand unsecured promissory note with Quercus Trust thatmaturity date of December 31, 2021 and bore interest at a rate of 5% per annum until June 30, 2019 and at a rate of 10% thereafter. Accrued unpaid interest totaled $0.1 million at December 31, 2019 and is included within accrued liabilities in the accompanying Consolidated Balance Sheets. 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 and the accumulated interest thereon in the amount of 1 percent$1,815,041 converted at a conversion price of $0.67 per year. share into an aggregate of 2,709,018 shares of the Company’s Series A Convertible Preferred Stock, par value $0.0001 per share (“Series A Preferred Stock”), which is convertible on a one-for-one basis into shares of our common stock.
The principalSeries 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 2,000,000 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 to 3,300,000 (the Original Series A Certificate of Designation as so amended, the “Series A Certificate of Designation”).
Pursuant to the Series A Certificate of Designation, each holder of outstanding shares of Series A Preferred Stock is entitled to vote with holders of outstanding shares of common stock, voting together as a single class, with respect to any and accrued interestall 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 55.37% 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 $0.67 per share and then participates on an as-converted basis with the note were duecommon stock with respect to any additional distributions, (b) shall receive any dividends declared and payable on June 1, 2109. In December 2015,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-one 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.
Iliad Note
On November 25, 2019, we entered into the Iliad Note Purchase Agreement with Iliad pursuant to which the Company sold and issued the Iliad Note in the principal amount of $1.3 million. The Iliad Note was issued with an agreement with Quercus Trustoriginal issue discount of $142 thousand and Iliad paid a purchase price of $1.1 million for the issuance of the Iliad Note, after deduction of $15 thousand of Iliad transaction expenses.
The Iliad Note has a maturity date of November 24, 2021 and accrues interest at 8% per annum, compounded daily, on the outstanding balance. The Company may prepay the amounts outstanding under the Iliad Note at a premium, which is 15% during the first year and 10% during the second year. Beginning in May 2020, Iliad may require the Company to cancelredeem up to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$150 thousand of the noteIliad 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. Each exercise of this deferral right by the Company will increase the amount outstanding under the Iliad Note by 1.5%.
In the event our common stock is delisted from NASDAQ, the amount outstanding under the Iliad Note will automatically increase by 15% as of the date of such delisting.
Pursuant to the Iliad Note Purchase Agreement and the accrued interest for a single paymentIliad Note, we have, among other things, agreed that, until the Iliad Note is repaid:
10% of $13 thousand in cash. Atgross proceeds the timeCompany 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 cancellation,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 10%); and
unless agreed to by Iliad, we had recorded $5 thousandwill not engage in accruedcertain 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 3% on each occasion the Company exercises its right to make the Restricted Issuance without Iliad’s agreement.
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 5% to 15%, 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 5%. After the occurrence of an event of default, Iliad may elect to have interest accrue on this note. For the year endedIliad Note at a rate per annum of 22%, or such lesser rate as permitted under applicable law.
The total liability for the Note Purchase Agreement, excluding financing fees, were $1.3 million at December 31, 2015, we recognized a gain of $62 thousand within “Other income” within the Consolidated Statements of Operations as a result of this cancellation.2019. Unamortized loan discount and debt issuance costs were $0.2 million at December 31, 2019.
NOTE 9.10. COMMITMENTS AND CONTINGENCIES
We lease certain equipment, manufacturing, warehouse and office space under non-cancellable operating leases expiring through 2022 under which we are responsible for related maintenance, taxes, and insurance. Future minimum non-cancellable lease commitments are as follows (in thousands):
|
| | | | | | | | | | |
| For the year ending December 31, | | Minimum Lease Commitments | Sublease Payments (1) | Net Lease Commitments |
| 2018 | | $ | 1,259 |
| $ | 428 |
| $ | 831 |
|
| 2019 | | 1,127 |
| 399 |
| 728 |
|
| 2020 | | 960 |
| 267 |
| 693 |
|
| 2021 | | 789 |
| 134 |
| 655 |
|
| 2022 & thereafter | | 309 |
| — |
| 309 |
|
| Total contractual obligations | | $ | 4,444 |
| $ | 1,228 |
| $ | 3,216 |
|
(1) Represents the amountAs of income expected from sublease agreements executed in 2017 for our former New York, New York and Arlington, Virginia offices.
Certain leases included above contain escalation clauses and, as such, rent expense was recorded on a straight-line basis over the term of the lease. Net rent expense from continuing operations was $1.2 million, $1.2 million, and $0.8 million for the years ended December 31, 2017, 2016, and 2015, respectively.
On December 22, 2014, a former employee filed a lawsuit against us2019, we had approximately $0.7 million in outstanding purchase commitments for inventory, of which $0.5 million is expected to ship in the Superior Courtfirst quarter of the State of California, County of San Diego, known as Merl Toyer v. Energy Focus, Inc., et al., alleging wrongful termination2020 and other claims related to his employment with us. We subsequently removed the case to the United States District Court for the Southern District of California. On May 1, 2015, we entered into a settlement agreement with the plaintiff, which assigned no culpability to any party and provided for a payment by us in exchange for full settlement and release of his claims. As of June 30, 2015, the total settlement amount of $0.3 million had been paid to the plaintiff. In September 2015, we received $0.2 million as reimbursement from our insurance company for the settlement claim. For the year ended December 31, 2015, we had income of $0.2 million from the insurance reimbursement and expense of $0.2 million, net of the insurance settlement, respectively, includedis expected to ship in the Consolidated Statementssecond quarter of Operations under the caption, “Selling, general, and administrative.”2020.
NOTE 10.11. STOCKHOLDERS’ EQUITY
Common stock follow-on offering
On September 11, 2015, we announced the pricing of a registered underwritten follow-on offering of shares of our common stock by us and certain of our stockholders (the “Selling Stockholders”). We sold 1,500,000 shares of our common stock at a purchase price to the public of $17.00 per share and the Selling Stockholders sold an additional 1,500,000 shares of our common stock on the same terms and conditions.
The offering closed on September 16, 2015 and we received $23.6 million in net proceeds from the transaction, after giving effect to underwriting discounts and commissions and estimated expenses. We expect to use the remaining net proceeds from the offering to finance our growth efforts, for working capital, and other general corporate purposes.
Warrants
WeIn the past, we have issued warrants in conjunction with various equity issuances, debt financing arrangements and sales incentives. As partDuring 2017 all outstanding warrants totaling 6,750 were canceled or otherwise forfeited. Accordingly, there were no warrants issued and outstanding at December 31, 2019 and 2018.
In January of the underwriting agreement for2020, we offered and sold 3,441,803 shares of our August 6, 2014 public offering, we issuedcommon stock to certain institutional investors, at a warrant for 47,000 sharespurchase price of $0.674 per share in a registered direct offering. We also sold to the underwriter representing four percent of the number ofsame institutional investors unregistered warrants to purchase up to 3,441,803 shares of our common stock sold in the offering at an issueexercise price of $5.40$0.674 per share representing 120 percent of the public offeringin a concurrent private placement for a purchase price of the shares of common stock. The warrant was exercised on September 10, 2015. Additionally, there was a warrant issued$0.125 per warrant. Refer to a former employee in 2013 as part of the sales of our pool products business, which was exercised in May 2015.
A summary of warrant activity was as follows:
|
| | | | | | |
| | Warrants Outstanding | | Weighted Average Exercise Price During Period |
| | | | |
| Balance, December 31, 2014 | 969,549 |
| | 4.61 |
|
| Warrants exercised | (638,189 | ) | | 4.58 |
|
| Warrants cancelled/forfeited | (112,110 | ) | | 5.54 |
|
| Warrants expired | (205,000 | ) | | 4.20 |
|
| Balance, December 31, 2015 | 14,250 |
| | 4.30 |
|
| Warrants cancelled/forfeited | (7,500 | ) | | 4.30 |
|
| Balance, December 31, 2016 | 6,750 |
| | $ | 4.30 |
|
| Warrants cancelled/forfeited | (6,750 | ) | | $ | 4.30 |
|
| Balance, December 31, 2017 | — |
| | $ | — |
|
Note 16 “Subsequent Events” for further information.
Stock-based compensation
On May 6, 2014, our Boardboard of Directorsdirectors approved the Energy Focus, Inc. 2014 Stock Incentive Plan (the “2014 Plan”). The 2014 Plan was approved by the stockholders at our annual meeting on July 15, 2014, after which no further awards could be issued under the Energy Focus, Inc. 2008 Incentive Stock Plan (the “2008 Plan”). The 2014 Plan initially allowed for awards up to 600,000 shares of common stock and expires on July 15, 2024. On July 22, 2015, the stockholders approved an amendment to the 2014 Plan to increase the shares available for issuance under the 2014 Plan by an additional 600,000 shares. On June 21,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2017, the stockholders approved an amendment to the 2014 Plan to increase the shares available for issuance under the 2014 Plan by an additional 1,300,000. We have two other equity-based compensation plans under which options are currently outstanding; however, no new awards may be granted under these plans. Generally, stock options are granted at fair market value and expire ten years from the grant date. Employee grants generally vest in three or four years, while grants to non-employee directors generally vest in one year. The specific terms of each grant are determined by our Boardboard of Directors.directors. At December 31, 2017, 1,798,6932019, 851,160 shares remain available to grant under the 2014 Plan.
Stock-based compensation expense is attributed to the granting of stock options, restricted stock, and restricted stock unit awards. For all stock-based awards, we recognize compensation expense using a straight-line amortization method.
The impact on our results for stock-based compensation was as follows (in thousands):
| | | | For the year ended December 31, | | | | | | | |
| | 2017 | | 2016 | | 2015 | For the year ended December 31, |
| | | | | | | 2019 | | 2018 | | 2017 |
| Cost of sales | $ | 34 |
| | $ | 56 |
| | $ | 38 |
| $ | 9 |
| | $ | 37 |
| | $ | 34 |
|
| Product development | 59 |
| | 84 |
| | 37 |
| 26 |
| | 118 |
| | 59 |
|
| Selling, general, and administrative | 714 |
| | 1,220 |
| | 738 |
| 581 |
| | 753 |
| | 714 |
|
| Total stock-based compensation | $ | 807 |
| | $ | 1,360 |
| | $ | 813 |
| $ | 616 |
| | $ | 908 |
| | $ | 807 |
|
At December 31, 20172019 and 2016,2018, we had unearned stock compensation expense of $0.7$0.6 million and $1.2$0.9 million, respectively. These costs will be charged to expense and amortized on a straight-line basis in subsequent periods. The remaining weighted average period over which the unearned compensation is expected to be amortized was approximately 2.6 years as of December 31, 2019 and 1.8 years as of both December 31, 2017 and 2016.2018.
Stock options
The fair value of each stock option is estimated on the date of grant using the Black-Scholes option pricing model. Estimates utilized in the calculation include the expected life of the option, risk-free interest rate, and expected volatility, and are further comparatively detailed as follows:
| | | | 2017 | | 2016 | | 2015 | | | | | | | |
| | | | | | | 2019 | | 2018 | | 2017 |
| Fair value of options issued | $ | 2.66 |
| | $ | 5.27 |
| | $ | 5.33 |
| $ | 0.29 |
| | $ | 1.41 |
| | $ | 2.66 |
|
| Exercise price | $ | 3.55 |
| | $ | 7.46 |
| | $ | 7.23 |
| $ | 0.44 |
| | $ | 1.97 |
| | $ | 3.55 |
|
| Expected life of option (in years) | 5.8 |
| | 5.8 |
| | 5.8 |
| 4.8 |
| | 5.9 |
| | 5.8 |
|
| Risk-free interest rate | 2.1 | % | | 1.5 | % | | 1.7 | % | 1.8 | % | | 2.7 | % | | 2.1 | % |
| Expected volatility | 91.9 | % | | 93.7 | % | | 90.7 | % | 90.0 | % | | 84.2 | % | | 91.9 | % |
| Dividend yield | 0.00 | % | | 0.00 | % | | 0.00 | % | 0.00 | % | | 0.00 | % | | 0.00 | % |
We utilize the simplified method as provided by ASC 718-10 to calculate the expected stock option life. Under ASC 718-10, the expected stock option life is based on the midpoint between the vesting date and the end of the contractual term of the stock option award. The use of this simplified method in place of using the actual historical exercise data is allowed when a stock option award meets all of the following criteria: the exercise price of the stock option equals the stock price on the date of grant; the exercisability of the stock option is only conditional upon completing the service requirement through the vesting date; employees who terminate their service prior to the vesting date forfeit their stock options; employees who terminate their service after vesting are granted a limited time period to exercise their stock options; and the stock options are nontransferable
and nonhedgeable.non-hedgeable. We believe that our stock option awards meet all of these criteria. The estimated expected life of the option is calculated based on contractual life of the option, the vesting life of the option, and historical exercise patterns of vested options. The risk-free interest rate is based on U.S. treasury zero-coupon yield curve on the grant date for a maturity similar to the expected life of the option. The volatility estimates are calculated using historical volatility of our stock price calculated over a period of time representative of the expected life of the option. We have not paid dividends in the past, and do not expect to pay dividends over the corresponding expected term as of the grant date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Options outstanding under all plans at December 31, 20172019 have a contractual life of ten years, and vesting periods between one and four years. A summary of option activity under all plans was as follows:
| | | | Number of Options | | Weighted Average Exercise Price Per Share | Number of Options | | Weighted Average Exercise Price Per Share |
| | | | | |
| Outstanding at December 31, 2014 | 459,271 |
| | $ | 8.95 |
| |
| Granted | 340,500 |
| | 8.65 |
| |
| Cancelled | (147,152 | ) | | 10.10 |
| |
| Exercised | (50,412 | ) | | 4.69 |
| |
| Outstanding at December 31, 2015 | 602,207 |
| | 8.58 |
| |
| Granted | 167,819 |
| | 7.31 |
| |
| Cancelled | (160,126 | ) | | 12.94 |
| |
| Exercised | (79,166 | ) | | 4.48 |
| |
| Outstanding at December 31, 2016 | 530,734 |
| | 7.48 |
| 530,734 |
| | $ | 7.48 |
|
| Granted | 192,984 |
| | 3.55 |
| 192,984 |
| | 3.55 |
|
| Cancelled | (377,095 | ) | | 6.71 |
| (377,095 | ) | | 6.71 |
|
| Expired | (56,111 | ) | | 10.65 |
| (56,111 | ) | | 10.65 |
|
| Exercised | (42,000 | ) | | 2.30 |
| (42,000 | ) | | 2.30 |
|
| Outstanding at December 31, 2017 | 248,512 |
| | $ | 5.76 |
| 248,512 |
| | 5.76 |
|
| Granted | | 100,746 |
| | 1.97 |
|
| Cancelled | | (46,387 | ) | | 6.96 |
|
| Expired | | (10,000 | ) | | 20.00 |
|
| Outstanding at December 31, 2018 | | 292,871 |
| | 3.78 |
|
| Granted | | 689,300 |
| | 0.44 |
|
| Cancelled | | (177,493 | ) | | 2.55 |
|
| Expired | | (27,525 | ) | | 5.33 |
|
| Outstanding at December 31, 2019 | | 777,153 |
| | $ | 1.04 |
|
| | | | | | | |
| Vested and expected to vest at December 31, 2017 | 228,880 |
| | $ | 5.97 |
| |
| Vested and expected to vest at December 31, 2019 | | 578,486 |
| | $ | 1.25 |
|
| | | | | | | |
| Exercisable at December 31, 2017 | 110,476 |
| | $ | 8.63 |
| |
| Exercisable at December 31, 2019 | | 111,595 |
| | $ | 4.61 |
|
The “Expected to Vest” options are the unvested options that remain after applying the pre-vesting forfeiture rate assumption to total unvested options. The total intrinsic value ofNo options were exercised during 2017 was $42 thousand.2019. The total intrinsic value of options outstanding and options exercisable at December 31, 20172019 was $150.00zero dollars each, which was calculated using the closing stock price at the end of the year of $2.45$0.46 per share less the option price of the in-the-money grants.
The options outstanding at December 31, 20172019 have been segregated into ranges for additional disclosure as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| OPTIONS OUTSTANDING | | OPTIONS EXERCISABLE |
Range of Exercise Prices | | Number of Shares Outstanding | | Weighted Average Remaining Contractual Life (in years) | | Weighted Average Exercise Price | | Number of Shares Exercisable | | Weighted Average Remaining Contractual Life (in years) | | Weighted Average Exercise Price |
| | | | | | | | | | | | | | | |
| $2.30 | — | $3.25 | | 59,558 |
| | 9.1 | | $ | 3.04 |
| | 2,000 |
| | 4.9 | | $ | 2.45 |
|
| $3.26 | — | $4.00 | | 74,165 |
| | 9.2 | | 3.43 |
| | — |
| | 9.2 | | 3.43 |
|
| $4.01 | — | $5.50 | | 51,919 |
| | 6.6 | | 4.96 |
| | 50,461 |
| | 6.6 | | 4.94 |
|
| $5.51 | — | $20.00 | | 62,870 |
| | 6.0 | | 11.75 |
| | 58,015 |
| | 5.8 | | 12.05 |
|
| | | | | 248,512 |
| | 7.8 | | $ | 5.76 |
| | 110,476 |
| | 6.1 | | $ | 8.63 |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| OPTIONS OUTSTANDING | | OPTIONS EXERCISABLE |
Range of Exercise Prices | | Number of Shares Outstanding | | Weighted Average Remaining Contractual Life (in years) | | Weighted Average Exercise Price | | Number of Shares Exercisable | | Weighted Average Remaining Contractual Life (in years) | | Weighted Average Exercise Price |
| $0.42 | — | $0.45 | | 450,000 |
| | 9.5 | | $ | 0.42 |
| | — |
| | — |
| | $ | — |
|
| $0.46 | — | $1.81 | | 213,800 |
| | 1.9 | | 0.48 |
| | — |
| | — |
| | — |
|
| $1.82 | — | $3.76 | | 72,603 |
| | 7.2 | | 3.34 |
| | 70,845 |
| | 7.2 |
| | 3.35 |
|
| $3.77 | — | $10.70 | | 40,750 |
| | 4.1 | | 6.80 |
| | 40,750 |
| | 4.1 |
| | 6.80 |
|
| | | | | 777,153 |
| | 6.9 | | $ | 1.04 |
| | 111,595 |
| | 6.0 |
| | $ | 4.61 |
|
Restricted stock and Restricted Stock Units
Prior to 2011, we issued restricted stock to Executive Officers and Directors in lieu of paying a portion of their cash compensation or Directors’ fees.units
In 2015, we began issuing restricted stock units to employees and non-employee Directors under the 2014 Plan with vesting periods ranging from 1 to 3 years from the grant date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows a summary of restricted stock and restricted stock unit activity:
| | | | Restricted Stock Units Outstanding | | Weighted Average Grant Date Fair Value | Restricted Stock Units Outstanding | | Weighted Average Grant Date Fair Value |
| | | | | |
| At December 31, 2014 | — |
| | — |
| |
| Granted | 73,750 |
| | 6.92 |
| |
| Forfeited | (16,250 | ) | | 5.54 |
| |
| At December 31, 2015 | 57,500 |
| | $ | 7.31 |
| |
| Granted | 290,966 |
| | 6.56 |
| |
| Vested | (11,213 | ) | | 14.18 |
| |
| Forfeited | (87,138 | ) | | 6.73 |
| |
| At December 31, 2016 | 250,115 |
| | $ | 6.34 |
| 250,115 |
| | $ | 6.34 |
|
| Granted | 375,542 |
| | $ | 3.18 |
| 375,542 |
| | 3.18 |
|
| Vested | (115,622 | ) | | $ | 5.78 |
| (115,622 | ) | | 5.78 |
|
| Forfeited | (203,893 | ) | | $ | 5.30 |
| (203,893 | ) | | 5.30 |
|
| At December 31, 2017 | 306,142 |
| | $ | 3.37 |
| 306,142 |
| | 3.37 |
|
| Granted | | 553,657 |
| | 2.38 |
|
| Vested | | (222,835 | ) | | 3.11 |
|
| Forfeited | | (90,106 | ) | | 2.99 |
|
| At December 31, 2018 | | 546,858 |
| | 2.54 |
|
| Granted | | 85,575 |
| | 0.62 |
|
| Vested | | (436,282 | ) | | 2.23 |
|
| Forfeited | | (163,100 | ) | | 2.33 |
|
| At December 31, 2019 | | 33,051 |
| | $ | 2.63 |
|
Employee stock purchase plans
In September 2013, our stockholders approved the 2013 Employee Stock Purchase Plan (the “2013 Plan”) to replace the 1994 prior purchase plan. A total of 500,000 shares of common stock were provided for issuance under the 2013 Plan. The 2013 Plan permits eligible employees to purchase common stock through payroll deductions at a price equal to the lower of 85 percent of the fair market value of our common stock at the beginning or end of the offering period. Employees may end their participation at any time during the offering period, and participation ends automatically upon termination of employment with us. During 2017, 20162019, 2018, and 2015,2017, employees purchased 15,706, 25,953 and 16,004 22,094, and 18,119,shares, respectively. At December 31, 2017, 427,4372019, 385,778 shares remained available for purchase under the 20142013 Plan.
NOTE 11.12. INCOME TAXES
We file income tax returns in the U.S. federal jurisdiction, as well as in various state and local jurisdictions. With few exceptions, we are no longer subject to U.S. federal, state, and local, or non-United Statesnon-U.S. income tax examinations by tax authorities for years before 2014.2016. Our practice is to recognize interest and penalties related to income tax matters in income tax expense when and if they become applicable. At December 31, 20172019 and 2016,2018, respectively, there were no accrued interest and penalties related to uncertain tax positions.
The following table shows the components of (loss) income from continuing operations beforethe provision for income taxes (in thousands):
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| United States | $ | (11,382 | ) | | $ | (16,848 | ) | | $ | 9,620 |
|
| (Loss) income from continuing operations before income taxes | $ | (11,382 | ) | | $ | (16,848 | ) | | $ | 9,620 |
|
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Current: | | | | | |
| State | $ | 10 |
| | $ | 11 |
| | $ | 10 |
|
| Deferred: | | | | | |
| U.S. Federal | — |
| | — |
| | (125 | ) |
| Provision for (benefit from) income taxes | $ | 10 |
| | $ | 11 |
| | $ | (115 | ) |
The following table shows the components of the provision for income taxes from continuing operations (in thousands):
|
| | | | | | | | | | | |
| | For the year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Current: | | | | | |
| U.S. federal | $ | — |
| | $ | 1 |
| | $ | 123 |
|
| State | 10 |
| | 26 |
| | 26 |
|
| Total current | $ | 10 |
| | $ | 27 |
| | $ | 149 |
|
| | | | | | |
| Deferred: | | | | | |
| U.S. Federal | $ | (125 | ) | | $ | — |
| | $ | — |
|
| State | $ | — |
| | $ | — |
| | $ | — |
|
| Total deferred | $ | (125 | ) | | $ | — |
| | $ | — |
|
| | | | | | |
| Provision for income taxes | $ | (115 | ) | | $ | 27 |
| | $ | 149 |
|
The principal items accounting for the difference between income taxes computed at the U.S. statutory rate and the provision for income taxes from continuing operations reflected in our Consolidated Statements of Operations are as follows:
| | | | For the year ended December 31, | | | | | | |
| | 2017 | | 2016 | | 2015 | For the year ended December 31, |
| | | | | | | 2019 | | 2018 | | 2017 |
| U.S. statutory rate | 34.0 | % | | 34.0 | % | | 34.0 | % | 21.0 | % | | 21.0 | % | | 34.0 | % |
| State taxes (net of federal tax benefit) | 2.3 |
| | 1.7 |
| | 0.2 |
| 2.0 |
| | 2.5 |
| | 2.3 |
|
| Valuation allowance | 17.4 |
| | (27.5 | ) | | (27.9 | ) | (20.7 | ) | | (25.0 | ) | | 17.4 |
|
| Deferred rate change due to changes in tax laws | (51.7 | ) | | — |
| | — |
| — |
| | — |
| | (51.7 | ) |
| Other | (1.0 | ) | | (8.4 | ) | | (4.8 | ) | (2.4 | ) | | 1.4 |
| | (1.0 | ) |
| | 1.0 | % | | (0.2 | )% | | 1.5 | % | (0.1 | )% | | (0.1 | )% | | 1.0 | % |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets are as follows (in thousands):
| | | | At December 31, | At December 31, |
| | 2017 | | 2016 | | 2015 | 2019 | | 2018 | | 2017 |
| | | | | | | |
| Allowance for doubtful accounts | $ | — |
| | $ | 18 |
| | $ | 18 |
| |
| Accrued expenses and other reserves | 1,749 |
| | 3,138 |
| | 2,244 |
| $ | 1,505 |
| | $ | 1,964 |
| | $ | 1,749 |
|
| Right-of-use-asset | | (378 | ) | | — |
| | — |
|
| Lease liabilities | | 461 |
| | — |
| | — |
|
| Tax credits, deferred R&D, and other | 197 |
| | 142 |
| | 122 |
| 44 |
| | 65 |
| | 197 |
|
| Net operating loss | 8,610 |
| | 9,239 |
| | 5,384 |
| 12,758 |
| | 10,793 |
| | 8,610 |
|
| Valuation allowance | (10,556 | ) | | (12,537 | ) | | (7,768 | ) | (14,390 | ) | | (12,822 | ) | | (10,556 | ) |
| Net deferred tax assets | $ | — |
| | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
| | $ | — |
|
In 2019, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $8.3 million additional federal net operating loss we recognized for the year. In 2018, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance of the $8.7 million additional federal net operating loss we recognized for the year. In 2017, our effective tax rate was lower than the statutory rate due to the remeasurement of our deferred tax assets resulting from the Tax Cuts and Jobs Act of 2017 (the “Act”) and a decrease in the valuation allowance. In 2016, our effective tax rate was lower than the statutory rate due to an increase in the valuation allowance as a result of the $10.6 million additional federal net operating loss we recognized for the year.
On December 22, 2017, the Act was signed into law making significant changes to the Internal Revenue Code (“IRC”). Changes include, but are not limited to, a corporate tax rate decrease from 35 percent35% to 21 percent21% effective for tax years beginning after December 31, 2017, repeal of the corporate Alternative Minimum Tax, elimination of certain deductions, and changes to the carryforward period and utilization of Net Operating Losses generated after December 31, 2017. We have calculated our best estimate of the impact of the Act in our year end income tax provision in accordance with our understanding of the Act and guidance available as of the date of this filing. As a result of the Act, we have recorded $0.1 million as additional income tax benefit in the fourth quarter of 2017, the period in which the legislation was enacted. The amount related to the release of the valuation allowance on the Alternative Minimum Tax Credit carry-forward which is expected to be fully refunded by 2021. We remeasured the deferred tax assets and liabilities, based on the rates at which they are expected to reverse in the future. The impact of the remeasurement was $5.9 million of additional tax expense which was offset by a $5.9 million reduction of the valuation allowance resulting in a net zero impact to the financial statements. The U.S. Treasury Department, the Internal Revenue Service, and other standard-setting bodies could interpret or issue guidance on how provisions of the Act will be applied or otherwise administered that is different from our interpretation. As we complete our analysis of the Act, collect and prepare necessary data, and interpret any additional guidance, weWe may make adjustments to provisional amounts that we have recorded that may materially impact our provision for income taxes in the period in which the adjustments are made.
At December 31, 2019, we had net operating loss carry-forwards of approximately $108.8 million for federal income tax purposes ($64.5 million for state and local income tax purposes). However, due to changes in our capital structure, approximately $54.5 million of the $108.8 million is available after the application of IRC Section 382 limitations. As a result of the Act, net operating loss carry-forwards generated in tax years beginning after December 31, 2017 can only offset 80% of taxable income. These net operating loss carry-forwards can no longer be carried back, but they can be carried forward indefinitely. The $8.3 million and $8.7 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 $37.3 million will begin to expire in 2021 for federal purposes and have begun to expire for state and local purposes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Since we believe it is more likely than not that the benefit from net operating loss carry-forwards will not be realized, we have provided a full valuation allowance against our deferred tax assets at December 31, 20172019 and 2016,2018, respectively. We had no net deferred tax liabilities at December 31, 2019 or 2018, respectively. In 2019, we recognized various states tax expense as a result of the adjustment from the 2018 provision to the actual tax on the 2018 returns that were filed in 2019. In 2018, we recognized various states tax expense as a result of the adjustment from the 2017 or 2016, respectively.provision to the actual tax on the 2017 returns that were filed in 2018. In 2017, we recognized U.S. federal and various states income tax benefit of $0.1 million as a result of the reduction ofin the valuation allowance on the portion of Alternative Minimum Tax Credits that are expected to be refunded. In 2016, we recognized U.S. federal and various states income tax expense as a result of the adjustment from the 2015 provision to the actual tax on the 2015 returns that were filed in 2016.
Deferred income tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred income tax assets will not be realized. In considering the need for a valuation allowance, we assess all evidence, both positive and negative, available to determine whether all or some portion of the deferred tax assets will not be realized. Such evidence includes, but is not limited to, recent earnings history, projections of future income or loss, reversal patterns of existing taxable and deductible temporary differences, and tax planning strategies. We will continue to evaluate the need for a valuation allowance on a quarterly basis.
At December 31, 2017, we had net operating loss carry-forwards of approximately $91.8 million for U.S. federal, state, and local income tax purposes. However, due to changes in our capital structure, approximately $37.3 million of this amount is available to offset future taxable income after the application of the limitations found under Section 382 of the IRC. As a result of this limitation, in 2018, we expect to have approximately $37.3 million of the net operating loss carry-forward available for use. If not utilized, these carry-forwards will begin to expire in 2021 for federal purposes and have begun to expire for state and local purposes. Additionally, the changes to our capital structure have subjected, and will continue to subject our net operating loss carry-forward to an annual limitation as discussed further below. This limitation will significantly restrict our ability to utilize the carry-forward to offset taxable income in future periods.
The IRC imposes restrictions on the utilization of various carry-forward tax attributes in the event of a change in ownership, as defined by IRC Section 382. During 2015, we completed an IRC Section 382 review and the results of this review indicate ownership changes have occurred which would cause a limitation on the utilization of carry-forward attributes. Our net operating loss carry-forwards and research and development credits are all subject to limitation. Under these tax provisions, the limitation is applied first to any capital losses, next to any net operating losses, and then to any general business credits. The Section 382 limitation is currently estimated to result in the expiration of $54.2 million of net operating loss carry-forwards and $0.3 million of research and development credits. A valuation allowance has been established to reserve for the potential benefits of the remaining net operating loss carry-forwards in the consolidated financial statements to reflect the uncertainty of future taxable income required to utilize available tax loss carry-forwards.
NOTE 12.13. PRODUCT AND GEOGRAPHIC INFORMATION
During 2013, we sold our pool products business. During 2014, we shifted ourWe focus away from the turnkey solutions business to align our resources with developing and selling our LED products and completed our exit of that business in September 2015. With the exit from EFLS and sale of CLL, we have aligned our resources and focused our efforts on the sale of LED lighting products, in particular our militaryMMM and commercial tubular LED (“TLED”)TLED lines of products and controls, into targeted vertical markets. Our products are sold primarily in the United States through a combination of direct sales employees, lighting agents, independent sales representatives and distributors. We currently operate in a single industry segment, developing and selling our energy-efficient light-emitting diode (“LED”)LED lighting products and controls into the military maritimeMMM and commercial markets.
The following table provides a breakdown of product net sales from continuing operations for the years indicated (in thousands):
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | | | | | |
| Commercial | $ | 15,217 |
| | $ | 14,809 |
| | $ | 14,156 |
|
| Military maritime | 4,629 |
| | 16,189 |
| | 50,128 |
|
| R&D services | — |
| | — |
| | 119 |
|
| Total net sales | $ | 19,846 |
| | $ | 30,998 |
| | $ | 64,403 |
|
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Commercial products | $ | 7,877 |
| | $ | 8,662 |
| | $ | 15,217 |
|
| MMM products | 4,828 |
| | 9,445 |
| | 4,629 |
|
| Total net sales | $ | 12,705 |
| | $ | 18,107 |
| | $ | 19,846 |
|
A geographic summary of net sales from continuing operations is as follows (in thousands):
| | | | For the year ended December 31, | | | | | | | |
| | 2017 | | 2016 | | 2015 | For the year ended December 31, |
| | | | | | | 2019 | | 2018 | | 2017 |
| United States | $ | 19,446 |
| | $ | 29,840 |
| | $ | 64,251 |
| $ | 12,599 |
| | $ | 17,736 |
| | $ | 19,446 |
|
| International | 400 |
| | 1,158 |
| | 152 |
| 106 |
| | 371 |
| | 400 |
|
| Total net sales | $ | 19,846 |
| | $ | 30,998 |
| | $ | 64,403 |
| $ | 12,705 |
| | $ | 18,107 |
| | $ | 19,846 |
|
At December 31, 20172019 and 2016,2018, approximately 98 percent100% and 99 percent98%, respectively, of our long-lived assets, respectively, which consist of property and equipment, were located in the United States.
NOTE 13.14. RELATED PARTY TRANSACTIONS
On December 12, 2012, our Boardboard of Directorsdirectors appointed James Tu to serve as our non-executive Chairman. On April 30, 2013, Mr. Tu became the Executive Chairman assuming the duties of the Principal Executive Officer. On October 30, 2013 Mr. Tu was appointed Executive Chairman and Chief Executive Officer by the Boardour board of Directors.directors. On May 9, 2016, Mr. Tu also assumed the role of President. On August 11, 2016, our Boardboard of Directorsdirectors appointed a separate Executive Chairman of the Board, and Mr. Tu continued to serve in the role of Chief Executive Officer and President, until February 19, 2017.
On November 30, 2018, each of Gina Huang, Brilliant Start Enterprise, Inc. (“Brilliant Start”), Jag International Ltd., Jiangang Luo, Cleantech Global Ltd., James Tu, 5 Elements Global Fund L.P., Yeh-Mei Hui Cheng, Communal International, Ltd., and 5 Elements Energy Efficiency Limited (the “Former Schedule 13D Parties”) filed a Schedule 13D with the SEC, indicating that they may have been deemed to be a “group” under Section 13(d)(3) of the Exchange Act of 1934, as amended, and Rule 13d-5 promulgated thereunder, and that such group beneficially owned 17.6% of our common stock. The Schedule 13D was amended on February 26, 2019 and April 3, 2019.
On February 21, 2019, the Former Schedule 13D Parties entered into a settlement with the Company providing for the appointment of two directors (Geraldine McManus and Jennifer Cheng) and the nomination of those two director for election at the Company’s 2019 annual meeting of stockholders.
On March 29, 2019, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with certain investors, including Fusion Park LLC (of which James Tu is the sole member) (“Fusion Park”) and Brilliant Start (which is
controlled by Gina Huang, a current member of our board of directors), for the purchase of an aggregate of $1.7 million of Convertible Notes. Pursuant to the Note Purchase Agreement, Fusion Park and Brilliant Start purchased $580 thousand and $500 thousand, respectively, in principal amount of Convertible Notes. In connection with the sale of Convertible Notes, Mr. Tu was appointed as a member of our board of directors on April 1, 2019 and Chief Executive Officer, President and interim Chief Financial Officer on April 2, 2019.
Mr. Tu is also the Founder, Chief Executive Officer and Chief Investment Officer of 5 Elements Global Advisors, an investment advisory and management company managing the holdings of 5 Elements Global Fund LP, which was a beneficial owner of more than 5 percent5.0% of our common stock prior to the August 2014 registered offering. As of December 31, 2017,2019, 5
Elements Global Fund LP holdsbeneficially owns approximately 2.5 percent2.5% of our common stock. 5 Elements Global Advisors focuses on investing in clean energy companies with breakthrough, commercialized technologies, and near-term profitability potential. Mr. Tu is also Co-Founder of Communal International Ltd. (“Communal”), a British Virgin Islands company dedicated to assisting clean energy, solutions-based companies, maximizing technology and product potential and gaining them access to global marketing, distribution licensing, manufacturing and financing resources. Communal has a 50 percent50.0% ownership interest in 5 Elements Energy Efficiencies (BVI) Ltd., a beneficial owner of approximately 2.4 percent2.4% of our common stock. Yeh-Mei Cheng controls 5 Elements Energy Efficiencies (BVI) Ltd. and owns the other 50 percent.50.0%. She is Co-Founder of Communal International Ltd. with Mr. Tu and the mother of Simon Cheng. Mr. Cheng was a member of our Boardboard of Directorsdirectors through February 19, 2017 and an employee of the Company.
On February 27, 2012, we entered into an Asian Business Development/Collaboration Agreement with Communal. The agreement hadCompany through June 30, 2018 and rejoined the Company on August 5, 2019. Yeh-Mei Cheng is also the mother of Jennifer Cheng, a termcurrent member of 60 months, under which we paid $523 thousand to Communal in 2012. Effective January 1, 2013, the Asian Business Development/Collaboration Agreement with Communal was amended to reflect the extensionour board of the terms of the Agreement for an additional twelve months, and the addition of certain services and countries in the territory covered by the Agreement. In connection with the amended and restated Agreement, we paid an additional $425 thousand in 2013 and recorded expense of $226 thousand. For the year ended December 31, 2015, nothing was paid under this Agreement and we recorded expense of $226 thousand per year. On December 23, 2015, we terminated the Agreement with Communal without penalty.directors.
NOTE 14.15. LEGAL MATTERS
We may be the subject of threatened or pending legal actions and contingencies in the normal course of conducting our business. We provide for costs related to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on our future results of operations and liquidity cannot be predicted because any such effect depends on future results of operations and the amount or timing of the resolution of such matters. While it is not possible to predict the future outcome of such matters, we believe that the ultimate resolution of such individual or aggregated matters will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows. For certain types of claims, we maintain insurance coverage for personal injury and property damage, product liability and other liability coverages in amounts and with deductibles that we believe are prudent, but there can be no assurance that these coverages will be applicable or adequate to cover adverse outcomes of claims or legal proceedings against us.
NOTE 16.SUBSEQUENT EVENTS
January 2020 Equity Offering
In January 2020, we announcedretained H.C. Wainwright & Co., LLC to act as our exclusive placement agent in connection with the sale of our pool products business for3,441,803 shares of the Company’s common stock to certain institutional investors, at a cash purchase price of $5.2$0.674 per share, in a registered direct offering. We also sold the same institutional investors unregistered warrants to purchase up to 3,441,803 shares of common stock at an exercise price of $0.674 per share in a concurrent private placement for a purchase price of $0.125 per warrant. We paid the placement agent commissions of $193 thousand plus $50 thousand in expenses in connection with the registered direct offering and the concurrent private placement, and we also paid clearing fees of $13 thousand. Proceeds to us, before expenses, from the sale of common stock and warrants (the “January 2020 Equity Offering”) were approximately $2.5 million. UnderIn accordance with the terms of the Purchase Agreement, we sold substantiallyIliad Note, 10% of the gross proceeds from the January 2020 Equity Offering ($275 thousand) was primarily used to reduce the outstanding principal amount of the Iliad Note.
Conversion of Convertible Notes into Series A Preferred Stock
Pursuant to their terms, on January 16, 2020, following approval of certain amendments to our certificate of incorporation by our stockholders, the principal amount of all of the assets associated with the pool products businessConvertible Notes and the buyer assumed certainaccumulated interest thereon in the amount of $1.8 million converted at a conversion price of $0.67 per share into an aggregate of 2,709,018 shares of Series A Preferred Stock, which is convertible on a one-for-one basis into shares of our common stock.
Recent Global Developments
In December 2019, a novel strain of corona-virus began to impact the population of Wuhan, China, where several of our suppliers are located. We rely upon these facilities to support our business in China, as well as to export components for use in products in other parts of the world. While the closures and limitations on movement in the region are expected to be
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
temporary, the duration of the production and supply chain disruption, and related liabilities. The Purchase Agreement providedfinancial impact, cannot be estimated at this time. Should the production and distribution closures continue for an escrowextended period of $500 thousandtime, the impact on our supply chain in China and globally could have a material adverse effect on our results of the purchase price to secure customary indemnification obligations with respect to our representations, warranties, covenantsoperations and other obligations under the Purchase Agreement. Under the terms of the Purchase Agreement, the first of five $100 thousand scheduled escrow releases commenced on March 25, 2014, and was to continue on the 25th day of each of the next four subsequent months. As of December 31, 2015 and 2014, $200 thousand of the cash held in escrow had been released to us and $300 thousand remained in escrow subject to the resolution of outstanding buyer claims. The Purchase Agreement provides that all disputes related to the sale must be resolved through binding arbitration. On February 18, 2015, the buyer filed a claim with the American Arbitration Association (“AAA”) asserting claims for damages of $780 thousand under the Purchase Agreement and relating to product development, which was amended on September 1, 2015 to assert damages of $1.6 million. We believed the claims were without merit and asserted a counterclaim in the arbitration for the $300 thousand that remained in escrow. On March 18, 2016, a settlement agreement was executed for this claim and the funds in the escrow account, plus the interest earned on the account, were released to the buyer. flows.
SUPPLEMENTARY FINANCIAL INFORMATION TO ITEM 8.
The following table sets forth our selected unaudited financial information for the four quarters in the periodsyears ended December 31, 20172019 and 2016,2018, respectively. This information has been prepared on the same basis as the audited financial statements and, in the opinion of management, contains all adjustments necessary for a fair presentation thereof.
QUARTERLY FINANCIAL DATA (UNAUDITED)
(amounts in thousands, except per share amounts)
|
| | | | | | | | | | | | | | | | |
| 2019 | | Fourth
Quarter | | Third
Quarter | | Second
Quarter | | First
Quarter |
| Net sales | | $ | 3,531 |
| | $ | 2,915 |
| | $ | 3,082 |
| | $ | 3,177 |
|
| Gross profit | | 957 |
| | 1,028 |
| | (109 | ) | | 98 |
|
| Net loss | | (1,308 | ) | | (946 | ) | | (2,254 | ) | | (2,865 | ) |
| | | | | | | | | |
| Net loss per share (basic and diluted) | | $ | (0.11 | ) | | $ | (0.08 | ) | | $ | (0.18 | ) | | $ | (0.24 | ) |
|
| | | | | | | | | | | | | | | | |
| 2018 | | Fourth
Quarter | | Third
Quarter | | Second
Quarter | | First
Quarter |
| Net sales | | $ | 3,118 |
| | $ | 5,158 |
| | $ | 5,172 |
| | $ | 4,659 |
|
| Gross profit | | 19 |
| | 1,281 |
| | 1,296 |
| | 816 |
|
| Net loss | | (3,000 | ) | | (1,920 | ) | | (1,801 | ) | | (2,390 | ) |
| | | | | | | | | |
| Net loss per share (basic and diluted) | | $ | (0.25 | ) | | $ | (0.16 | ) | | $ | (0.15 | ) | | $ | (0.20 | ) |
|
| | | | | | | | | | | | | | | | |
| 2017 | | Fourth
Quarter | | Third
Quarter | | Second
Quarter | | First
Quarter |
| Net sales from continuing operations | | $ | 4,727 |
| | $ | 5,002 |
| | $ | 6,011 |
| | $ | 4,106 |
|
| Gross profit from continuing operations | | 1,622 |
| | 1,137 |
| | 1,501 |
| | 561 |
|
| Net loss from continuing operations | | (1,858 | ) | | (1,773 | ) | | (3,114 | ) | | (4,522 | ) |
| Net loss from discontinued operations | | — |
| | — |
| | — |
| | — |
|
| Net loss | | $ | (1,858 | ) | | $ | (1,773 | ) | | $ | (3,114 | ) | | $ | (4,522 | ) |
| Net loss per share (basic and diluted): | | | | | | | | |
| Net loss from continuing operations | | $ | (0.16 | ) | | $ | (0.15 | ) | | $ | (0.26 | ) | | $ | (0.39 | ) |
| Net loss from discontinued operations | | — |
| | — |
| | — |
| | — |
|
| Net loss | | $ | (0.16 | ) | | $ | (0.15 | ) | | $ | (0.26 | ) | | $ | (0.39 | ) |
|
| | | | | | | | | | | | | | | | |
| 2016 | | Fourth
Quarter | | Third
Quarter | | Second
Quarter | | First
Quarter |
| Net sales from continuing operations | | $ | 7,186 |
| | $ | 8,261 |
| | $ | 7,126 |
| | $ | 8,425 |
|
| Gross profit from continuing operations | | (1,072 | ) | | 3,082 |
| | 2,522 |
| | 3,145 |
|
| Net loss from continuing operations | | (7,805 | ) | | (3,177 | ) | | (3,916 | ) | | (1,977 | ) |
| Net loss from discontinued operations | | — |
| | — |
| | — |
| | (12 | ) |
| Net loss | | $ | (7,805 | ) | | $ | (3,177 | ) | | $ | (3,916 | ) | | $ | (1,989 | ) |
| Net loss per share (basic and diluted): | | | | | | | | |
| Net loss from continuing operations | | $ | (0.67 | ) | | $ | (0.27 | ) | | $ | (0.34 | ) | | $ | (0.17 | ) |
| Net loss from discontinued operations | | — |
| | — |
| | — |
| | — |
|
| Net loss | | $ | (0.67 | ) | | $ | (0.27 | ) | | $ | (0.34 | ) | | $ | (0.17 | ) |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTACCOUNTING AND FINANCIAL DISCLOSURESDISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures
We maintain “disclosuredisclosure controls and procedures,” as such term is 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 Securities and Exchange Commissionthe rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing
Pursuant to Rule 13a-15(b) under the Exchange Act, our management must evaluate, with the participation of our Chief Executive Officer and evaluatingChief Financial Officer, the effectiveness of our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectivesas of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. Any design of disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on their evaluation as ofDecember 31, 2019, the end of the period covered by this Reportreport. Management, with the participation of our current 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 Form 10-K,this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of December 31, 2017.2019.
Management’s report on internal controls over financial reporting
The managementManagement of Energy Focus, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of internal control over financial reporting as of December 31, 2019 based upon criteria established in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”).
An effective internal control system, no matter how well designed, has inherent limitations, including the possibility of human error and circumvention or overriding of controls; therefore, it can provide only reasonable assurance with respect to reliable financial reporting. Furthermore, effectiveness of an internal control system in future periods cannot be guaranteed, because the design of any system of internal controls is based in part upon assumptions about the likelihood of future events. There can be no assurance that any control design will succeed in achieving its stated goals under all potential future conditions. Over time, certain controls may become inadequate because of changes in business conditions, or the degree of compliance with policies and procedures may deteriorate. As such, misstatements due to error or fraud may occur and not be detected.
Based upon our evaluation under the COSO framework as of December 31, 2017,2019, management concluded that its internal control over financial reporting was effective as of December 31, 2017.2019.
Changes in internal control over financial reporting
During the fourth quarter ended December 31, 2019, following steps to remediate our previously disclosed material weakness through various process improvements, including the hiring of 2017, thereadditional associates to allow for segregated levels of review, we concluded the material weakness to be remediated. There were no materialother changes in our internal controlscontrol over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Attestation Report of Independent Registered Public Accounting Firm
This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent public accounting firm pursuant to the rules of the Securities and Exchange CommissionSEC that permit us to provide only management’s report.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
TheBiographical information regarding ourconcerning each of the Company’s directors will beas of February 29, 2020 is set forth underbelow. Each director’s term of office expires at the caption “Election of Directors” in our Proxy Statement for our 20172020 Annual Meeting of Stockholders, (the “Proxy Statement”) andwhich is incorporated herein by reference.currently expected to occur during June 2020.
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| | | |
| Name | Age | Director Since | Background |
| | | | |
| Jennifer Cheng | 52 | 2019 | Ms. Cheng has served as a member of our board of directors since February 2019. She is the co-founder and has served as director on the board of Social Energy Partners LLC, which develops sustainability and smart building/smart city projects in the United States, Caribbean, Southeast Asia and the Middle East, since September 2017. Ms. Cheng also served as an independent director within the meaning of the NASDAQ Marketplace Rules (“Independent Director”) of the Company from 2012 to 2015. From 1997 to 2006, Ms. Cheng was the co-founder and chairwoman of The X/Y Group, a marketing enterprise that markets and distributes global consumer brand products, including JanSport and Skechers in the greater China region. From 1995 to 1998, Ms. Cheng was a marketing director for Molten Metal Technology, a Boston-based clean energy company that developed patented technologies and offered solutions for advanced treatment and energy recycling for hazardous radioactive waste.
Ms. Cheng received a Master’s degree in Business Administration from Fairleigh Dickinson University and a Bachelor’s degree in Economics and International Business from Rutgers University.
Our board of directors believes that Ms. Cheng’s qualifications to serve as a board member include her familiarity with the Company due to her prior service as a director and her experience with and insight into businesses focused on energy efficiency. Ms.Cheng has served as a member of the Nominating and Corporate Governance Committee since February 2019.
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| Gina Huang (Mei Yun Huang) | 57 | 2019 | Ms. Huang has served as a member of our board of directors since January 2020. She is the Founder and since January 1994, has been Honorary Chairwoman of Ti Town Technology Limited, an advanced industrial and mechanical equipment manufacturer based in Taiwan that specializes in the design, production, marketing and sales of corrosion-resistant pumps and motors, advanced filters and specialty alloys for semiconductor, electronic and chemical manufacturing industries, with offices across Asia and sales across the world. Since February 1996. Ms. Huang has also been the Founder and Chairwoman of Da Fa Industrial Limited, an investment company focusing on the global mining sector, Ms. Huang has founded each of Brilliant Start Limited and Jag International Limited, both investment companies focusing on technologies and special situations. Brilliant Start Limited and Jag International Limited were both founded in 2012, and Ms. Huang has served as Chairwoman of each since they were founded. Ms. Huang is a significant stockholder in the Company.
Ms. Huang received a B.A. degree in Textile Design from Vanung University in Taiwan.
Our board of directors believes Ms. Huang’s experience in manufacturing and her contacts with manufacturers in Asia as well as her significant investment in the Company qualify her to serve as a board member. |
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| Geraldine McManus | 62 | 2019 | Ms. McManus has served as a member of our board of directors since February 2019. She has been a Managing Member of Granger Management, an independent investment business, since May 2014. Previously, she was a Managing Director in the Investment Management Division at Goldman Sachs, where she worked from February 1998 until February 2014 and helped build its Private Wealth Management business, including structuring its business model and key functions focused on ultra-high net worth individuals and family groups. Prior to joining Goldman Sachs, Ms. McManus spent six years at Merrill Lynch as a Managing Director heading the Yankee Debt Capital Markets Group, advising sovereigns, supranational and international corporations on global debt issuance and liability management. Before working at Merrill Lynch, Ms. McManus spent six years at Salomon Brothers, two years as an associate in Corporate Finance and four years as a Product Specialist in the Hedge Management/Derivatives Group. Ms. McManus received a B.S. from Cornell University and an M.B.A. from Wharton. She serves on the Board of Trustees for The Delbarton School in Morristown, New Jersey, The Caron Foundation in Wernersville, Pennsylvania and The Jane Goodall Institute. Our board of directors believes that Ms. McManus’s qualifications to serve as a board member include her experience in evaluating businesses for investment, her achievements in building organizational structures and her non-profit board service.
Ms. McManus serves as member of the Audit and Finance Committee and chair of the Nominating and Corporate Governance Committee.
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| Philip Politziner | 79 | 2019 | Mr. Politziner has served as a member of our board of directors since August 2019. He was a founder, president and a member of the board of directors of Amper Politziner and Mattia. Amper Politziner and Mattia is one of two predecessor firms to Eisner Amper LLC, a full service advisory and accounting firm. Mr. Politziner retired from Eisner Amper in 2015, last serving as Chairman Emeritus. Mr. Politziner was appointed as a member of the Board of Directors of Jensyn Acquisition Corporation (NASDAQ: JSYN) in 2016, where he had been the chair of the audit committee until June 2019 when it consummated its merger with Peck Electric Co. He had served on the board of directors of Baker Tilly International North America, the Board of Directors of New Jersey Technology Council and the Board of Directors of Middlesex County Regional Chamber of Commerce. He has served on the Advisory Board of Jump Start New Jersey Angel Fund. He was awarded the Chamber of Commerce “Community Leader of Distinction” and was inducted into NJBiz Hall of Fame for businesspeople in New Jersey. He also appears in Who’s Who in Corporate Finance. Mr. Politziner received his B.S. in accounting from New York University and is currently licensed as a CPA in New Jersey. He is a member of the American Institute of Certified Public Accountants (AICPA) and the New Jersey Society of Certified Public Accountants (NJSCPA). Our board of directors believes that Mr. Politziner’s qualifications to serve as a board member include his considerable experience with financial and accounting matters and SEC compliance matters as the chair of the audit committee of a public company.
Mr. Politziner serves as chair of the Audit and Finance Committee.
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| Stephen Socolof | 59 | 2019 | Mr. Socolof has served as a member of our board of directors since May 2019. Mr. Socolof has been Managing Partner of Tech Council Ventures, an early-stage venture capital firm, since 2017 and remains a Managing Partner of New Venture Partners, a venture capital firm that he co-founded in 2001. Previously, Mr. Socolof worked at Lucent Technologies, Inc. from 1996 to 2001 where he established Lucent’s New Ventures Group. Before joining Lucent, Mr. Socolof spent eight years with Booz, Allen & Hamilton Inc., where he was a leader of the firm’s innovation consulting practice. Mr. Socolof is currently a director or observer on the boards of Stratis IoT, SunRay Scientific, Vydia Inc., and Everspin Technologies Inc., which is a semiconductor and electronics technology company listed on the NASDAQ Global Market. He was a director of Gainspan Corporation before its acquisition by Telit Communications, Silicon Hive, until its acquisition by Intel Corporation, SyChip, Inc. before its acquisition by Murata, and a board observer of Flarion Technologies, Inc., until its acquisition by Qualcomm Inc.
Mr. Socolof holds a Bachelor of Arts degree in economics and a Bachelor of Science degree in mathematical sciences from Stanford University and received his M.B.A. from the Amos Tuck School at Dartmouth College, where he was a Tuck Scholar. He currently serves on the Board of Advisors of the Center for the Study of Private Equity at the Tuck School.
Our board of directors believes that Mr. Socolof’s qualifications to serve as a board member include his long history of investing in technology growth companies, his significant leadership experience in the corporate venture community and his experience as a public company board member, as well as his financial, business and investment expertise. Mr. Socolof currently serves on the Audit and Finance Committee and as chair of the Compensation Committee. |
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| James Tu | 50 | 2019 | Mr. Tu has served as our Chairman and Chief Executive officer since April 2019. He is also the founder and Chief Executive Officer of Social Energy Partners LLC, which develops energy efficiency and smart building projects, and founder and Chief Investment Officer of 5 Elements Global Advisors LLC, which focuses on investing in the cleantech sector and is a significant stockholder in the Company. Mr. Tu served as the Executive Chairman and Chief Executive Officer of the Company from May 2013 to February 2017, and as the non-Executive Chairman of the board of directors from December 2012 to April 2013. Previously, he served as the Director of Investment Management of Gerstein Fisher & Associates, and an equity analyst at Dolphin Asset Management Corp.
Mr. Tu received an MBA in finance from Baruch College and a B.S. in electrical engineering from Tsinghua University. A Chartered Financial Analyst (CFA) since 1997, he received an “E&Y Entrepreneur of the Year” award in the Technology category in 2016.
Our board of directors believes that Mr. Tu’s qualifications to serve as a board member include his role as the Company’s Chief Executive Officer, as well as his experience advising clean energy companies. |
Executive officersOfficers
The following table sets forth certain information about the executive officers and certain significant employees. There are no family relationships among any of our directors and executive officers. For biographical information regarding our executive officers, is set forthsee the discussion under “Biographical Information” below.
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| | |
| Name | Age | Position |
| James Tu | 50 | Chairman and Chief Executive Officer |
| Tod Nestor | 56 | President, Chief Financial Officer and Secretary |
Biographical Information
James Tu
See the caption entitled “Executive Officersdiscussion under “Directors” above.
Tod Nestor
From 2017 to 2018, Mr. Nestor served as Executive Vice President and Chief Financial Officer of Alumni Ventures Group, a Manchester, New Hampshire based venture capital firm with the most active global transaction volume in 2018 according to PitchBook. Between 2013 and 2016, Mr. Nestor served as the Chief Financial Officer of Merchants Automotive Group, Inc., a privately held, $300 million in revenue in 2016 fleet management, short-term rental, automobile retail and consumer financing company. Previously, Mr. Nestor also served as Senior Vice President and Chief Financial Officer of The Penn Traffic Company, a $1.5 billion in revenue in 2009 publicly traded grocery distribution company, and Chief Financial Officer for Fairway Holdings Corp., a privately held, $750 million in revenue in 2011 grocery store chain based in the greater New York City region. Earlier in his career, Mr. Nestor held other senior leadership roles across a wide array of functions in large organizations such as American Eagle Outfitters, HJ Heinz, and WR Grace. Mr. Nestor received a Bachelor of Business Administration degree in Accounting from the University of Notre Dame and an MBA in Finance and Entrepreneurial Management from The Wharton School of the Registrant” following Item 4,University of Pennsylvania. He is also a licensed Certified Public Accountant (CPA), Certified Management Account (CMA), Certified Financial Manager (CFM), and Chartered Financial Analyst (CFA).
Senior Management
John Davenport
John Davenport currently serves as Chief Scientist for Energy Focus. Mr. Davenport joined Energy Focus in Part I,November 1999 as Vice President and Chief Technology Officer and served as Chief Operating Officer from July 2005 until May 2008 and President from May 2008 until July 2012. Prior to joining Energy Focus, Mr. Davenport served as President of this reportUnison Fiber Optic Lighting Systems, LLC from 1998 to 1999. Mr. Davenport began his career at GE Lighting in 1972 as a research physicist and thereafter served 25 years in various capacities, including GE Lighting’s research and development manager and as development manager for high performance LED projects. He is incorporated herein by reference.a recognized global expert in light sources, lighting systems and lighting applications, with special emphasis in low wattage discharge lamps, electronic ballast technology and distributed lighting systems. Mr. Davenport developed numerous advanced lighting products for GE Lighting, including the blue Xenon headlamp currently used in automobiles. During his tenure with Energy Focus, Mr. Davenport led the development of a range of LED lighting products, including Intellitube®, Energy Focus’ unique tubular LED retrofit lamp. He is the author of more than 125 patents.
Section 16(a)beneficialownershipreportingcompliance
The information regarding compliance with Section 16Mr. Davenport received a Master’s degree in Physics and a Bachelor of the Securities Exchange Act of 1934 will be set forth under the caption entitled “Section 16(a) Beneficial Ownership Reporting Compliance”Science degree in our Proxy Statement and is incorporated herein by reference.
Physics from John Carroll University.
Audit committeeand FinanceCommittee
The Company’s Audit and Finance Committee acts as the standing audit committee of our board of directors. The Audit and Finance Committee, which currently consists of Mr. Politziner, as chair, Mr. Socolof and Ms. McManus, held six meetings in 2019. Each of the members of the Audit and Finance Committee is an Independent Director and is also independent under the criteria established by the SEC and NASDAQ for audit committee membership. Our board of directors has determined that Mr. Politziner is an “audit committee financial expert,” as defined under the rules of the SEC. Our board has approved a charter for the Audit and Finance Committee.A copy of this charter can be found on the Company’s website at http://www.energyfocus.com.
The Audit and Finance Committee’s primary functions are to assist our board of directors in its oversight of the integrity of the Company’s financial statements and other financial information, regardingthe Company’s compliance with legal and regulatory requirements, the qualifications, independence and performance of the Company’s independent registered public accounting firm. More specifically, the Audit CommitteeCommittee:
appoints, compensates, evaluates and, when appropriate, replaces the Company’s independent registered public accounting firm;
reviews and pre-approves audit and permissible non-audit services;
reviews the scope of our Boardthe annual audit;
monitors the independent registered public accounting firm’s relationship with the Company; and
meets with the independent registered public accounting firm and management to discuss and review the Company’s financial statements, internal controls, and auditing, accounting and financial reporting processes.
Code of ethicsEthics
We have adopted a Code of Ethics and Business Conduct, which applies to all of our directors, officers, and employees. Our Code of Ethics and Business Conduct can be found on our website at www.energyfocus.com. Any person may receive a copy free of charge by writing to us at Energy Focus, Inc., 32000 Aurora Road, Suite B, Solon, Ohio 44139, Attention: Secretary.
We intend to disclose on our website any amendment to, or waiver from, a provision of our Code of Ethics and Business Conduct that applies to our directors and executive officers, including our principal executive officer, principal financial officer, principal accounting officer or controller, or any persons performing similar functions, and that is required to be publicly disclosed pursuant to the rules of the SecuritiesSEC.
Delinquent Section 16(a) Reports
Section 16(a) of the Exchange Act requires our officers, directors and Exchange Commission.persons owning more than 10% of a registered class of our equity securities, who collectively we generally refer to as insiders, to file certain reports regarding ownership of, and transactions in, our securities with the SEC. Such insiders are also required by SEC rules to furnish us with copies of all Section 16(a) reports they file.
Based solely on our review of such reports filed with the SEC and written representations from the reporting persons, we believe that all of our insiders filed the required reports on a timely basis under Section 16(a) for fiscal year 2019, except (i) Ms. Cheng inadvertently filed two late Form 4s with respect to two transactions; (ii) Ms. McManus inadvertently filed two late Form 4s with respect to two transactions; (iii) the Former Schedule 13D Parties inadvertently filed one late Form 4 with respect to two transactions; (iv) Mr. Socolof inadvertently filed one late Form 3 after being appointed a director and two late Form 4s with respect to two transactions; (v) Mr. Nestor inadvertently filed one late Form 3 after being appointed President, Chief Financial Officer and Secretary; (vi) Mr. Politziner inadvertently filed one late Form 4 with respect to one transaction.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information requiredabout compensation of our current and former Chief Executive Officer; and our current and former Chief Financial Officer (our “Named Executive Officers”) for the years indicated:
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| | | | | | | | | | | | | | |
| Name and Principal Position | Year | Salary ($) (1) | Bonus ($) | Stock Awards ($ (2)) | Option Awards ($) (2) | Non-Equity Incentive Plan Compensation (3) | All Other Compensation ($) (4) | Total ($) |
| James Tu (5) | 2019 | 170,766 |
| — |
| — |
| 87,000 |
| 120,000 |
| — |
| 377,766 |
| | | | | | | | |
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| Theodore L. Tewksbury, III | 2019 | 351,825 |
| — |
| — |
| — |
| — |
| — |
| 351,825 |
| Former Chairman, Chief Executive Officer and President (6) | 2018 | 459,249 |
| — |
| 409,944 |
| — |
| — |
| 2,652 |
| 871,845 |
| | | | | | | | |
|
| Tod Nestor (7) | 2019 | 108,173 |
| — |
| — |
| 43,500 |
| 50,000 |
| — |
| 201,673 |
| | | | | | | | |
|
| Jerry Turin | 2019 | 169,677 |
| — |
| — |
| — |
| — |
| — |
| 169,677 |
| Former Chief Financial Officer and Secretary (8) | 2018 | 172,686 |
| 75,000 |
| 91,358 |
| 98,424 |
| — |
| 2,549 |
| 440,017 |
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| |
| (1) | Amounts paid in 2018 and 2019 reflect adjustments to implement salary increases and the timing of payroll dates. |
| (2) | Under SEC rules, the values reported reflect the aggregate grant date fair values computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 (“FASB ASC Topic 718”), to each of the Named Executive Officers in the years shown. We calculate the grant date fair value of stock option grants using the Black-Scholes option pricing model. We calculate the fair value of RSU grants based on the closing stock price on the grant date. A discussion of the assumptions used in calculating the fair value is set forth in Note 11 to the Consolidated Financial Statements contained in Item 8 of the 10-K Filing. |
| (3) | The amounts set forth in this column are amounts paid under the Company’s cash incentive program, which is described below under “Cash incentive plan.” |
| (4) | The amounts set forth in this column include Company-paid contributions for life insurance and supplemental disability policies |
| (5) | Mr. Tu joined the Company as an executive officer on April 2, 2019. Amounts reported reflect amounts earned for the portion of 2019 Mr. Tu was an employee. |
| (6) | Dr. Tewksbury served as the Chairman, Chief Executive Officer and President until the 10-K Filing on April 1, 2019. |
| (7) | Mr. Nestor joined the Company as an executive officer on July 1, 2019. Amounts reported reflect amounts earned for the portion of 2019 Mr. Nestor was an employee.
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| (8) | Mr. Turin was appointed as Chief Financial Officer and Secretary on May 29, 2018 and served until the 10-K Filing on April 1, 2019.
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Narrative Disclosure to Summary Compensation Table
The Compensation Committee (the “Committee”) of our board of directors generally has the responsibility of administering our executive compensation program or making recommendations to the full board with respect to such program. The Committee reviews and, as appropriate, makes recommendations to the full Board regarding the base salaries and annual cash bonuses for executive officers, and administers our stock incentive plans, including the grants of stock options.
Compensation Philosophy and Objectives
Our principal executive compensation policy is to provide a compensation program that will attract, motivate and retain persons of high quality and provide incentives that align the interests of our employees and directors with those of our stockholders. In administering the executive compensation program, the Committee is mindful of the following principles and guidelines, which are supported by this item is incorporated hereinthe full Board:
Base salaries for executive officers should be competitive.
A sufficient portion of annual compensation should be at risk in order to align the interests of executives with those of our stockholders.
The variable part of annual compensation should reflect both individual and corporate performance.
As a person’s level of responsibility increases, a greater portion of total compensation should be at risk and include more stock-based compensation to provide executives long-term incentives, and help to align further the interests of executives and stockholders in the enhancement of stockholder value.
Executive officer compensation has three primary components: base salary, bonuses granted under a bonus or cash incentive plan, and stock-based awards granted pursuant to our 2014 Equity Incentive Plan (“2014 Plan”). In addition, executive officers receive certain benefits that are generally available to all salaried employees. We do not have any defined benefit pension plans, non-qualified deferred compensation arrangements, or supplemental retirement plans for our executive officers.
During 2019, the Compensation Committee engaged Radford (a division of Aon) to assist with the review of the Company’s executive compensation by referenceproviding data on market trends and, more specifically, with respect to a group of peer companies having similar size and other characteristics to the Company based on the Company’s performance and how the Company’s compensation levels compared with such peers.
For each Named Executive Officer’s compensation for 2019, the Committee reviewed the proposed level for each compensation component based on various factors, including the median level for the peer group and other competitive market factors, internal equity and consistency, and an emphasis on pay for performance. The Committee made recommendations to our board of directors, based on input from the information providedthen Chief Executive Officer other than with respect to his own compensation, which then approved the final compensation amounts for each executive officer. We have not adopted any formal or informal policies or guidelines for allocating compensation between long-term and currently paid compensation, between cash and non-cash compensation, or among different forms of non-cash compensation.
Base Salary
The Committee seeks to establish executive officer base salary levels that are competitive with the median amounts paid to executives performing similar functions within the Company’s peer group. The Committee also takes into account a number of largely subjective factors, including changes in the section captioned “Executive Compensationindividual’s duties and responsibilities, the personal performance of such executive officer, the performance of the Company, cost-of-living increases, and such other factors as the Committee deems appropriate, including the individual’s overall mix between fixed and variable compensation and between cash and stock-based compensation.
Cash Incentive Plan
Effective July 16, 2019, an Executive Bonus Plan (the “Bonus Plan”) was established, based on the Committee’s recommendation to our board of directors, for executive management under which the executive officers are each eligible for a cash incentive payment. Our board of directors set the potential payments at up to the following percentages of such executive’s 2019 prorated salary, with the final amounts payable to be determined by our board of directors based upon the 2019 financial results with respect to the metrics and percentages described below:
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| | | Incentive Payment as a % of Base Salary (1) | |
| | Minimum | Target | Maximum | |
| | Chief Executive Officer | 0% | 120% | 240% | |
| | President and Chief Financial Officer | 0% | 60% | 120% | |
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| (1) | Based on the annual salary rate for the year and prorated for the portion of the year they worked for the Company. |
Subject to the terms of the Bonus Plan, distribution of the 2019 bonus was based 70% on Company performance and 30% on individual performance. Our board of directors or the Committee could, in its sole discretion, adjust amounts payable to any participant downward or upward to reflect such considerations as it may in its sole discretion deem to be appropriate.
The Company performance metrics selected for the Bonus Plan by the Committee were revenue and cash management. The minimum targets for the revenue condition and the cash management condition for Company performance were not met in 2019. The individual performance distribution was determined to be $120,000 for the Chief Executive Officer and $50,000 for the President and Chief Financial Officer, for a total of $170,000, which were paid in January 2020. As permitted by the Bonus Plan, the Committee used its discretion to grant Mr. Nestor a bonus that was $9,500, in excess of the amount payable pursuant to the Bonus Plan in light of his performance during 2019.
Discretionary Bonuses
The Committee may from time to time award a discretionary annual cash bonus to executive officers, in the amounts and based on the factors determined by the Committee. The bonus awards may be based on an executive officer’s individual performance or on the overall success of the Company, or both. There were no discretionary bonuses awarded to the Named Executive Officers with respect to 2019, other than the discretionary bonus paid to Mr. Nestor under the Bonus Plan.
Stock Awards and Other Information”Stock-Based Awards
The Committee believes that employee equity ownership provides significant motivation to be includedexecutive officers to maximize value for the Company’s stockholders and, therefore; periodically grants time-based stock options and restricted stock units (“RSUs”) under the Company’s 2014 Stock Incentive Plan, as amended (the “Equity Incentive Plan”) at the then current market price.
The Committee grants, or recommends to the Board to grant, options and/or RSUs to executive officers, typically after consideration of recommendations from the Chief Executive Officer. Recommendations for equity awards are based upon the relative position, responsibilities, and previous and expected contributions of each officer, previous equity award grants to such officers and customary levels of equity award grants for the respective position in other comparable companies. The exercise price for stock options is equal to the fair market value of our Proxy Statement.common stock on the grant date. Stock options generally vest over a four-year period with 25% vesting one year from the date of grant and the remaining 75% vesting equally on a monthly basis over the remaining 36 months. Options expire 10 years from the date of grant. RSUs, if granted, generally vest over a
three-year period with 33% vesting one year from the grant date, 33% vesting two years from the grant date, and the remaining 34% vesting three years from the grant date.
Under the Equity Incentive Plan, upon a Change of Control (as defined in such plan) all outstanding unvested RSUs become fully vested if not assumed, or substituted with a new award, by the successor to the Company and, if such awards are assumed or substituted by the successor to the Company, they become fully vested if the RSU holder’s employment is terminated (other than a termination for cause) within two years following a Change of Control. If an option holder’s employment is terminated within two years after a Change of Control for any reason other than death, retirement, disability or termination for cause, each outstanding stock option that is vested following such termination will remain exercisable until the earlier of the third anniversary of termination or the expiration of the term of the stock option.
In July 2019, Mr. Tu, Executive Chairman and Chief Executive Officer, was awarded 300,000 stock options and Mr. Nestor, President and Chief Financial Officer, was awarded 150,000 stock options. These options have an exercise price of $0.42 per share. One fourth of these options vest on July 16, 2020, with the remaining three-fourths vesting in equal monthly installments thereafter over a three-year period.
Change in Control Benefit Plan
On February 19, 2017, we established a Change in Control Benefit Plan to provide for the payment of certain benefits to selected eligible employees and directors of the Company. A Change in Control is defined in the same manner as under the Equity Incentive Plan and, subject to limited exceptions, includes any one or more of the following events summarized below:
any “person” becomes the beneficial owner, directly or indirectly, of 50% or more of the total voting power of the voting securities of the Company then outstanding and entitled to vote generally in the election of directors of the Company;
individuals who, as of the beginning of any 24-month period, constitute the Board cease for any reason during such 24-month period to constitute at least a majority of the Board; or
consummation of (A) a merger, consolidation or reorganization of the Company, in each case, with respect to which all or substantially all of the persons who were the respective owners of the voting securities of the Company prior to such merger, consolidation or reorganization, do not, following such merger, consolidation or reorganization
beneficially own, directly or indirectly, at least 35% of the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors of the entity or entities resulting from such merger, consolidation or reorganization, (B) a complete liquidation or dissolution of the Company, or (C) a sale or other disposition of all or substantially all of the assets of the Company.
The Company entered into Change in Control participation agreements with Dr. Tewksbury on February 19, 2017 and with Mr. Turin on May 18, 2018 (which terminated upon their departure). The Change in Control participation agreement provides for a lump sum payment equal to one times annual base salary and target bonus, accelerated vesting of stock awards, and continuation of group health plan benefits for 12 months if the participant’s employment is involuntarily terminated within 24 months of a Change in Control.
There are no Change in Control participation agreements in place with either Mr. Tu, Executive Chairman and Chief Executive Officer or Mr. Nestor, President Chief Financial Officer and Secretary.
Employment Agreements with Named Executive Officers
We do not have employment agreements with any of our Named Executive Officers.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth information with respect to equity awards outstanding for our Named Executive Officers as of December 31, 2019:
|
| | | | | | | | |
| | | | Option Awards |
| Name | Award Grant Date | | Number of Securities Underlying Unexercised Options Exercisable (#) | | Number of Securities Underlying Unexercised Options Unexercisable (#) | | Option Exercise Price ($) | Option Expiration Date |
| James Tu | 7/16/2019 | | — | | 300,000 | (1) | $0.42 | 7/16/2029 |
| | | | | | | | | |
| Tod Nestor | 7/16/2019 | | — | | 150,000 | (1) | $0.42 | 7/16/2029 |
| | | | | | | | | |
| Theodore L. Tewksbury, III | 2/27/2017 | | 45,323 | (2) | — | | $3.43 | 2/27/2027 |
| | | | | | | | | |
| Jerry Turin | 0 | | — | | — | | $0 | 0 |
|
| | |
| | |
| | |
| (1) | One-fourth vests on the first anniversary of the grant date, and the remainder vests in equal monthly installments thereafter over a three-year period. |
| (2) | One third was to vest on the first anniversary of the grant date, and the remainder was to vest monthly in equal installments over the following 24-month period. Pursuant to the terms of Dr. Tewksbury’s separation agreement with the Company, his unvested options terminated on April 1, 2019 and his vested options will remain exercisable for one year following his separation date, or through April 1, 2020. |
Compensation of Directors
We use a combination of cash and stock-based awards to attract and retain qualified candidates to serve on our board. In setting director compensation, our board considers the significant amount of time that directors expend in fulfilling their duties, the skill level required, and the compensation of board members at comparable companies.
Our board has approved the following annual cash and stock-based compensation for non-employee directors:
|
| | | | | |
| Annual Cash Retainer | $ | 24,000 |
| | |
| Additional Annual Cash Retainers: | | | |
| Lead Director | $ | 14,750 |
| | |
| Compensation Committee Chair | $ | 14,000 |
| | |
| Compensation Committee Member | $ | 5,000 |
| | |
| Audit and Finance Committee Chair | $ | 19,000 |
| | |
| Audit and Finance Committee Member | $ | 7,000 |
| | |
| Nominating and Corporate Governance Committee Chair | $ | 9,000 |
| | |
| Nominating and Corporate Governance Committee Member | $ | 4,000 |
| | |
| Initial Restricted Stock Unit Grant | 20,000 |
| | (1) |
|
| | |
| | |
| | |
| (1) | Each current non-employee director received 20,000 RSUs/shares of common stock for their service during 2019, with any RSUs granted vesting in full on December 17, 2019, the date of our annual meeting of stockholders. |
The Board, at its discretion, may grant options or other equity awards to newly elected directors and additional grants to other directors.
The following table shows the total annual compensation paid to non-employee directors for the year ended December 31, 2019:
|
| | | | | | | | | |
| Name | | Fees Earned or Paid in Cash ($) (1) | | Stock Awards ($) (2) | | Total ($) |
| Jennifer Cheng | | 24,033 |
| | 14,286 |
| | 38,319 |
|
| Geraldine McManus | | 34,550 |
| | 14,286 |
| | 48,836 |
|
| Philip Politziner | | 12,671 |
| | 8,400 |
| | 21,071 |
|
| Stephen Socolof | | 31,103 |
| | 8,400 |
| | 39,503 |
|
| Ronald D. Black (3) | | 28,638 |
| | — |
| | 28,638 |
|
| Glenda M. Dorchak (3) | | 22,521 |
| | — |
| | 22,521 |
|
| Marc J. Eisenberg (3) | | 23,088 |
| | — |
| | 23,088 |
|
| Michael R. Ramelot (4) | | 49,443 |
| | — |
| | 49,443 |
|
| Satish Rishi (3) | | 24,829 |
| | — |
| | 24,829 |
|
|
| | |
| | |
| (1) | Represents cash fees earned during 2019. |
| (2) | Represents RSUs that vested on December 17, 2019 and settled in Common Stock or stock grants. The grant date fair value is calculated based on the closing price of the stock on the grant date. |
| (3) | Dr. Black and Messrs. Eisenberg and Rishi resigned from our board of directors effective as of the April 1, 2019. Ms. Dorchak resigned from the Board as of February 21, 2019. Their unvested RSUs vested as of their respective resignation dates. |
| (4) | Mr. Ramelot’s term as a director expired at the 2019 Annual Meeting of stockholders held on December 17, 2019, and he was not re-nominated for an additional term. |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information about security ownership of certain beneficial owners and management and related stockholder matters required by this item is incorporated herein by reference from the information to be provided in the section captioned “Security Ownership of Principal Shareholders and Management” in our Proxy Statement. Information regarding our equity compensation plans is set forth under Item 5 of this Annual Report under “Shares Securitiesauthorized for issuance under equity compensation plans.”plans
The following table details information regarding our existing equity compensation plans as of December 31, 2019:
|
| | | | | | | | | |
| | | Equity Compensation Plan Information | |
| Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| Equity compensation plans approved by security holders | | 810,204 |
| | 1.04 | (2) | 1,236,938 |
| (1) |
(1)Includes 385,778 shares available for issuance under the 2013 Employee Stock Purchase Plan and 851,160 shares available for issuance under our 2014 Stock Incentive Plan, which may be issued in the form of options, restricted stock, restricted stock units, and other equity-based awards.
(2)Does not include 33,051 shares that are restricted stock units and do not have an exercise price.
Security Ownership of Principal Stockholders and Management
The following table sets forth certain information with respect to beneficial ownership of Common Stock as of February 21, 2020, as to (i) each person known by the Company to beneficially own more than 5% of the outstanding shares of Common Stock, (ii) each of the Company’s current directors and Named Executive Officers listed below, and (iii) all current executive officers and directors of the Company as a group. Unless otherwise specified, the address for each
officer and director is 32000 Aurora Road, Suite B, Solon Ohio 44139. Except as otherwise indicated and subject to community property laws where applicable, each person or entity included in the table below has sole voting and investment power with respect to the shares beneficially owned by that person or entity.
As noted in the footnotes to the tables below, beneficial ownership of our common stock includes shares of Series A Preferred Stock, which are convertible into our common stock on a one-for-one-basis. 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 our 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 55.37% of the number of shares of common stock into which such share of Series A Preferred Stock is convertible.
|
| | | | | | | |
| | | Shares Beneficially Owned |
| | | | | | Percent of Outstanding Common Stock (1) |
| | | | | |
| Name and Address | | | | |
| 5% Stockholders | | | | | |
| Schedule 13D Parties (James Tu and Gina Huang (Mei Yun Huang) | | 3,038,413 |
| (2) | | 17.3 | % |
| 1 Bridge Plaza North, #275 | | | | | |
| Fort Lee, NJ 07024 | | | | | |
| | | | | | |
| James Tu | | 1,224,253 |
| (3) | | 7.3 | % |
| Gina Huang (Mei Yun Huang) | | 1,814,160 |
| (4) | | 10.9 | % |
| | | | | | |
| Current Directors and Named Executive Officers | | | | | |
| Jennifer Cheng | | 24,390 |
| | | * |
|
| Geraldine F. McManus | | 24,390 |
| | | * |
|
| Philip Politziner | | 20,000 |
| | | * |
|
| Stephen Socolof | | 20,000 |
| | | * |
|
| Tod Nestor | | 0 |
| | | * |
|
| James Tu | | See “5% Stockholders” above |
| Gina Huang (Mei Yun Huang) | | See “5% Stockholders” above |
| Theodore L. Tewksbury III | | 231,549 |
| (5) | | 1.5 | % |
| Jerry Turin | | 18,064 |
| | | * |
|
| | | | | | |
| All Current Directors and Executive Officers as a Group | | 3,127,193 |
| | | 17.8 | % |
*Less than one percent
| |
| (1) | Based on 15,892,526 shares of Common Stock outstanding as of February 21, 2020. In addition, shares of Common Stock issuable pursuant to options that are currently exercisable, or may become exercisable within 60 days of February 21, 2020, or pursuant to RSUs scheduled to vest within 60 days of February 21, 2019, are included in the reported beneficial holdings of the individual owning such options or RSUs. These shares of Common Stock have been treated as outstanding in calculating the percentage ownership of the individual possessing such interest, but not for any other individual. |
| |
| (2) | On January 30, 2020, James Tu and Gina Huang and certain of their respective controlled affiliates filed a Schedule 13D that indicated that they may be deemed to be members of a “group” (as such term is defined in as defined in Section 13(d)(3) of the Exchange Act and Rule 13d-5(b) promulgated thereunder). This number reflects the beneficial ownership of the group collectively and includes 1,721,023 shares of Common Stock that could be acquired upon the conversion of 1,721,023 shares of Series A Preferred Stock. For information regarding the beneficial ownership of Mr. Tu and Ms. Huang individually, see footnotes (3) and (4), respectively. |
| |
| (3) | Mr. Tu has shared voting and dispositive power over 300,000 shares of Common Stock held by 5 Elements Global Fund L.P. (“Global Fund”) and 924,253 shares of Common Stock issuable upon the conversion of 924,253 shares of Series A Preferred Stock held by Fusion Park LLC. (“Fusion Park”). Global Fund and Fusion Park are controlled affiliates of Mr. Tu. |
| |
| (4) | Ms. Huang has shared voting and dispositive power over 1,214,160 shares of Common Stock (which includes 796,770 shares of Series A Preferred Stock convertible into 796,770 shares of Common Stock) held by Brilliant Start Enterprise, Inc. (“Brilliant Start”), and 600,000 shares of Common Stock held by Jag International Ltd. (“Jag”). Brilliant Start and Jag are controlled affiliates of Ms. Huang. |
| |
| (5) | Includes 51,503 options currently exercisable until April 1, 2020. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Transactions with Related Persons
On November 30, 2018, each of Gina Huang, Brilliant Start, Jag, Jiangang Luo, Cleantech Global Ltd., James Tu, Global Fund, Yeh-Mei Hui Cheng, Communal International, Ltd., and 5 Elements Energy Efficiency Limited (the “Former Schedule 13D Parties”) filed a Schedule 13D with the SEC, indicating that they may have been deemed to be a “group” under Section 13(d)(3) of the Exchange Act of 1934, as amended, and Rule 13d-5 promulgated thereunder, and that such group beneficially owned 17.6% of our common stock. The information regardingSchedule 13D was amended on February 26, 2019 and April 3, 2019.
A description of the relationships between certain relationshipsof the Former Schedule 13D Parties is set forth below:
Gina Huang (“Ms. Huang”), who:
| |
| ◦ | is the Chairperson of Brilliant Start and the sole owner of Jag; |
| |
| ◦ | has voting and dispositive power over the common stock beneficially owned by Brilliant Start and Jag; |
Jiangang Luo (“Mr. Luo”), who is the Managing Partner of Cleantech Global Ltd. (“Cleantech”), and related transactionsa former member of our board of directors;
James Tu (“Mr. Tu”), who is now the Company’s Chairman and Chief Executive Officer and member of our board and previously served as Chairman, Chief Executive Officer and President of the Company and a member of our board from December 18, 2012 until his resignation from such positions on February 19, 2017:
| |
| ◦ | has voting and dispositive power over the common stock held by Global Fund; |
| |
| ◦ | is a Co-Founder and 50% owner of Communal International, Ltd. (“Communal”), which has 50% ownership interest in Energy Efficiency (defined below); |
Yeh-Mei Hui Cheng (“Ms. Cheng”), who:
| |
| ◦ | is the general partner and controlling partner of Energy Efficiency (defined below); |
| |
| ◦ | owns 50% of Energy Efficiency; |
| |
| ◦ | is Co-Founder and 50% owner of Communal, which owns the other 50% of Energy Efficiency; and |
| |
| ◦ | is the mother of Jennifer Cheng, a current member of our board of directors, and Simon Cheng, a member of our board of directors through February 19, 2017 and a current employee of the Company. |
Communal, which holds 50% ownership interest in 5 Elements Energy Efficiency Limited (“Energy Efficiency”); and
Energy Efficiency, which is owned 50% by Ms. Cheng and 50% by Communal.
On February 21, 2019, the Former Schedule 13D Parties entered into a settlement with the Company providing for the appointment of two directors (Geraldine McManus and Jennifer Cheng) and the nomination of those two director independence requiredfor election at the Company’s 2019 annual meeting of stockholders.
On March 29, 2019, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with certain investors, including Fusion Park (of which James Tu is the sole member) and Brilliant Start (which is controlled by this item is incorporated herein by referenceGina Huang), for the purchase of an aggregate of $1.7 million in subordinated convertible promissory notes. Pursuant to the informationNote Purchase Agreement, Fusion Park and Brilliant Start purchased $580,000 and $500,000, respectively, in principal amount of the subordinated convertible promissory notes. The subordinated convertible promissory notes were amended on May 29, 2019 (as amended, the “Convertible Notes”). In connection with the sale of Convertible Notes, Mr. Tu was appointed as a member of our board of directors on April 1, 2019 and Chief Executive Officer, President and interim Chief Financial Officer on April 2, 2019.
The Convertible Notes had a maturity date of December 31, 2021 and bore interest at a rate of 5% per annum until June 30, 2019 and at a rate of 10% thereafter. Pursuant to their terms, on January 16, 2020 following approval of certain amendments to our certificate of incorporation by our stockholders, the principal amount of all of the Convertible Notes and the accumulated interest thereon in the amount of $1,815,041 converted at a conversion price of $0.67 per share into an aggregate of 2,709,018 shares of Series A Preferred Stock, which is convertible on a one-for-one basis into shares of our common stock. Upon the conversion of the Convertible Notes, Fusion Park and Brilliant Start received 924,253 shares and 796,770 shares, respectively, of Series A Preferred Stock.
On January 30, 2020, the Former Schedule 13D Parties filed an amendment to their Schedule 13D, which among other things, reported that the “group” that may have been formed by the Former Schedule 13D parties was no longer a group. That amendment did note, however, that Ms. Huang, Jag, Brilliant Start, James Tu, Global Fund and Fusion Park may be deemed to be provideda “group” (as such term is defined in as defined in Section 13(d)(3) of the Exchange Act and Rule 13d-5(b) promulgated thereunder).
Director Independence
Our board of directors has determined that each of the following current directors is an Independent Director:
|
| | | | |
| • Jennifer Cheng | | • Stephen Socolof | |
| • Geraldine F. McManus | | • Gina Huang | |
| • Philip Politziner | | | |
In addition, to the knowledge of the current management, each of the following persons that served as a director during the last completed fiscal year but is no longer a member of our Proxy Statement underboard of directors was an Independent Director during his or her tenure: Ronald D. Black, Glenda M. Dorchak, Marc J. Eisenberg, Michael Ramelot and Satish Rishi.
Each of the captions “Certain RelationshipsAudit and Related Transactions”Finance Committee, the Nominating and “Director Independence.”Corporate Governance Committee and the Compensation Committee is comprised entirely of Independent Directors.
ITEM 14. PRINCIPAL ACCOUNTANTACCOUNTING FEES AND SERVICES
The information regarding principal accountant fees and services and the pre-approval policies and procedures required by this item is incorporated herein by reference from the information to be contained in our Proxy Statement under the captions “Principal Accountant Fees and Services”Services
Plante & Moran, PLLC provided audit services to the Company for the fiscal year ending December 31, 2018. GBQ Partners, LLC, an independent member of the BDO Alliance USA, provided audit services to the Company for the fiscal year ending December 31, 2019. The following table presents fees for professional services rendered by Plante & Moran, PLLC for 2018; and “Pre-ApprovalPlante & Moran, PLLC and GBQ Partners, LLC collectively for 2019:
|
| | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 |
| Audit Fees | $ | 290,308 |
| | $ | 327,500 |
|
| Audit-Related Fees | - |
| | - |
|
| Tax Fees | - |
| | - |
|
| All Other Fees | - |
| | - |
|
| Total Fees | $ | 290,308 |
| | $ | 327,500 |
|
Audit Fees. “Audit Fees” include the aggregate fees billed for professional services rendered. Audit Fees for 2019 include fees billed by Plante & Moran, PLLC and GBQ Partners, LLC and include payments for professional services rendered in 2019,
including audit services related to quarterly reviews and audits of consolidated financial statements, reviews in connection with SEC filings and related consents, comfort letters related to the public stock offering, and other consultations. Because we are a smaller reporting company, for both 2019 and 2018, we were not required to obtain an attestation report with respect to our internal control over financial reporting from our independent registered public accounting firm. Therefore, no fees related to that attestation report were incurred.
Pre-Approval Policies and Procedures.”Procedures
It is the Company’s policy that all audit and non-audit services to be performed by the Company’s principal auditors be approved in advance by the Audit and Finance Committee. The Audit and Finance Committee pre-approved all services provided by GBQ Partners, LLC during 2019.
PART IV
ITEM 15. EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES
| |
| (a) | (1) Financial statements |
The financial statements required by this Item 15(a)(1) are set forth in Item 8.8 of this Annual Report.
(2) Financial statement schedules
Schedule II—Valuation and Qualifying Accounts is set forth below. All other schedules are omitted either because they are not applicable, or the required information is shown in the financial statements or the notes.
SCHEDULE II
ENERGY FOCUS, INC.
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
| | | Description | | Beginning Balance | | Charges to Revenue/ Expense | | Deductions | | Ending Balance | | Beginning Balance | | Charges to Revenue/ Expense | | Deductions | | Ending Balance |
| Year ended December 31, 2019 | | | | | | | | | |
| Allowance for doubtful accounts and returns | | | $ | 33 |
| | $ | 30 |
| | $ | 35 |
| | $ | 28 |
|
| Inventory reserves | | | 4,212 |
| | 814 |
| | 1,381 |
| | 3,645 |
|
| Valuation allowance for deferred tax assets | | | 12,822 |
| | 1,568 |
| | — |
| | 14,390 |
|
| Year ended December 31, 2018 | | | | | | | | | |
| Allowance for doubtful accounts and returns | | | $ | 42 |
| | 20 |
| | 29 |
| | $ | 33 |
|
| Inventory reserves | | | 4,196 |
| | 1,085 |
| | 1,069 |
| | 4,212 |
|
| Valuation allowance for deferred tax assets | | | 10,556 |
| | 2,266 |
| | — |
| | 12,822 |
|
| Year ended December 31, 2017 | | | | | | | | | | | | |
| | |
| | |
| Allowance for doubtful accounts and returns | | $ | 236 |
| | $ | 23 |
| | $ | 217 |
| | $ | 42 |
| | $ | 236 |
| | 23 |
| | 217 |
| | $ | 42 |
|
| Inventory reserves | | 5,596 |
| | 1,139 |
| | 2,539 |
| | 4,196 |
| | 5,596 |
| | 1,139 |
| | 2,539 |
| | 4,196 |
|
| Valuation allowance for deferred tax assets | | 12,537 |
| | 3,883 |
| | 5,864 |
| | 10,556 |
| | 12,537 |
| | 3,883 |
| | 5,864 |
| | 10,556 |
|
| Year ended December 31, 2016 | | | | | | | | | |
| Allowance for doubtful accounts and returns | | $ | 155 |
| | $ | 156 |
| | $ | 75 |
| | $ | 236 |
| |
| Inventory reserves | | 2,315 |
| | 6,110 |
| | 2,829 |
| | 5,596 |
| |
| Valuation allowance for deferred tax assets | | 7,768 |
| | 4,769 |
| | — |
| | 12,537 |
| |
| Year ended December 31, 2015 | | | | | | | | | |
| Allowance for doubtful accounts and returns | | $ | 307 |
| | $ | 39 |
| | $ | 191 |
| | $ | 155 |
| |
| Inventory reserves | | 576 |
| | 2,066 |
| | 327 |
| | 2,315 |
| |
| Valuation allowance for deferred tax assets | | 9,008 |
| | (1,240 | ) | | — |
| | 7,768 |
| |
(3) Exhibits required by Item 601 of Regulation S-K
The information required by this Item is set forth on the Exhibit Index that follows the signature page of this report.
ITEM16.FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereto duly authorized.
|
| | | | |
| | | | ENERGY FOCUS, INC. |
| | | | |
| | By: | | /s/ Theodore L. Tewksbury III |
| | | | Theodore L. Tewksbury III |
| | | | Chairman, Chief Executive Officer and President
Date: February 22, 2018
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the date indicated:
|
| | | | | | |
Signature | | Title |
| | |
/s/ Theodore L. Tewksbury III | | Chairman, Chief Executive Officer, President and Director |
Theodore L. Tewksbury III | | (Principal Executive Officer) |
| | |
/s/ Michael H. Port | | Chief Financial Officer |
Michael H. Port | | (Principal Financial and Accounting Officer)
|
| | |
| | |
*Ronald D. Black | | Director |
*William Cohen | | Director |
*Glenda Dorchak | | Director |
*Marc J. Eisenberg | | Director |
*Michael R. Ramelot | | Director |
| | |
| *By: | /s/ Theodore L. Tewksbury III |
| | Theodore L. Tewksbury III (Attorney-in-fact) |
| | Date: February 22, 2018 |
EXHIBIT INDEX
|
| |
Exhibit Number | Description of Documents |
| |
| Certificate of Incorporation of the RegistrantEnergy Focus, Inc. (incorporated by reference to Exhibit 3.1Appendix A to the Registrant’s Quarterly ReportDefinitive Proxy Statement on Form 10-QSchedule 14A filed on November 13, 2013)May 1, 2006). |
| Certificate of Amendment to the Certificate of Incorporation of Energy Focus, Inc. filed with the RegistrantSecretary of State of the State of Delaware on June 21, 2010 (filed with this Report). |
| Certificate of Amendment to the Certificate of Incorporation of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on October 9, 2012 (filed with this Report). |
|
| |
| Certificate of Amendment to the Certificate of Incorporation of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on October 28, 2013 (filed with this Report). |
| Certificate of Amendment to the Certificate of Incorporation of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on July 16, 2014 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on July 16, 2014). |
| Certificate of Amendment to the Certificate of Incorporation of Energy Focus, Inc. filed with the RegistrationSecretary of State of the State of Delaware on July 24, 2015 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on July 27, 2015). |
| Certificate of Amendment to the Certificate of Incorporation of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on January 15, 2020 (filed with this Report). |
| Certificate of Designation of Series A ParticipatingConvertible Preferred Stock of Energy Focus, Inc. filed with the RegistrantSecretary of State of the State of Delaware on March 29, 2019 (incorporated by reference to Exhibit 3.23.1 to the Registrant’s Current Report on Form 8-K filed on November 27, 2006)April 1, 2019). |
| Amendment to the Certificate of Designation of Series A Convertible Preferred Stock of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on May 30, 2019 (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on May 30, 2019). |
| Amendment to the Certificate of Designation of Series A Convertible Preferred Stock of Energy Focus, Inc. filed with the Secretary of State of the State of Delaware on January 15, 2020 (filed with this Report). |
| Bylaws of the RegistrantEnergy Focus, Inc. (incorporated by reference to Exhibit 3.5 to the Registrant’s Annual Report on Form 10-K filed on March 10, 2016). |
| Certificate of Ownership and Merger, Merging Energy Focus, Inc., a Delaware corporation, into Fiberstars, Inc., a Delaware corporation, filed with the Secretary of State of the State of Delaware on May 4, 2007 (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 10, 2007). |
| Description of Securities of Energy Focus, Inc. (filed with this Report). |
| Form of Common Stock CertificateWarrant (incorporated by reference to Exhibit 4.1 of the Registrant’s AnnualCurrent Report on Form 10-K8-K filed on March 27, 2014)January 13, 2020). |
| Form of Placement Agent Warrant (incorporated by reference to Exhibit 4.2 of the Registrant’s Current Report on Form 8-K filed on January 13, 2020). |
| 2013 Employee Stock Purchase Plan (incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Form DEF14A filed on August 16, 2013). |
| 2004 Stock Incentive Plan (incorporated by reference to Exhibit 99.1 to the Registrant’s Registration Statement on Form S-8 (Commission File No. 333-122-686) filed on February 10, 2005). |
| 2008 Incentive Stock Plan, as amended (incorporated by reference from Appendix B to the Registrant’s Preliminary Proxy Statement on Form PRER14A filed on June 8, 2012). |
| 2014 Stock Incentive Plan, as amended (filed with this report)(incorporated by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K filed on February 22, 2018). |
| Form of Nonqualified Stock Option Grant Agreement to Non-Employee Directors (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 16, 2014). |
| Form of Nonqualified Stock Option Grant Agreement to Employees (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on July 16, 2014). |
| Form of Restricted Stock Unit Grant Agreement to Employees (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on July 16, 2014). |
| Form of Restricted Stock Unit Grant Agreement to Non-Employee Directors (filed with this Report)(incorporated by reference to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K filed on February 22, 2018). |
| Form of Incentive Stock Option Grant Agreement to Employees (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on July 16, 2014). |
| Agreement and General Release of Claims dated May 6, 2016 between Eric W. Hilliard and Energy Focus, Inc. (incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed May 11, 2016). |
| Separation Agreement and Release dated June 17, 2016 between Marcia J. Miller and Energy Focus, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 21, 2016). |
| Executive Chairman Offer Letter dated November 18, 2016 between Theodore L. Tewksbury III and Energy Focus, Inc. (filed as Exhibit 10.13 to the Registrant’s Annual Report on Form 10-K filed February 23, 2017). |
| Chief Financial Officer Offer Letter dated November 18, 2016 between Bradley B. White and Energy Focus, Inc. (filed as Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K filed February 23, 2017). |
| Separation Agreement and Release dated February 18, 2017 between James Tu and Energy Focus, Inc. (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed February 21, 2017). |
| Chairman, Chief Executive Officer and President Offer Letter and Change in Control Participation Agreement dated February 19, 2017 between Theodore L. Tewksbury III and Energy Focus, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed February 21, 2017). |
| Change in Control Benefit Plan Participation Agreement dated March 21, 2017 between Michael H. Port and Energy Focus, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed May 4, 2017). |
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| Energy Focus, Inc. Executive Bonus Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 17, 2017). |
| Change in Control Plan and Form of Participation Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed February 21, 2017). |
| Change in Control Participation AgreementChief Financial Officer Offer Letter dated February 19, 2017May 18, 2018 between Bradley B. WhiteJerry Turin and Energy Focus, Inc. (incorporated by reference to Exhibit 10.310.1 to the Registrant’s Quarterly Report on Form 10-Q filed on August 8, 2018). |
| Change in Control Plan and Form of Participation Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed February 21, 2017). |
| Form of Notice of Stock Option Grant for 2008 Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on November 13, 2013). |
| Form of Notice of Stock Option Grant for 2008 Stock Incentive Plan (incorporated by reference to Exhibit 99.2 to the Registrant’s Registration Statement on Form S-8 filed on September 8, 2010). |
| Lease agreement by and between Aurora Development Center LLC and Energy Focus, Inc. dated April 19, 2016 (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 11, 2016). |
| Loan and Security Agreement dated December 11, 2018 by and between the Company and Austin Financial Services, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K/A filed on December 14, 2018). |
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| Agreement dated February 21, 2019 entered into by Energy Focus, Inc. and the Investor Group thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on February 26, 2019). |
| Note Purchase Agreement, dated March 29, 2019, among the Company and each of the Investors thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on April 1, 2019). |
| Form of Subordinated Convertible Promissory Note entered into by the Company and each of the Investors on March 29, 2019 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on April 1, 2019). |
| Separation Agreement and Release between Energy Focus, Inc. and Theodore L. Tewksbury III, effective as of April 1, 2019 (incorporated by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed on April 1, 2019). |
| Separation Agreement and Release between Energy Focus, Inc. and Jerry Turin, effective as of April 1, 2019 (incorporated by reference to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed on April 1, 2019). |
| Form of Amended and Restated Subordinated Convertible Promissory Note entered into by the Company and each of the Investors thereto (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 30, 2019). |
| President and Chief Financial Officer Offer Letter dated June 18, 2019 between Tod A. Nestor and Energy Focus, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on July 22, 2019). |
| Energy Focus, Inc. Executive Bonus Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on July 19, 2019). |
| Note Purchase Agreement, dated November 25, 2019, by and between Energy Focus, Inc. and Iliad Research and Trading, L.P. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 29, 2019). |
| Promissory Note, effective November 25, 2019, in favor of Iliad Research and Trading, L.P. (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on November 29, 2019). |
| Form of Securities Purchase Agreement, dated as of January 9, 2020, between the Company and each purchaser named in the signature pages thereto (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K filed on January 13, 2020). |
| Subsidiaries of the Registrant (filed with this Report). |
| Consent of GBQ Partners, LLC, Independent Registered Public Accounting Firm (filed with this Report). |
| Consent of Plante & Moran, PLLC, Independent Registered Public Accounting Firm (filed with this Report). |
| Powers of Attorney (filed with this Report). |
| Rule 13a-14(a) Certification byof Chief Executive Officer (filed with this Report).Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Rule 13a-14(a) Certification byof Chief Financial Officer (filed with this Report).Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| Section 1350 Certification of Chief Executive Officer and Chief Financial Officer (filed with this Report).Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101101+ | The following financial information from Energy Focus, Inc. Annual Report on Form 10-K for the year ended December 31, 2014,2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Shareholders’ Equity, (v) Consolidated Statements of Cash Flows, (vi) the Notes to Consolidated Financial Statements. |
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| * | Management contract or compensatory plan or arrangement. |
| + | 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. |
ITEM16.FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
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| | | | |
| | | | ENERGY FOCUS, INC. |
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| Date: March 24, 2020 | | By: | | /s/ James Tu |
| | | | James Tu |
| | | | Executive Chairman and Chief Executive Officer (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date indicated:
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| Date | Signature | Title |
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| March 24, 2020 | /s/ James Tu | Executive Chairman and Chief Executive Officer |
| James Tu | (Principal Executive Officer) |
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| March 24, 2020 | /s/ Tod Nestor | President and Chief Financial Officer |
| Tod Nestor | (Principal Financial and Accounting Officer) |
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| March 24, 2020 | /s/ Jennifer Y. Cheng | |
| Jennifer Y. Cheng | Director |
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| March 24, 2020 | /s/ Gina Huang (Mei Yun Huang) | |
| Gina Huang (Mei Yun Huang) | Director |
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| March 24, 2020 | /s/ Geraldine F. McManus | |
| Geraldine F. McManus | Director |
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| March 24, 2020 | /s/ Philip Politziner | |
| Philip Politziner | Director |
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| March 24, 2020 | /s/ Stephen Socolof | |
| Stephen Socolof | Director |
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