Energy Focus, Inc. (NASDAQ:EFOI) Q1 2020 Earnings Conference Call May 13, 2020 11:00 AM ET Company Participants Brett Maas - Managing Partner, Hayden IR James Tu - Chairman & Chief Executive Officer Tod Nestor - President & Chief Financial Officer Conference Call Participants Amit Dayal - H.C. Wainwright Orin Hirschman - AIGH Investment Partners Robert Smith - Center for Performance Investing Edward Gilmore - Little Grapevine Operator Greetings and welcome to Energy Focus First Quarter Fiscal Year 2020 Earn ...

[Cover Page and Filing Information](index=1&type=section&id=Cover%20Page%20and%20Filing%20Information) This report is a Quarterly Report on Form 10-Q for Q1 2020 by Energy Focus, Inc., a non-accelerated and smaller reporting company - The report is a Quarterly Report on Form 10-Q for the period ended March 31, 2020, filed by Energy Focus, Inc. (EFOI) on NASDAQ[2](index=2&type=chunk)[3](index=3&type=chunk) - The registrant is classified as a Non-accelerated filer and a Smaller reporting company[4](index=4&type=chunk) - As of May 5, 2020, the number of outstanding shares of common stock was **15,896,956**[5](index=5&type=chunk) [PART I - FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20-%20FINANCIAL%20INFORMATION) This section presents the unaudited condensed consolidated financial statements and related disclosures for the company [Forward-looking Statements](index=4&type=section&id=Forward-looking%20statements) This section outlines the company's forward-looking statements, emphasizing that they involve risks and uncertainties and are not guarantees of future performance. It lists various factors that could cause actual results to differ materially, including economic disruptions from COVID-19, the need for additional financing, liquidity challenges, market competition, and reliance on a limited number of customers - Forward-looking statements are subject to risks and uncertainties, and actual results may differ materially[11](index=11&type=chunk) - Key risk factors include disruptions from the COVID-19 pandemic, the need for additional financing, liquidity and refinancing demands, ability to continue as a going concern, customer concentration, and intense market competition[12](index=12&type=chunk)[14](index=14&type=chunk) - The company does not undertake to update any forward-looking statement unless required by law, and historical comparisons are not indicative of future performance[15](index=15&type=chunk) [ITEM 1. FINANCIAL STATEMENTS](index=4&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS) This section presents the unaudited condensed consolidated financial statements for Energy Focus, Inc., including the balance sheets, statements of operations, comprehensive loss, changes in stockholders' equity, and cash flows, along with detailed notes explaining the company's accounting policies, financial instruments, debt, equity, and other significant financial activities for the quarter ended March 31, 2020 [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section presents the company's financial position, detailing assets, liabilities, and equity at period-end Condensed Consolidated Balance Sheets (in thousands) | Metric | March 31, 2020 (Unaudited) | December 31, 2019 | | :-------------------------------------- | :------------------------- | :------------------ | | **ASSETS** | | | | Cash | $2,911 | $350 | | Total current assets | $10,181 | $9,334 | | Total assets | $12,423 | $11,739 | | **LIABILITIES** | | | | Total current liabilities | $5,674 | $6,542 | | Total liabilities | $6,539 | $7,743 | | **STOCKHOLDERS' EQUITY** | | | | Total stockholders' equity | $5,884 | $3,996 | - Cash significantly increased from **$350 thousand** at December 31, 2019, to **$2,911 thousand** at March 31, 2020[19](index=19&type=chunk) - Total stockholders' equity increased from **$3,996 thousand** to **$5,884 thousand**, while total liabilities decreased from **$7,743 thousand** to **$6,539 thousand**[19](index=19&type=chunk) [Condensed Consolidated Statements of Operations](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) This section presents the company's financial performance, including net sales, gross profit, and net loss for the reported periods Condensed Consolidated Statements of Operations (in thousands, except per share amounts) | Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | | :----------------------------------------- | :-------------------------------- | :-------------------------------- | | Net sales | $3,783 | $3,177 | | Cost of sales | $2,751 | $3,079 | | Gross profit | $1,032 | $98 | | Total operating expenses | $2,295 | $2,901 | | Loss from operations | $(1,263) | $(2,803) | | Net loss | $(541) | $(2,865) | | Net loss per share - basic and diluted | $(0.04) | $(0.24) | - Net sales increased by **19.1%** YoY, from **$3,177 thousand** in Q1 2019 to **$3,783 thousand** in Q1 2020[22](index=22&type=chunk) - Gross profit significantly improved from **$98 thousand** (**3.1%** of net sales) in Q1 2019 to **$1,032 thousand** (**27.3%** of net sales) in Q1 2020[22](index=22&type=chunk)[130](index=130&type=chunk) - Net loss decreased substantially from **$(2,865) thousand** in Q1 2019 to **$(541) thousand** in Q1 2020, leading to a reduced net loss per share of **$(0.04)**[22](index=22&type=chunk)[141](index=141&type=chunk) [Condensed Consolidated Statements of Comprehensive Loss](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Loss) This section presents the company's comprehensive loss, including net loss and other comprehensive income/loss components Condensed Consolidated Statements of Comprehensive Loss (in thousands) | Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | | :----------------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(541) | $(2,865) | | Foreign currency translation adjustments | — | — | | Comprehensive loss | $(541) | $(2,865) | - Comprehensive loss mirrored net loss, showing a significant reduction from **$(2,865) thousand** in Q1 2019 to **$(541) thousand** in Q1 2020, with no foreign currency translation adjustments in either period[24](index=24&type=chunk) [Condensed Consolidated Statements of Changes in Stockholders' Equity](index=11&type=section&id=Condensed%20Consolidated%20Statements%20of%20Changes%20in%20Stockholders'%20Equity) This section details changes in stockholders' equity, including net loss, stock issuances, and warrant liabilities Condensed Consolidated Statements of Changes in Stockholders' Equity (in thousands) | Metric | December 31, 2019 | March 31, 2020 | | :----------------------------------------- | :------------------ | :--------------- | | Total Stockholders' Equity | $3,996 | $5,884 | | Issuance of common stock and warrants | — | $2,750 | | Offering costs on issuance of common stock and warrants | — | $(474) | | Warrant liability | — | $(1,636) | | Conversion of notes to preferred stock | — | $1,769 | | Net loss for the three months ended March 31, 2020 | $(124,874) (Accumulated Deficit) | $(541) (Net Loss) | - Total stockholders' equity increased from **$3,996 thousand** at December 31, 2019, to **$5,884 thousand** at March 31, 2020, primarily due to the January 2020 Equity Offering and conversion of notes to preferred stock, despite a net loss[26](index=26&type=chunk) - The company issued common stock and warrants for **$2,750 thousand** and converted notes to preferred stock for **$1,769 thousand** during Q1 2020[26](index=26&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=12&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section presents the company's cash flows from operating, investing, and financing activities for the reported periods Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | | :----------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by (used in) operating activities | $504 | $(3,556) | | Net cash used in investing activities | $(47) | $(4) | | Net cash provided by financing activities | $2,104 | $1,086 | | Net increase (decrease) in cash and restricted cash | $2,561 | $(2,474) | | Cash and restricted cash, end of period | $3,253 | $3,861 | - Operating activities generated **$504 thousand** in cash in Q1 2020, a significant improvement from using **$3,556 thousand** in Q1 2019[29](index=29&type=chunk)[156](index=156&type=chunk) - Financing activities provided **$2,104 thousand** in Q1 2020, primarily from the issuance of common stock and warrants[29](index=29&type=chunk)[159](index=159&type=chunk) - Overall cash and restricted cash increased by **$2,561 thousand** in Q1 2020, ending the period at **$3,253 thousand**[29](index=29&type=chunk) [Notes to the Condensed Consolidated Financial Statements](index=14&type=section&id=Notes%20to%20the%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations of accounting policies, financial instruments, debt, equity, and other significant financial activities [NOTE 1. NATURE OF OPERATIONS](index=14&type=section&id=NOTE%201.%20NATURE%20OF%20OPERATIONS) This note describes Energy Focus, Inc.'s core business of designing, manufacturing, and selling energy-efficient LED lighting systems - Energy Focus, Inc. designs, develops, manufactures, markets, and sells energy-efficient LED lighting systems and controls, specializing in retrofit solutions for commercial and military maritime markets[32](index=32&type=chunk) - The company's mission is to enhance energy efficiency, productivity, and wellness through advanced LED retrofit solutions, aiming to be a market leader in demanding applications[32](index=32&type=chunk) [NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES](index=14&type=section&id=NOTE%202.%20BASIS%20OF%20PRESENTATION%20AND%20SUMMARY%20OF%20SIGNIFICANT%20ACCOUNTING%20POLICIES) This note outlines the basis of financial statement preparation, key accounting policies, and significant estimates used by management - The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP and SEC regulations, with certain information condensed or omitted[34](index=34&type=chunk)[35](index=35&type=chunk) - Management's estimates are used for various financial statement items, including reserves for accounts receivable, inventory obsolescence, and warranty claims[36](index=36&type=chunk) Customer Concentration in Net Sales | Customer Type | Q1 2020 (% of Net Sales) | Q1 2019 (% of Net Sales) | | :-------------------------------- | :----------------------- | :----------------------- | | Primary distributor for U.S. Navy | 38% | 22% | | Regional commercial lighting retrofit company | 15% | 30% | | Total U.S. Navy sales (incl. shipbuilders) | 46% | 32% | Disaggregation of Product Net Sales (in thousands) | Product Category | Q1 2020 | Q1 2019 | | :----------------- | :------ | :------ | | Commercial | $1,736 | $1,983 | | MMM products | $2,047 | $1,194 | | Total net sales | $3,783 | $3,177 | - Sales to the U.S. Navy (primary distributor and shipbuilders) increased from **32%** of net sales in Q1 2019 to **46%** in Q1 2020, while sales to a regional commercial lighting retrofit company decreased from **30%** to **15%**[38](index=38&type=chunk) - The company transitioned to an account receivable insurance program in December 2019 to assist in evaluating customer creditworthiness[44](index=44&type=chunk) Product Warranty Activity (in thousands) | Metric | Q1 2020 | Q1 2019 | | :----------------------------------------- | :------ | :------ | | Balance at beginning of period | $195 | $258 | | Warranty accruals for current period sales | $7 | $12 | | Adjustments to existing warranties | $44 | $89 | | In kind settlements made during the period | $(6) | $(7) | | Accrued warranty reserve | $240 | $352 | [NOTE 3. RESTRUCTURING](index=18&type=section&id=NOTE%203.%20RESTRUCTURING) This note details restructuring activities, their financial impact, and the company's ongoing efforts to address going concern issues - The company recorded net restructuring credits of **$14 thousand** in Q1 2020, related to lease obligations for its former New York office[58](index=58&type=chunk) - Despite restructuring and cost-cutting initiatives, the company continues to incur losses and has substantial doubt about its ability to continue as a going concern[61](index=61&type=chunk)[62](index=62&type=chunk) - Plans for profitability include a multi-channel sales strategy targeting key verticals, marketing campaigns, channel partnerships, a new e-commerce platform, and new product development like EnFocus™[62](index=62&type=chunk) - The company is actively pursuing external funding sources, including equity or debt instruments, to ensure adequate financial resources[63](index=63&type=chunk) - NASDAQ granted temporary relief from the **$1.00** minimum bid price rule until July 24, 2020, due to COVID-19, and the company is evaluating options including a potential reverse stock split[69](index=69&type=chunk) [NOTE 4. INVENTORIES](index=21&type=section&id=NOTE%204.%20INVENTORIES) This note provides details on the company's inventory balances, including raw materials, finished goods, and obsolescence reserves Inventories, Net (in thousands) | Metric | March 31, 2020 | December 31, 2019 | | :----------------------------------------- | :------------- | :---------------- | | Raw materials | $3,019 | $4,064 | | Finished goods | $5,248 | $5,749 | | Reserves for excess, obsolete, and slow-moving inventories | $(3,567) | $(3,645) | | Inventories, net | $4,700 | $6,168 | - Net inventories decreased from **$6,168 thousand** at December 31, 2019, to **$4,700 thousand** at March 31, 2020, driven by reductions in raw materials and finished goods[70](index=70&type=chunk) - Reserves for excess, obsolete, and slow-moving inventories slightly decreased from **$3,645 thousand** to **$3,567 thousand**[70](index=70&type=chunk) [NOTE 5. PROPERTY AND EQUIPMENT](index=22&type=section&id=NOTE%205.%20PROPERTY%20AND%20EQUIPMENT) This note details the company's property and equipment, including cost, accumulated depreciation, and depreciation expense Property and Equipment, Net (in thousands) | Metric | March 31, 2020 | December 31, 2019 | | :----------------------------------------- | :------------- | :---------------- | | Property and equipment at cost | $3,031 | $2,984 | | Less: accumulated depreciation | $(2,641) | $(2,595) | | Property and equipment, net | $390 | $389 | - Net property and equipment remained relatively stable at **$390 thousand** at March 31, 2020, compared to **$389 thousand** at December 31, 2019[72](index=72&type=chunk) - Depreciation expense for Q1 2020 was **$46 thousand**, a decrease from **$105 thousand** in Q1 2019[72](index=72&type=chunk) [NOTE 6. LEASES](index=22&type=section&id=NOTE%206.%20LEASES) This note describes the company's operating and finance leases, including lease costs, liabilities, and future payment obligations - The company leases equipment, manufacturing, warehouse, and office space under non-cancellable operating leases expiring through 2024, and one finance lease expiring in 2022[73](index=73&type=chunk) - The weighted average remaining lease term for operating, restructuring, and finance leases is **2.3 years**, **1.3 years**, and **2.0 years**, respectively[73](index=73&type=chunk) Components of Lease Costs (in thousands) | Metric | Q1 2020 | Q1 2019 | | :----------------------------------------- | :------ | :------ | | Operating lease cost, net | $127 | $122 | | Restructured lease cost, net | $(7) | $(3) | | Finance lease cost, net | — | $1 | | Total lease cost, net | $120 | $120 | Lease Liabilities (in thousands) | Metric | March 31, 2020 | December 31, 2019 | | :----------------------------------------- | :------------- | :---------------- | | Operating lease liabilities, total | $1,747 | $1,968 | | Finance lease liabilities | $6 | $6 | Future Minimum Undiscounted Lease Payments (in thousands) | Period | Operating Leases | Restructured Leases Payments (Net of Sublease) | Finance Lease | | :----------------------- | :--------------- | :--------------------------------------------- | :------------ | | April 2020 to March 2021 | $621 | $69 | $3 | | April 2021 to March 2022 | $644 | $18 | $3 | | April 2022 to March 2023 | $172 | — | — | | April 2023 to March 2024 | $13 | — | — | | Total future undiscounted lease payments | $1,450 | $87 | $6 | [NOTE 7. DEBT](index=24&type=section&id=NOTE%207.%20DEBT) This note details the company's debt instruments, including revolving credit, convertible notes, and the Iliad Note terms - Borrowings under the revolving line of credit facility were **$0.8 million** at March 31, 2020, with an interest rate of **5.25%**[80](index=80&type=chunk)[81](index=81&type=chunk) - Convertible Notes totaling **$1.8 million** (principal, interest, and unamortized costs) were converted into **2,709,018 shares** of Series A Convertible Preferred Stock on January 16, 2020[82](index=82&type=chunk)[84](index=84&type=chunk) - The Iliad Note, with a principal amount of approximately **$1.3 million**, has a maturity date of November 24, 2021, accrues interest at **8%** per annum, and includes provisions for prepayment premiums and potential increases in outstanding balance upon certain events (e.g., delisting, restricted issuances)[86](index=86&type=chunk)[87](index=87&type=chunk)[88](index=88&type=chunk)[89](index=89&type=chunk) - **10%** of gross proceeds from equity sales, including **$226 thousand** from the January 2020 Equity Offering, are applied to reduce the Iliad Note's outstanding balance[89](index=89&type=chunk)[90](index=90&type=chunk) [NOTE 8. INCOME TAXES](index=27&type=section&id=NOTE%208.%20INCOME%20TAXES) This note explains the company's income tax provisions, deferred tax assets, valuation allowances, and NOL carry-forwards - No provision for U.S. federal or state income tax was recorded due to operating losses in Q1 2020 and Q1 2019, and the application of IRC Section 382 limitations[93](index=93&type=chunk) - A full valuation allowance is recorded against deferred tax assets, primarily net operating loss (NOL) carry-forwards, due to uncertainties regarding their realization[94](index=94&type=chunk) - At December 31, 2019, the company had **$108.8 million** in federal NOL carry-forwards, with **$54.5 million** available after Section 382 limitations[95](index=95&type=chunk) [NOTE 9. STOCKHOLDERS' EQUITY](index=27&type=section&id=NOTE%209.%20STOCKHOLDERS'%20EQUITY) This note details changes in stockholders' equity, including preferred stock conversion, equity offerings, and warrant liabilities - On January 16, 2020, **$1.8 million** in Convertible Notes and accrued interest converted into **2,709,018 shares** of Series A Convertible Preferred Stock, which are convertible one-for-one into common stock[96](index=96&type=chunk) - In January 2020, the company completed a registered direct offering, selling **3,441,803 common shares** at **$0.674 per share** and warrants to purchase an equal number of shares, generating approximately **$2.3 million** in net proceeds[102](index=102&type=chunk) - Warrants issued in the January 2020 offering are classified as liabilities due to potential cash settlement provisions and are revalued at fair value each balance sheet date, resulting in a **$0.9 million** income from change in fair value in Q1 2020[104](index=104&type=chunk)[105](index=105&type=chunk)[106](index=106&type=chunk)[137](index=137&type=chunk) Stock-Based Compensation Expense (in thousands) | Expense Category | Q1 2020 | Q1 2019 | | :----------------------------------------- | :------ | :------ | | Cost of sales | $1 | $7 | | Product development | $1 | $28 | | Selling, general, and administrative | $18 | $508 | | Total stock-based compensation | $20 | $543 | - Total stock-based compensation expense significantly decreased from **$543 thousand** in Q1 2019 to **$20 thousand** in Q1 2020[109](index=109&type=chunk) [NOTE 10. COMMITMENTS AND CONTINGENCIES](index=30&type=section&id=NOTE%2010.%20COMMITMENTS%20AND%20CONTINGENCIES) This note outlines the company's significant purchase commitments for inventory as of the reporting date - As of March 31, 2020, the company had approximately **$3.4 million** in outstanding purchase commitments for inventory, with **$2.5 million** expected to ship in Q2 2020[113](index=113&type=chunk) [NOTE 11. SUBSEQUENT EVENTS](index=30&type=section&id=NOTE%2011.%20SUBSEQUENT%20EVENTS) This note discloses significant events occurring after the balance sheet date, including a PPP loan and NASDAQ relief - On April 17, 2020, the company received a **$795 thousand** loan under the Paycheck Protection Program (PPP) of the CARES Act, with an interest rate of **1.0%** and a maturity date of April 17, 2022. The company expects the loan to be forgiven[114](index=114&type=chunk)[152](index=152&type=chunk) - NASDAQ provided temporary relief from the **$1.00** minimum bid price rule until July 24, 2020, due to COVID-19, and the company is evaluating options including a potential reverse stock split[115](index=115&type=chunk)[151](index=151&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=31&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's perspective on the company's financial performance and condition for the three months ended March 31, 2020, highlighting increased net sales driven by military markets, ongoing efforts to achieve profitability despite commercial sales decline and COVID-19 impacts, and details on liquidity, capital resources, and critical accounting policies [Overview](index=31&type=section&id=Overview) This section provides a high-level summary of the company's financial performance, strategic initiatives, and going concern status - Net sales increased by **19.1%** in Q1 2020 compared to Q1 2019, primarily due to a **71.6%** increase in military maritime market (MMM) sales[119](index=119&type=chunk) - Commercial product sales decreased by **12.5%** in Q1 2020, partly due to delayed orders in healthcare and education industries caused by the COVID-19 pandemic[119](index=119&type=chunk)[121](index=121&type=chunk) - The company continues to incur losses and faces substantial doubt about its ability to continue as a going concern, despite progress in reducing operating losses[120](index=120&type=chunk) - Strategic initiatives include executing a multi-channel sales strategy, launching new products like the EnFocus™ platform, and maintaining rigorous financial disciplines to achieve profitability[122](index=122&type=chunk)[124](index=124&type=chunk) Financial Position at March 31, 2020 (in millions) | Metric | Amount | | :----------------- | :----- | | Cash | $2.9 | | Restricted cash | $0.3 | | Total debt | $1.7 | | Revolving credit facility outstanding | $0.8 | | Iliad Note outstanding | $0.9 | | Warrant liability | $0.8 | | Additional credit line availability | $1.1 | [Results of Operations](index=32&type=section&id=Results%20of%20operations) This section analyzes the company's net sales, gross profit, operating expenses, and net loss for the reported periods Net Sales Breakdown (in thousands) | Category | Q1 2020 | Q1 2019 | | :----------------- | :------ | :------ | | Commercial | $1,736 | $1,983 | | MMM products | $2,047 | $1,194 | | Total net sales | $3,783 | $3,177 | - Net sales increased by **$606 thousand** (**19.1%**) YoY, primarily driven by a **$853 thousand** (**71.6%**) increase in MMM product sales, while commercial sales decreased by **$247 thousand** (**12.5%**)[129](index=129&type=chunk) - Gross profit improved significantly to **$1.0 million** (**27.3%** of net sales) in Q1 2020 from **$98 thousand** (**3.1%** of net sales) in Q1 2019, benefiting from favorable warranty and inventory reserves[130](index=130&type=chunk) - Product development expenses decreased by **$0.2 million** YoY due to lower product testing and reduced salaries from office eliminations[132](index=132&type=chunk) - Selling, general and administrative expenses decreased by **$0.2 million** YoY, mainly due to lower stock-based compensation, partially offset by increased salaries for direct sales staff[133](index=133&type=chunk) - Interest expense increased by **$90 thousand** YoY to **$133 thousand**, primarily due to increased amortization of debt financing costs[136](index=136&type=chunk) - The company recognized **$0.9 million** in income from the change in fair value of warrant liabilities in Q1 2020 due to revaluation based on stock price changes[137](index=137&type=chunk) - Net loss decreased substantially to **$0.5 million** in Q1 2020 from **$2.9 million** in Q1 2019, driven by lower operating expenses and higher gross profit margins[141](index=141&type=chunk) [Financial Condition](index=34&type=section&id=Financial%20condition) This section discusses the company's financial position, including cash, debt, accumulated deficit, and going concern assessment - At March 31, 2020, the company had **$2.9 million** in cash (excluding **$0.3 million** restricted cash) and **$1.7 million** in total debt, with **$1.1 million** additional availability under its credit facility[142](index=142&type=chunk) - The company's accumulated deficit was **$125.4 million** at March 31, 2020, and customer concentration remains high, with two customers accounting for **53%** of net sales in Q1 2020[142](index=142&type=chunk) - Substantial doubt about the company's ability to continue as a going concern persists, necessitating continued pursuit of external funding and execution of strategic plans[143](index=143&type=chunk)[144](index=144&type=chunk)[145](index=145&type=chunk) - The company believes its plans for external funding, reorganizational actions, current financial position, and the recent PPP loan will mitigate going concern doubt for the next twelve months[149](index=149&type=chunk) [Liquidity and Capital Resources](index=35&type=section&id=Liquidity%20and%20capital%20resources) This section details the company's cash position, cash flow activities, and available capital resources for future operations - Cash balance increased to **$2.9 million** at March 31, 2020, from **$0.4 million** at December 31, 2019, excluding **$0.3 million** in restricted cash[153](index=153&type=chunk) Cash Flow Summary (in thousands) | Activity | Q1 2020 | Q1 2019 | | :----------------------------------------- | :------ | :------ | | Net cash provided by (used in) operating activities | $504 | $(3,556) | | Net cash used in investing activities | $(47) | $(4) | | Net cash provided by financing activities | $2,104 | $1,086 | - Operating activities generated **$0.5 million** in cash in Q1 2020, primarily from inventory utilization and accounts receivable collection, a significant improvement from a **$3.6 million** cash usage in Q1 2019[156](index=156&type=chunk)[157](index=157&type=chunk) - Financing activities provided **$2.1 million** in cash in Q1 2020, mainly from **$2.8 million** in proceeds from the January 2020 share issuance, partially offset by offering costs and Iliad Note repayment[159](index=159&type=chunk) [Contractual Obligations](index=37&type=section&id=Contractual%20obligations) This section outlines the company's significant contractual obligations, primarily focusing on inventory purchase commitments - As of March 31, 2020, the company had **$3.4 million** in outstanding purchase commitments for inventory, with **$2.5 million** expected to ship in Q2 2020[162](index=162&type=chunk) [Critical Accounting Policies](index=37&type=section&id=Critical%20accounting%20policies) This section describes the company's critical accounting policies, particularly the valuation of warrant liabilities - The fair value of warrant liabilities, classified as Level 3, is determined using the Black-Scholes valuation model, with estimates based on historical volatility and probability-weighted average assumptions[164](index=164&type=chunk) [Certain Risks and Concentrations](index=37&type=section&id=Certain%20risks%20and%20concentrations) This section highlights key risks, including customer concentration and its impact on net sales and accounts receivable - Customer concentration remains a risk, with the primary distributor for the U.S. Navy and a regional commercial lighting retrofit company accounting for **38%** and **15%** of net sales, respectively, in Q1 2020[166](index=166&type=chunk) - Total U.S. Navy sales (including shipbuilders) comprised **46%** of net sales in Q1 2020, up from **32%** in Q1 2019[166](index=166&type=chunk) - These two key customers also represented **44%** and **12%** of net trade accounts receivable, respectively, at March 31, 2020[167](index=167&type=chunk) [Recent Accounting Pronouncements](index=37&type=section&id=Recent%20accounting%20pronouncements) This section discusses the company's evaluation of recently issued accounting pronouncements and their potential impact - The company is evaluating the impact of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which will be effective for smaller reporting companies for interim and annual periods starting after December 15, 2022[40](index=40&type=chunk)[168](index=168&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=38&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) As a smaller reporting company, Energy Focus, Inc. is not required to provide the information typically required by this item - The company is exempt from providing quantitative and qualitative disclosures about market risk due to its status as a 'smaller reporting company'[170](index=170&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=38&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) Management, including the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of March 31, 2020, concluding they were effective at a reasonable assurance level. No material changes in internal control over financial reporting occurred during the quarter - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of March 31, 2020[172](index=172&type=chunk) - There were no material changes in internal control over financial reporting during the quarterly period[173](index=173&type=chunk) [PART II - OTHER INFORMATION](index=39&type=section&id=PART%20II%20-%20OTHER%20INFORMATION) This section provides other non-financial information, including legal proceedings, risk factors, and exhibits [ITEM 1. LEGAL PROCEEDINGS](index=39&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) As of March 31, 2020, Energy Focus, Inc. was not involved in any material legal proceedings - The company was not involved in any material legal proceedings as of March 31, 2020[176](index=176&type=chunk) [ITEM 1A. RISK FACTORS](index=39&type=section&id=ITEM%201A.%20RISK%20FACTORS) As a smaller reporting company, Energy Focus, Inc. is not required to provide specific risk factor disclosures in this quarterly report - The company is exempt from providing risk factor information due to its status as a 'smaller reporting company'[177](index=177&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=39&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) There were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds occurred during the period[178](index=178&type=chunk) [ITEM 3. DEFAULTS UPON SENIOR SECURITIES](index=39&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) There were no defaults upon senior securities to report for the period - No defaults upon senior securities occurred during the period[179](index=179&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=39&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This item is not applicable to Energy Focus, Inc - Mine safety disclosures are not applicable to the company[180](index=180&type=chunk) [ITEM 5. OTHER INFORMATION](index=39&type=section&id=ITEM%205.%20OTHER%20INFORMATION) There is no other information to report for the period - No other information is reported for the period[181](index=181&type=chunk) [ITEM 6. EXHIBITS](index=40&type=section&id=ITEM%206.%20EXHIBITS) This section lists all exhibits filed with the Form 10-Q, including corporate organizational documents, warrant forms, a securities purchase agreement, an SBA loan agreement, and certifications - Exhibits include various corporate documents such as Certificates of Incorporation and Designation, Bylaws, Warrant forms, a Securities Purchase Agreement, and the SBA Loan Agreement[185](index=185&type=chunk) - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act are also included[185](index=185&type=chunk)[187](index=187&type=chunk) [SIGNATURES](index=42&type=section&id=SIGNATURES) This section provides the official signatures of the company's executive officers, certifying the report's submission - The report was signed on May 13, 2020, by James Tu, Executive Chairman and Chief Executive Officer, and Tod A. Nestor, President, Chief Financial Officer, and Secretary[189](index=189&type=chunk)[190](index=190&type=chunk)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2019 ¨ 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) DELAWARE 94-3021850 (State or other jurisdict ...

Financial Data and Key Metrics Changes - For Q4 2019, the company reported sales of $3.5 million, a 21% increase from $2.9 million in Q3 2019, and a 13.2% increase from $3.1 million in Q4 2018 [10][33] - The full year 2019 net sales were $12.7 million, down 29.8% from $18.1 million in 2018, primarily due to lower military and commercial product sales [31] - The net loss for Q4 2019 improved to $1.3 million, or $0.11 loss per share, compared to a loss of $3 million, or $0.25 loss per share in Q4 2018 [45] Business Line Data and Key Metrics Changes - Commercial sales in Q4 2019 were $2 million, up 18% sequentially from $1.7 million in Q3 2019, driven by new sales to educational institutions [11] - Military sales for Q4 2019 were $1.5 million, representing 42.5% of total sales, down from $1.9 million or 61% in Q4 2018 [35] - The company received over $7.6 million in new contracts from the U.S. Navy and allied navies over the past six months, marking the highest order rate since 2016 [14] Market Data and Key Metrics Changes - The company noted that the ongoing COVID-19 pandemic has led to some commercial projects being put on hold, particularly in schools and hospitals [29] - The penetration of LED lighting in hospitals is estimated at only 10% to 15%, indicating significant growth potential in this market [65] Company Strategy and Development Direction - The company is focused on relaunching its brand with superior sales and operating infrastructure to drive long-term growth [8] - The introduction of the EnFocus product line is expected to differentiate the company in the market and tap into the emerging building IoT platform [20][89] - The company aims to maintain gross margins in the 25% to 30% range long-term through product design optimization and new higher-margin products [22] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism about military sales picking up throughout the year, while commercial sales may be impacted by COVID-19 [61] - The company is actively monitoring the pandemic's impact on operations and is prepared to adjust its strategies accordingly [30] - Management indicated that the current economic environment may provide opportunities for retrofitting projects in schools and hospitals due to reduced activity [64] Other Important Information - The company raised approximately $2.75 million through a direct offering of common stock to support its balance sheet amid COVID-19 challenges [27] - Operating expenses for Q4 2019 were $2.1 million, down from $3 million in Q4 2018, reflecting cost-cutting measures [40] Q&A Session Summary Question: What is the expected sales mix for Q1 2020? - Management indicated that the sales mix would likely be similar to Q4 2019, with a slightly higher proportion of military sales [60] Question: How are discussions with hospitals and schools regarding projects? - Some projects are being put on hold, but there is potential for expedited retrofitting opportunities due to school closures [62][64] Question: How is the company managing manufacturing operations during COVID-19? - The company has implemented safety measures, including temperature checks and social distancing, to ensure operations continue safely [73][75] Question: What are the capital needs for 2020? - Management clarified that they do not plan to raise equity capital but are working to expand their credit facility for better access to capital [80] Question: How does the company view the competitive landscape amid COVID-19? - Management believes that the pandemic may impact weaker competitors more significantly, while the company is positioned to benefit from its focus on high-quality products [91][93]

Financial Data and Key Metrics Changes - Revenue for Q3 2019 was $2.9 million, slightly below the expectation of approximately $3 million, and down from $5.2 million in Q3 2018, representing a year-over-year decline of 43.5% [8][36] - Gross profit margin improved to 35.3% in Q3 2019 from 24.8% in Q3 2018, with normalized margins at approximately 23.6% [13][42] - Net loss for Q3 2019 was $0.9 million or $0.08 per share, an improvement from a net loss of $1.9 million or $0.16 per share in Q3 2018 [14][47] Business Line Data and Key Metrics Changes - Military sales decreased approximately 59% year-over-year, while commercial sales decreased about 24% year-over-year [38] - The company has restructured its sales approach, focusing on direct customer engagement, which is expected to improve sales performance [12][17] Market Data and Key Metrics Changes - The U.S. Navy's budget constraints impacted sales, but a new fiscal year is expected to return to normal budget levels, aiding recovery in military sales [9][10] - The company has recently secured a $2.5 million exclusive contract with the U.S. Navy, indicating potential growth in military sales [10] Company Strategy and Development Direction - The company aims to transform into a leading LED lighting provider through superior product quality and innovation [6] - Four strategic goals have been set for the relaunch: streamline operations, win business through customer education, develop impactful products, and build a talented workforce [15][30] - A new product family featuring advanced lighting control technology is expected to launch in Q1 2020, which is anticipated to drive future growth [24][29] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in returning to growth, with Q4 sales expected to range from $3.1 million to $3.4 million, representing a 7% to 17% increase from Q3 [33] - The company is focused on maintaining cost control while expanding its sales force and product offerings [16][31] Other Important Information - The company has reduced operating expenses significantly, down 45% year-over-year, reflecting cost control measures [45] - Inventory levels have decreased, and the company plans to purchase more inventory as new products are launched [51] Q&A Session Summary Question: What are the expected gross margins going forward? - Management indicated that normalized margins are expected to be around 23% to 24%, with a goal to reach higher margins as new products are introduced [58] Question: When will the new lighting control offerings be launched? - The launch is expected in the first quarter of 2020, with initial sales anticipated shortly thereafter [59] Question: How will sales growth be achieved in the fourth quarter? - Sales growth is expected from both military sales recovery and new customer acquisitions, including large institutions [60] Question: What is the strategy for balancing military and commercial sales? - The company plans to grow both segments, with a focus on expanding military sales while targeting significant growth in commercial sales [64][65] Question: What is the competitive landscape in the military space? - The company maintains a strong market share and believes its product quality differentiates it from competitors, despite new entrants [66] Question: Can the new product technology be applied to the residential market? - Management acknowledged that the new product has potential applications in the residential market, which could be explored in the future [70]

Financial Performance - Net sales for the first nine months of 2019 decreased by 38.8% to $9.2 million compared to $14.9 million in the same period of 2018, primarily due to a 55.8% decrease in military product sales[125]. - Gross profit for the third quarter of 2019 was $1.0 million, representing 35.3% of net sales, an increase from 24.8% in the third quarter of 2018[127]. - The company incurred a net loss of 66.1% of net sales for the first nine months of 2019, compared to a net loss of 40.8% in the same period of 2018[123]. - For the three months ended September 30, 2019, the net loss was $0.9 million, a decrease from $1.9 million for the same period in 2018, primarily due to lower operating expenses[141]. - For the nine months ended September 30, 2019, the net loss remained at $6.1 million, consistent with the same period in 2018[141]. Operating Expenses - Operating expenses for the first nine months of 2019 totaled $6.8 million, a decrease of $2.1 million compared to $8.9 million in the same period of 2018, primarily due to reduced salaries and related benefits[133]. - Selling, general, and administrative expenses for the third quarter of 2019 were $1.7 million, a decrease from $2.5 million in the third quarter of 2018, driven by lower headcount and severance expenses[132]. - Product development expenses for the first nine months of 2019 were $1.0 million, down from $1.9 million in the same period of 2018, reflecting lower product testing expenses[131]. Cash and Debt Position - Cash and cash equivalents as of September 30, 2019, were $0.6 million, with $3.0 million in total debt, including $1.7 million from subordinated convertible notes[119]. - As of September 30, 2019, cash and cash equivalents were approximately $0.6 million, down from $6.3 million at December 31, 2018[149]. - The company had a total debt of $3.0 million, including $1.3 million on a revolving credit facility and $1.7 million in subordinated convertible notes[143]. - Net cash used in operating activities was $6.3 million for the nine months ended September 30, 2019, compared to $3.8 million for the same period in 2018[152][153]. - Net cash provided by financing activities was $0.7 million for the nine months ended September 30, 2019, primarily from proceeds of subordinated convertible notes[156]. Customer Concentration and Commitments - Sales to two major customers accounted for approximately 20% and 23% of net sales for the nine months ended September 30, 2019[143][168]. - The company had approximately $0.8 million in outstanding purchase commitments for inventory as of September 30, 2019[158]. Future Outlook - The company continues to face substantial doubt about its ability to continue as a going concern, despite restructuring actions aimed at reducing operating expenses[138]. - The company plans to pursue additional external funding and continue developing new technologies to enhance its product lines and expand its customer base[120]. - The company plans to pursue external funding sources to support its operations and achieve profitability[145]. - The accumulated deficit as of September 30, 2019, was $123.6 million, indicating substantial historical losses[143].

Energy Focus, Inc. (NASDAQ:EFOI) Q2 2019 Earnings Conference Call September 13, 2019 11:00 AM ET Company Participants James Tu - Chairman and CEO Tod Nestor - President and CFO Conference Call Participants Allan Snider - Oppenheimer Amit Dayal - H.C. Wainwright & Co Operator Greetings, and welcome to the Energy Focus Second Quarter 2019 Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As ...

Financial Performance - Net sales for the first six months of 2019 decreased by 36.3% to $6.3 million compared to $9.8 million in the same period of 2018, primarily due to a 53.9% decrease in military product sales[121] - Gross profit for the second quarter of 2019 was $(0.1) million, or (3.5)% of net sales, compared to $1.3 million, or 25.1% of net sales, in the second quarter of 2018[123] - The company incurred a net loss of $(73.1)% of net sales in the second quarter of 2019, compared to a net loss of (34.8)% in the second quarter of 2018[119] - For the three months ended June 30, 2019, the net loss was $2.3 million, an increase from $1.8 million for the same period in 2018[138] - For the six months ended June 30, 2019, the net loss was $5.1 million, compared to $4.2 million for the same period in 2018[139] Operating Expenses - Operating expenses for the first six months of 2019 totaled 79.0% of net sales, up from 64.3% in the same period of 2018, driven by increased restructuring costs[119] - Selling, general, and administrative expenses for the first six months of 2019 were $3.8 million, down from $5.1 million in the same period of 2018, primarily due to reduced salaries and related benefits[129] - Product development expenses decreased to $0.3 million in the second quarter of 2019 from $0.7 million in the second quarter of 2018, reflecting lower product testing expenses[126] Cash and Debt Position - The company had $2.2 million in cash and cash equivalents as of June 30, 2019, with $3.4 million in total debt[115] - As of June 30, 2019, cash and cash equivalents were approximately $2.2 million, down from $6.3 million at December 31, 2018[147] - The company had a total of $3.4 million in debt, including $1.7 million outstanding on a revolving credit facility and $1.7 million in subordinated convertible notes[140] - For the six months ended June 30, 2019, net cash used in operating activities was $5.1 million, primarily due to the net loss incurred[150] Strategic Actions and Future Outlook - The company continues to evaluate strategic options to achieve profitability and plans to pursue additional external funding sources[116] - The company continues to evaluate strategic options to achieve a profitable business model and maximize shareholder value[143] - Restructuring actions included the elimination of twelve positions and resulted in severance charges of $0.2 million during the first half of 2019[131] - The company faces substantial doubt about its ability to continue as a going concern due to ongoing losses and accumulated deficits[142] Sales Performance - Military product sales for the second quarter of 2019 decreased by 56.8% to $951,000 compared to $2.2 million in the second quarter of 2018[120] - Sales to the primary distributor for the U.S. Navy accounted for approximately 17% of net sales for the six months ended June 30, 2019[164] Lease Liabilities - The company recognized additional operating lease liabilities of approximately $2.9 million upon adopting new lease accounting standards[160] Inventory Commitments - As of June 30, 2019, the company had approximately $0.9 million in outstanding purchase commitments for inventory[154]

Financial Performance - Net sales for the first quarter of 2019 were $3.2 million, a decrease of 31.8% compared to $4.7 million in the first quarter of 2018, primarily due to a 51.3% decline in military product sales [121]. - Gross profit for the first quarter of 2019 was $0.1 million, or 3.1% of net sales, down from $0.8 million, or 17.5% of net sales in the same period of 2018, reflecting unfavorable manufacturing variances [122]. - Operating expenses for the first quarter of 2019 totaled $2.9 million, representing 91.3% of net sales, compared to 69.2% in the first quarter of 2018 [119]. - The net loss for the first quarter of 2019 was $2.9 million, an increase from a net loss of $2.4 million in the first quarter of 2018, primarily due to lower gross profit [137]. - The company experienced a 10.1% decrease in commercial product sales for the first quarter of 2019 compared to the same period in 2018, attributed to fluctuations in project timing and size [121]. Cash and Debt Position - As of March 31, 2019, the company had $3.9 million in cash and cash equivalents and $3.4 million in total debt, including $1.7 million in subordinated convertible notes [115]. - As of March 31, 2019, the company's cash and cash equivalents were approximately $3.9 million, down from $6.3 million at December 31, 2018 [145]. - Net cash used in operating activities for the three months ended March 31, 2019 was $3.6 million, primarily due to a net loss of $2.9 million [148]. - The company reported net cash provided by financing activities of $1.1 million for the three months ended March 31, 2019, mainly from $1.7 million in proceeds from subordinated convertible notes [152]. - The company has an accumulated deficit of $120.4 million as of March 31, 2019, raising substantial doubt about its ability to continue as a going concern [138]. Restructuring and Future Plans - Restructuring actions taken in 2019 included the elimination of 12 positions and the closure of offices in San Jose, California, and Taipei, Taiwan, incurring additional charges of $0.1 million [115]. - Future plans include developing new technologies and pursuing external funding sources to achieve profitability and expand the customer base [140]. - The company is exploring financing options, including traditional and non-traditional investment capital, as well as potential equity or debt instruments [141]. - The company anticipates that its plans for additional financing and restructuring will mitigate substantial doubt about its ability to continue as a going concern [144]. Inventory and Sales - Approximately $2.5 million in outstanding purchase commitments for inventory were reported as of March 31, 2019, with $1.9 million expected to ship in Q2 2019 [152]. - Sales to the primary distributor for the U.S. Navy accounted for approximately 22% of net sales for the three months ended March 31, 2019 [160]. - Total sales of products for the U.S. Navy comprised approximately 32% of net sales for the same period [160]. Lease and Investment Activities - The company recognized additional operating lease liabilities of approximately $2.9 million upon adopting new lease accounting standards [157]. - Net cash used in investing activities was $4 thousand for the three months ended March 31, 2019, primarily for tooling purchases [150]. - The company had a net loss of $2.4 million for the three months ended March 31, 2018, with net cash used in operating activities of $0.7 million [149].

Sales Performance - In Q4 2018, sales of new products introduced in the past two years increased to 17% of total revenue, up from less than 1% in Q4 2017[20]. - Net sales for 2018 were $18,107,000, a decrease of 8.8% from $19,846,000 in 2017[178]. - Total net sales for 2018 were $18.1 million, a decrease of 8.8% compared to 2017, with military maritime sales increasing by 104.0%[193]. - Military maritime sales in 2018 were driven by higher sales of military globe, flood light, fixture, and Intellitube® product lines[193]. - Commercial product sales decreased by 43.1% in 2018, reflecting fluctuations in project timing and significant price competition[193]. Financial Performance - For the year ended December 31, 2018, the company reported a net loss from continuing operations of $9.1 million, with an accumulated deficit of $117.3 million[58][69]. - Gross profit in 2018 was $3,412,000, representing 18.8% of net sales, down from 24.3% in 2017[191]. - The net loss from continuing operations for 2018 was $(9,111,000), or $(0.76) per share, compared to a loss of $(11,267,000) in 2017[178]. - Cash and cash equivalents at year-end 2018 were $6,335,000, down from $10,761,000 in 2017[178]. - Selling, general, and administrative expenses were $9.8 million in 2018, or 54.1% of net sales, down from $11.3 million, or 57.0% of net sales in 2017[202]. Customer Dependence - In 2018, one customer, a distributor to the U.S. Navy, accounted for 41.9% of net sales, with total sales to U.S. Navy distributors representing 46.2% of net sales[45]. - One customer, a distributor to the U.S. Navy, accounted for 41.9% of net sales in 2018, highlighting the company's reliance on a limited customer base[72]. - The company is attempting to expand and diversify its customer base to reduce dependence on a few key customers, with efforts in early stages[73]. Product Development and Innovation - The company aims to develop differentiated and sustainable product lines to effectively compete and expand its customer base[23]. - Gross product development expenses for the years ended December 31, 2018, 2017, and 2016 were $2.6 million, $2.9 million, and $3.6 million respectively, indicating a focus on product development[50]. - The company introduced six new product families in 2018, with new product sales growing from less than 1% of total revenue in Q4 2017 to 17% in Q4 2018[185]. - The company has invested in connected lighting research and development to capitalize on the growing demand for smart lighting solutions[30]. Operational Efficiency - The company streamlined operations in 2018, resulting in significantly decreased operating expenses from 2016 levels[21]. - The restructuring initiative in 2017 resulted in a net reduction of operating expenses by $8.4 million[184]. - The restructuring initiative in 2017 expanded sales coverage to the entire U.S. through 50 sales agents, increasing reliance on independent sales channels[88]. Market and Competitive Landscape - The North American commercial and industrial linear fixtures market, including retrofit applications, was estimated at approximately $16.0 billion in 2017[25]. - The competitive landscape includes major players such as Royal Philips and Osram Sylvania, which may have greater resources for R&D and marketing, impacting the company's market position[85]. - The adoption of LED lighting is still in its early stages, facing challenges such as higher initial costs and limited customer awareness, which could hinder demand[92]. Financial Risks and Challenges - The company has a history of operating losses and anticipates incurring further losses as it continues efforts to grow sales and streamline operations[68][70]. - The company faces challenges in scaling back manufacturing expenses if customer demand does not meet forecasts, potentially leading to lower margins and write-downs of inventory[84]. - Significant increases in component prices could adversely affect product pricing and demand, impacting margins and profitability[111]. - The company is vulnerable to economic downturns that could reduce demand for its products, particularly in construction and renovation sectors[103]. - A portion of the business depends on government funding, and any reduction in such funding could adversely affect sales opportunities[106]. Compliance and Regulatory Risks - The company is subject to various environmental, health, and safety laws, which could impose significant compliance costs and affect operations[131]. - The company derives a portion of revenues from government contracts, which are subject to strict compliance regulations that could impact sales[125]. - International operations are subject to risks such as regulatory changes, tariffs, and political instability, which could adversely impact business[134]. Stock and Market Performance - The market price of the company's common stock is highly volatile due to its thinly-traded status, which may decline regardless of operating performance[147]. - The company's common stock is thinly traded, with a market price range from a low of $0.49 to a high of $29.20 since its NASDAQ listing in August 2014, indicating significant volatility[148]. - The company received a notice of non-compliance from NASDAQ in January 2019 due to the closing bid price being below the minimum $1.00 per share for 30 consecutive business days[157]. - The stock price has fluctuated significantly, with the highest price in Q1 2018 at $3.45 and the lowest in Q4 2018 at $0.49[171]. Warranty and Liability Risks - The company offers warranty periods ranging from one to ten years, with the standard warranty for new LED lighting products being ten years[118]. - Increased warranty claims could lead to significant losses due to rising warranty expenses and customer support costs[118]. Cash Flow and Funding - The company raised approximately $1.7 million from the issuance of subordinated convertible promissory notes in March 2019, following a $23.6 million common stock offering in 2015[59]. - The company is pursuing additional external funding sources to achieve a profitable business model and maximize shareholder value[59][61]. - As of March 31, 2019, the company's estimated cash and cash equivalents were approximately $3.9 million, with an outstanding balance of $1.9 million under the Credit Facility[59][69].