Energy Focus(EFOI) - 2020 Q1 - Quarterly Report

Cover Page and Filing Information 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][3] - The registrant is classified as a Non-accelerated filer and a Smaller reporting company[4] - As of May 5, 2020, the number of outstanding shares of common stock was 15,896,956[5] PART I - FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and related disclosures for the company Forward-looking Statements 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] - 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][14] - 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] ITEM 1. FINANCIAL STATEMENTS 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 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] - 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] Condensed Consolidated Statements of Operations 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] - 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][130] - 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][141] Condensed Consolidated Statements of Comprehensive Loss 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] Condensed Consolidated Statements of Changes in Stockholders' Equity 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] - 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] Condensed Consolidated Statements of Cash Flows 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][156] - Financing activities provided $2,104 thousand in Q1 2020, primarily from the issuance of common stock and warrants[29][159] - Overall cash and restricted cash increased by $2,561 thousand in Q1 2020, ending the period at $3,253 thousand[29] Notes to the Condensed Consolidated Financial Statements This section provides detailed explanations of accounting policies, financial instruments, debt, equity, and other significant financial activities NOTE 1. NATURE OF OPERATIONS 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] - 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] NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 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][35] - Management's estimates are used for various financial statement items, including reserves for accounts receivable, inventory obsolescence, and warranty claims[36] 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] - The company transitioned to an account receivable insurance program in December 2019 to assist in evaluating customer creditworthiness[44] 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 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] - 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][62] - 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] - The company is actively pursuing external funding sources, including equity or debt instruments, to ensure adequate financial resources[63] - 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] NOTE 4. INVENTORIES 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] - Reserves for excess, obsolete, and slow-moving inventories slightly decreased from $3,645 thousand to $3,567 thousand[70] NOTE 5. PROPERTY AND EQUIPMENT 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] - Depreciation expense for Q1 2020 was $46 thousand, a decrease from $105 thousand in Q1 2019[72] NOTE 6. LEASES 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] - 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] 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 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][81] - 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][84] - 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][87][88][89] - 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][90] NOTE 8. INCOME TAXES 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] - A full valuation allowance is recorded against deferred tax assets, primarily net operating loss (NOL) carry-forwards, due to uncertainties regarding their realization[94] - 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] NOTE 9. STOCKHOLDERS' EQUITY 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] - 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] - 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][105][106][137] 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] NOTE 10. COMMITMENTS AND CONTINGENCIES 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] NOTE 11. SUBSEQUENT EVENTS 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][152] - 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][151] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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] - 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][121] - 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] - 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][124] 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 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] - 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] - Product development expenses decreased by $0.2 million YoY due to lower product testing and reduced salaries from office eliminations[132] - 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] - Interest expense increased by $90 thousand YoY to $133 thousand, primarily due to increased amortization of debt financing costs[136] - 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] - 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] Financial Condition 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] - 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] - 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][144][145] - 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] Liquidity and Capital Resources 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] 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][157] - 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] Contractual Obligations 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] Critical Accounting Policies 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] Certain Risks and Concentrations 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] - Total U.S. Navy sales (including shipbuilders) comprised 46% of net sales in Q1 2020, up from 32% in Q1 2019[166] - These two key customers also represented 44% and 12% of net trade accounts receivable, respectively, at March 31, 2020[167] Recent Accounting Pronouncements 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][168] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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] ITEM 4. CONTROLS AND PROCEDURES 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] - There were no material changes in internal control over financial reporting during the quarterly period[173] PART II - OTHER INFORMATION This section provides other non-financial information, including legal proceedings, risk factors, and exhibits ITEM 1. LEGAL PROCEEDINGS 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] ITEM 1A. RISK FACTORS 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] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 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] ITEM 3. DEFAULTS UPON SENIOR SECURITIES There were no defaults upon senior securities to report for the period - No defaults upon senior securities occurred during the period[179] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to Energy Focus, Inc - Mine safety disclosures are not applicable to the company[180] ITEM 5. OTHER INFORMATION There is no other information to report for the period - No other information is reported for the period[181] ITEM 6. EXHIBITS 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] - Certifications from the Chief Executive Officer and Chief Financial Officer pursuant to the Sarbanes-Oxley Act are also included[185][187] 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][190]