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. engages in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and controls. We develop, market and sell high quality energy-efficient light-emitting diode (“LED”) lighting products and controls in the commercial and military maritime markets (“MMM”). Our mission is to enable our customers to run their facilities and offices with greater energy efficiency, productivity, and wellness through advanced LED retrofit solutions. Our goal is to be the retrofit technology and market leader for the most demanding applications where performance, quality and health are considered paramount. We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge (“HID”) lighting and other types of lamps in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military tubular LED (“TLED”) and other LED products and controls.
The LED lighting industry has changed dramatically over the past several 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 focused on redesigning our products for lower costs and consolidating our supply chain for stronger purchasing power where appropriate in order to price 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 these products 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 for us.
The restructuring initiative implemented in the first quarter of 2017 included a new management team, an organizational consolidation of management functions and a hybrid sales model, combining our existing historical direct sales model with sales agencies to expand our market presence throughout the United 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 expanded our sales coverage to the entire United States through six geographic regions and at the time had 50 sales agencies, 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 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.
Despite 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 as of December 31, 2019.
During the beginning of 2020 we continued to see continued benefits from the relaunch efforts undertaken in the last three quarters of 2019. It is our belief that the continued momentum of the efforts undertaken in 2019, along with the launch of new and innovative products will continue to result in improved sales and bottom-line performance for the Company, barring significant economic and business impacts from the corona-virus outbreak. Meanwhile, the Company continues to seek additional external funding alternatives and sources 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 partnerships, 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 is yet uncertain; however, a material adverse effect on our customers, suppliers, or logistics providers could significantly impact our operating results. We also plan to continue to actively follow, assess and analyze the development of the 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:
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2019
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2018
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2017
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Net sales
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100.0
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%
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100.0
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%
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100.0
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%
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Cost of sales
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84.5
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81.2
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75.7
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Gross profit
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15.5
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18.8
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24.3
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Operating expenses:
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Product development
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10.1
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14.3
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14.8
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Selling, general, and administrative
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58.6
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54.1
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57.0
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Loss on impairment
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—
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—
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0.9
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Restructuring
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1.6
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0.6
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8.4
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Total operating expenses
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70.3
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69.0
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81.1
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Operating loss
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(54.7
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)
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(50.2
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)
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(56.8
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)
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Other expenses:
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Interest expense
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2.5
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—
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—
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Other expenses, net
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0.7
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—
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0.4
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Net loss before income taxes
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(57.9
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)
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(50.2
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)
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(57.3
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)
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Provision for (benefit from) income taxes
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0.1
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0.1
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(0.5
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)
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Net loss
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(58.0
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)
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(50.3
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)
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(56.8
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)
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Net loss
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(58.0
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)%
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(50.3
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)%
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(56.8
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)%
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Net sales
A further breakdown of our net sales by product line is as follows (in thousands):
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2019
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2018
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2017
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Commercial products
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$
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7,877
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$
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8,662
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$
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15,217
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MMM products
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4,828
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9,445
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4,629
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Total net sales
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$
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12,705
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$
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18,107
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$
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19,846
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Our net sales of $12.7 million in 2019 decreased 29.8% compared to 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 products decreased 9.1% in 2019 as compared to 2018, reflecting fluctuations in the timing, pace, and size of commercial projects.
Net sales of $18.1 million in 2018 decreased 8.8% in comparison to $19.8 million in 2017. MMM product sales increased by 104.0% in 2018 as compared to 2017, driven by higher sales of our military globe, flood light, fixture, and Intellitube® product lines. Net sales of our commercial products decreased 43.1% in 2018 as compared to 2017, reflecting fluctuations in the timing, pace, and size of commercial projects, including the implications of the long sales cycle in our industry.
International sales
We do not generate significant sales from customers outside the United States. International net sales accounted for approximately 1% of net sales in 2019, and approximately 2% of net sales in 2018 and 2017. Changes in currency exchange rates did not have an impact on net sales in 2019, 2018 or 2017, as our sales, including international sales, are denominated in U.S. dollars.
Gross profit
Gross profit was $2.0 million in 2019, compared to $3.4 million in 2018. The decline 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 $5 million in 2017. The decline in gross profit was principally driven by lower sales volumes year-over-year, reflecting fluctuations in the timing, pace and size of commercial projects. Our 2018 gross profit as a percent of net sales of 18.8% decreased from our 2017 gross profit as a percent of net sales of 24.3%. This decrease is attributable to higher unfavorable manufacturing variances and absorption in 2018 as compared to 2017, and the impact of selling large volumes of a low gross margin linear tube for military applications in the first quarter of 2018, prior to achieving cost reductions and improved margins on the product by the end of 2018. Additionally, the gross profit percentage in 2017 benefited from the reduction in our excess inventory reserves, as we implemented a strategic initiative to sell certain excess inventory in 2017 that had been written down in prior years.
Operating expenses
Product development
Product development expenses include salaries, including stock-based compensation and related benefits, contractor and consulting fees, legal fees, supplies and materials, as well as overhead items, such as depreciation and facilities costs. Product development costs are expensed as they are incurred. Cost recovery represents the combination of revenues and credits from government contracts.
Total gross and net product development spending, including credits from government contracts, is shown in the following table (in thousands):
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For the year ended December 31,
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2019
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2018
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2017
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Total gross product development expenses
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$
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1,284
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|
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$
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2,597
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|
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$
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2,940
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Gross product development expenses were $1.3 million in 2019, a decrease of 50.6%, compared to $2.6 million in 2018. The decrease primarily resulted from lower salaries and related benefits of $0.9 million, lower outside testing fees of $0.3 million, as 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 $0.4 million due to the timing of new product introductions. This decrease was partially offset by higher salaries and related benefits of $0.1 million due to staffing.
Selling, general, and administrative
Selling, general, and administrative expenses were $7.4 million, or 58.6%, of net sales in 2019, compared to $9.8 million, or 54.1%, of net sales in 2018. Of the year-over-year $2.4 million decrease, approximately $1.4 million is attributable to our restructuring initiative, resulting in reduced salaries, including stock-based compensation and related benefits, $0.3 million to decrease in severance and benefits, $0.2 million decrease each to commissions and depreciation expense, $0.1 million decrease each to accounting fees, network costs and trade show costs. Savings were offset by increased consultant costs of $0.3 million.
Selling, general, and administrative expenses in 2018 decreased by $1.5 million, or 13.5%, from $11.3 million in 2017. Of the decrease, approximately $0.9 million is a result of lower salaries, including stock-based compensation and related benefits, decreases of $0.2 million in each of the following categories: consulting fees, trade show and marketing expenses, and travel and related expenses, and decreases of $0.1 million each in rent expense and depreciation expense, as we continued our cost control initiatives. The lower expenses were partially offset by increased severance and benefits of $0.2 million, as a result of the resignation of Jerry Turin, our prior Chief Financial Officer.
Loss on impairment
As a result of the decline in the level of expected future sales of our MMM 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 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 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 including 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 eliminated an additional 17 production and administrative positions 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.
During 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 $0.4 million in sublease payments to offset our remaining lease obligations of $0.5 million, which extend until June 2021. We expect to incur insignificant additional costs over the remaining life of our lease obligations. Please refer to Note 3, “Restructuring,” included in Item 8 of this Annual Report for further information.
Other expenses
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 related to an insurance premium financing agreement.
Other expenses, net
We recognized other expenses, net of $91 thousand in 2019, compared to other expenses, net of $7 thousand in 2018 and other expenses, net of $99 thousand in 2017. 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 primarily consisted of losses on the disposal of fixed assets partially offset by interest income on our cash balances.
Income taxes
For the years ended December 31, 2019, 2018 and 2017, our effective tax rate was (0.1)%, (0.1)%, and 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.
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% to 21% 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 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. We may make adjustments to 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, 2019 and 2018, respectively. We had no net deferred liabilities at December 31, 2019 or 2018. We will continue to evaluate the need for a valuation allowance on a quarterly basis.
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. Please refer to Note 12, “Income Taxes,” included in Item 8 of this Annual Report for further information.
Net loss
Despite a $5.4 million, or 29.8 percent, decline in net sales, our net loss from operations improved to $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.
The improvement in our loss from operations in 2018 as compared to 2017 was directly attributable to our restructuring initiatives, which resulted in a $3.6 million year-over-year operating expense reduction, including $0.1 million in restructuring and asset impairment charges. 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.
Liquidity and capital resources
General
We generated a net loss of $7.4 million in 2019, compared to net loss of $9.1 million in 2018. We have incurred substantial losses in the past, and as of December 31, 2019, we had an accumulated deficit of $124.9 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 products required for long-term competitiveness and revenue growth, continue our efforts to reduce product cost, and drive further operating efficiencies. There is a risk that our strategy to return to profitability may not be as successful as we envision. We 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 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 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%.
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 Iliad Note, we have, among other things, agreed that, until the Iliad Note is repaid:
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•
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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 an event of default under the Iliad Note, but will increase the amount then outstanding under the Note by 10%); and
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•
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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.
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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 business. As such, we expect to need additional external financing during 2020 and will continue to review and pursue selected external funding sources including, but not limited to, the following:
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•
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obtaining financing from traditional or non-traditional investment capital organizations or individuals;
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•
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obtaining funding from the sale of our common stock or other equity or debt instruments; and
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•
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obtaining debt financing with lending terms that more closely match our business model and capital needs.
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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:
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•
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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;
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•
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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 board of directors; and
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•
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the current environment in capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing.
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If we fail to obtain 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 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 debt
At December 31, 2019, our cash balance was $0.4 million, compared to $6.3 million at December 31, 2018.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Net cash used in operating activities
|
$
|
(6,624
|
)
|
|
$
|
(6,795
|
)
|
|
$
|
(5,874
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)
|
|
|
|
|
|
|
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 operating activities
Net cash used in operating activities of $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 $0.6 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 2019 and resulted primarily from the addition of property and equipment tooling to support production operations.
Net cash provided by investing activities was $0.2 million in 2018 and resulted primarily from the proceeds we received from the sale of certain equipment previously classified as held for sale, partially offset by purchases of computer equipment, equipment to support production operations, and leasehold improvements.
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.
Cash provided by financing activities
Net cash provided by financing activities for the year ended December 31, 2019 of $1.1 million primarily resulted from net proceeds from the Convertible Notes of $1.7 million and the 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.
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 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 twelve-months, 2% in the second twelve-months, and 1% in the third twelve-months after closing.
Borrowings under the revolving line of credit were $0.7 million and $2.2 million at December 31, 2019 and 2018, respectively, and are recorded in the Consolidated Balance Sheets as a current liability under the caption, “Credit line borrowings.” Please refer to Note 9, “Debt,” included in Item 8 of this Annual Report for further information.
Off-balance sheet arrangements
We had no off-balance sheet arrangements at December 31, 2019 or 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:
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•
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allowances for doubtful accounts, returns and discounts,
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•
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impairment of long-lived assets,
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•
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valuation of inventories,
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•
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accounting for income taxes,
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•
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share-based compensation, and
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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 measured at the amount of consideration we expect to receive in exchange for the transferred products. We recognize revenue at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. Distributors’ obligations to us are not contingent upon the resale of our products. We recognize revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales. We provide for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year. We do not incur any other incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. therefore, the product warranties are not a separate performance obligation and are accounted for as described below. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.
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:
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•
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allowance for doubtful accounts for accounts receivable, and
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•
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allowance for sales returns and discounts.
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In 2019 and 2018, the total allowance was $28 thousand and $33 thousand, respectively, which was all 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 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, 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 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 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 2018, due to the introduction of new products and technological advancements, we charged $17 thousand to cost of sales 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, 2019 and 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, 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 federal 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. Please refer to Note 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 11, “Stockholders’ Equity,” included in Item 8 of this Annual Report for additional information.
Leases
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes the current lease accounting requirements. Additionally, 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. It 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.
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 is effective for interim and annual periods beginning after December 15, 2019. We do not expect the adoption of this guidance to have a significant impact on our financial position, results of operations, or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TABLE OF CONTENTS
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Page
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Reports of Independent Registered Public Accounting Firms
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Consolidated Balance Sheets as of December 31, 2019 and 2018
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Consolidated Statements of Operations for the years ended December 31, 2019, 2018, and 2017
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Consolidated Statements of Comprehensive Loss for the years ended December 31, 2019, 2018, and 2017
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Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018, and 2017
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Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018, and 2017
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Notes to Consolidated Financial Statements
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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 balance sheet of Energy Focus, Inc. and subsidiaries (the “Company”) as of December 31, 2018, the related statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes and schedule appearing under Schedule II (collectively referred to as the “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, 2018 and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 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”) 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 served as the Company’s auditor from 2009 to 2019.
/s/ Plante & Moran, PLLC
Cleveland, Ohio
April 1, 2019
ENERGY FOCUS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31,
(amounts in thousands except share data)
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2019
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2018
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ASSETS
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Current assets:
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Cash
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$
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350
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$
|
6,335
|
|
Trade accounts receivable, less allowances of $28 and $33, respectively
|
2,337
|
|
|
2,201
|
|
Inventories, net
|
6,168
|
|
|
8,058
|
|
Prepaid and other current assets
|
479
|
|
|
1,094
|
|
Total current assets
|
9,334
|
|
|
17,688
|
|
Property and equipment, net
|
389
|
|
|
610
|
|
Operating lease, right-of-use asset
|
1,289
|
|
|
—
|
|
Restructured lease, right-of-use asset
|
322
|
|
|
—
|
|
Other assets
|
405
|
|
|
194
|
|
Total assets
|
$
|
11,739
|
|
|
$
|
18,492
|
|
|
|
|
|
LIABILITIES
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
1,340
|
|
|
$
|
3,606
|
|
Accrued liabilities
|
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
|
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
|
6,542
|
|
|
7,240
|
|
Other liabilities
|
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
|
7,743
|
|
|
7,440
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
Preferred stock, par value $0.0001 per share:
|
|
|
|
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 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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
FOR THE YEARS ENDED DECEMBER 31,
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2019, 2018, AND 2017
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
Paid-in
Capital
|
|
Accumulated
Other
Comprehensive
(Loss) Income
|
|
|
|
|
|
Common Stock
|
Accumulated
Deficit
|
|
|
Shares
|
|
Amount
|
Total
|
Balance at December 31, 2016
|
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
|
|
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units
|
(15
|
)
|
|
—
|
|
|
(49
|
)
|
|
—
|
|
|
—
|
|
|
(49
|
)
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
807
|
|
|
—
|
|
|
—
|
|
|
807
|
|
Stock-based compensation reversal
|
—
|
|
|
—
|
|
|
(270
|
)
|
|
—
|
|
|
—
|
|
|
(270
|
)
|
Foreign currency translation adjustment
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,267
|
)
|
|
(11,267
|
)
|
Balance at December 31, 2017
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Cash flows 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
|
|
Depreciation
|
326
|
|
|
522
|
|
|
681
|
|
Stock-based compensation
|
616
|
|
|
908
|
|
|
807
|
|
Stock-based compensation reversal
|
—
|
|
|
—
|
|
|
(270
|
)
|
Provision for doubtful accounts receivable
|
(5
|
)
|
|
(9
|
)
|
|
(194
|
)
|
Provision for slow-moving and obsolete inventories
|
14
|
|
|
17
|
|
|
(1,400
|
)
|
Provision for warranties
|
78
|
|
|
51
|
|
|
196
|
|
Amortization of discounts on the Iliad Note
|
6
|
|
|
—
|
|
|
—
|
|
Amortization of loan origination fees
|
102
|
|
|
4
|
|
|
—
|
|
Loss on dispositions of property and equipment
|
24
|
|
|
2
|
|
|
203
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
(131
|
)
|
|
1,403
|
|
|
2,240
|
|
Inventories
|
1,876
|
|
|
(2,356
|
)
|
|
5,151
|
|
Prepaid and other assets
|
611
|
|
|
(538
|
)
|
|
161
|
|
Accounts payable
|
(2,214
|
)
|
|
2,047
|
|
|
(1,759
|
)
|
Accrued and other liabilities
|
(542
|
)
|
|
240
|
|
|
(613
|
)
|
Deferred revenue
|
(12
|
)
|
|
25
|
|
|
5
|
|
Total adjustments
|
749
|
|
|
2,316
|
|
|
5,393
|
|
Net cash used in operating activities
|
(6,624
|
)
|
|
(6,795
|
)
|
|
(5,874
|
)
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Acquisitions of property and equipment
|
(132
|
)
|
|
(57
|
)
|
|
(162
|
)
|
Proceeds from the sale of property and equipment
|
3
|
|
|
246
|
|
|
97
|
|
Net cash (used in) provided by investing activities
|
(129
|
)
|
|
189
|
|
|
(65
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Proceeds from exercise of stock options and purchases through employee stock purchase plan
|
—
|
|
|
28
|
|
|
130
|
|
Principal payments under finance lease obligations
|
(3
|
)
|
|
—
|
|
|
—
|
|
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units
|
(110
|
)
|
|
(62
|
)
|
|
(49
|
)
|
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
|
1,094
|
|
|
2,185
|
|
|
81
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
16
|
|
|
(5
|
)
|
|
(10
|
)
|
|
|
|
|
|
|
(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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. engages in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and controls. We develop, market and sell high quality energy-efficient light-emitting diode (“LED”) lighting products and controls in the commercial and military maritime markets (“MMM”). Our mission is to enable our customers to run their facilities and offices with greater energy efficiency, productivity, and wellness through advanced LED retrofit solutions. Our goal is to be the retrofit technology and market leader for the most demanding applications where performance, quality and health are considered paramount. We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge (“HID”) lighting and other types of lamps in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military tubular LED (“TLED”) and other LED products and controls.
The LED lighting industry has changed dramatically over the past several 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 focused on redesigning our products for lower costs and consolidating our supply chain for stronger purchasing power where appropriate in order to price 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 these more innovated and differentiated products 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 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 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.
The restructuring initiative implemented in the first quarter of 2017 included a new management team, an organizational consolidation of management functions and a hybrid sales model, combining our existing historical direct sales model with sales agencies to expand our market presence throughout the United 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 expanded our sales coverage to the entire United States through six geographic regions and at the time had 50 sales agencies, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 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, the useful lives for property and 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.
Basis of presentation
The Consolidated Financial Statements include the accounts of the Company. All significant inter-company balances and transactions have been eliminated. Unless indicated otherwise, the information in the Notes to Consolidated Financial Statements relates to our operations.
Revenue recognition
Net sales include revenues from sales of products and shipping and handling charges, net of estimates for product returns. Revenue is measured at the amount of consideration we expect to receive in exchange for the transferred products. We recognize revenue at the point in time when we transfer the promised products to the customer and the customer obtains control over the products. Distributors’ obligations to us are not contingent upon the resale of our products. We recognize revenue for shipping and handling charges at the time the goods are shipped to the customer, and the costs of outbound freight are included in cost of sales. We provide for product returns based on historical return rates. While we incur costs for sales commissions to our sales employees and outside agents, we recognize commission costs concurrent with the related revenue, as the amortization period is less than one year. We do not incur any other incremental costs to obtain contracts with our customers. Our product warranties are assurance-type warranties, which promise the customer that the products are as specified in the contract. Therefore, the product warranties are not a separate performance obligation and are accounted for as described below. Sales taxes assessed by governmental authorities are accounted for on a net basis and are excluded from net sales.
A disaggregation of product net sales is presented in Note 13, “Product and Geographic Information.”
Cash and restricted cash
At December 31, 2019 and 2018, we had cash and restricted cash of $0.7 million and $6.3 million, respectively, on deposit with financial institutions located in the United States. The $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, 2019. Please refer to Note 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 2018, due to the introduction of new products and technological advancements, we charged $17 thousand to cost of sales 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.
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 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 maintain 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 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.
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, 2019 and 2018, we have recorded a full valuation allowance 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, 2019, we had net operating loss carry-forwards of approximately $108.8 million for U.S. federal 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 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 2019, we expect to have approximately $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, the 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 12, “Income Taxes,” included in Item 8 for further 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, 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 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. 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. Up 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 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, 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% or more of our total net sales, or whose net trade accounts receivable balance individually represented 10% or more of our total net trade accounts receivable, as follows:
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•
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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 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% and 13% 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% of net sales in 2017.
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•
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At December 31, 2019, a distributor to the U.S. Navy accounted for 9.8% of our net trade accounts receivable and a large regional retrofit company located in Texas accounted for 41.0% of our net trade accounts receivable. At December 31, 2018, a distributor to the U.S. Navy accounted for 40.4% of our net trade accounts receivable.
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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.
Net loss per share
Basic loss per share is computed by dividing the net loss 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 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 per share computations (in thousands, except per share amounts):
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|
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|
|
|
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For the years ended December 31,
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2019
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2018
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2017
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Numerator:
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|
|
|
|
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Net loss
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$
|
(7,373
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)
|
|
$
|
(9,111
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)
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|
$
|
(11,267
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)
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|
|
|
|
|
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Denominator:
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|
|
|
|
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Basic and diluted weighted average common shares outstanding
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12,309
|
|
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11,997
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|
|
11,806
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As a result of the net loss we incurred for the years ended December 31, 2019, 2018 and 2017, options, warrants and convertible securities representing 27,883, 59,180 and 60,434 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 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 Accounting 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 loss” within the Consolidated Statements of Stockholders’ Equity is the effect of foreign currency translation related to our Taiwan operations. This operation was shut down in 2019, the effect of which was not material to the Consolidated Financial Statements.
Advertising expenses
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 were $0.2 million, $0.3 million and $0.5 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Product warranties
Through March 31, 2016, we warranted finished goods against defects in material and workmanship under normal use and service for periods generally between one and five years. Beginning April 1, 2016, we warrant our commercial LEDFL Tubular LED Lamps (excluding Battery Backup TLED), the troffer luminaires, and certain Globe Lights for a period of ten years and all other LED Products for five years. Beginning in October 2019, LEDFL Tubular LED Lamps (excluding RedCap™) are warranted for ten years and the warranty for all of our other products is five years. Warranty settlement costs consist of actual amounts expensed for warranty, which are largely a result of the cost of replacement products provided to our customers. A liability for the estimated future costs under product warranties is maintained for products under warranty based on the actual claims incurred to date and the estimated nature, frequency, and costs of future claims. These estimates are inherently uncertain and changes to our historical or projected experience may cause material changes to our warranty reserves in the future. We continuously review the assumptions related to the adequacy of our warranty reserve, including product failure rates, and make adjustments to the existing warranty liability when there are changes to these estimates or the underlying replacement product costs, or the warranty period expires. The following table summarizes warranty activity for the periods presented (in thousands):
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At December 31,
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2019
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2018
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Balance at the beginning of the year
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$
|
258
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|
|
$
|
174
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|
Accruals for warranties issued
|
78
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|
|
51
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|
Adjustments to existing warranties
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(91
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)
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|
103
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|
Settlements made during the year (in kind)
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(50
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)
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|
(70
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)
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Accrued warranty expense
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$
|
195
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|
|
$
|
258
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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 be effective for interim and annual periods starting after December 15, 2019. We do not expect the adoption of this guidance to have a significant impact on our financial position, results of operations, or cash flows.
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 starting after December 15, 2022 and will generally require adoption on a modified retrospective basis. We are in the process of evaluating the impact of the standard.
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. Additionally, 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. It 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.
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 on 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 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” below for additional disclosures relating to the Company’s leasing arrangements.
NOTE 3. RESTRUCTURING
Due to our financial performance in 2017, 2018, and 2019, including net losses of $11.3 million, $9.1 million, and $7.4 million, respectively, and total cash used of $5.9 million, $4.4 million, and $5.6 million, respectively, we believe that substantial doubt about our ability to continue as a going concern existed at December 31, 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 closing our offices in Rochester, Minnesota, New York, New York, and Arlington, Virginia and reducing 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.
These restructuring actions 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, consisting of approximately $0.8 million for severance and related benefits, approximately $0.7 million related to the facility closings, approximately $0.1 million primarily related to fixed asset and prepaid expenses 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 estimated ongoing costs related to long-term operating lease obligations, which the Company has exited. The recorded value of the ongoing lease obligations is based on the remaining lease term and payment amount, discounted to present value. Changes in subsequent periods resulting from a revision to either the timing or the amount of estimated cash flows over the future period are measured using the credit adjusted, risk free rate that was used to measure the restructuring liabilities initially. Please also refer to Note 4, “Leases” as certain amounts formerly included below in the restructuring reserve as of December 31, 2018, have been reclassified on the balance sheet to be shown netted against the restructured lease, right-of-use asset in accordance with Topic 842.
The following is a reconciliation of the beginning and ending balances of our restructuring liability as it relates to the 2017 restructuring plan (in thousands):
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|
|
|
|
Restructuring Liability
|
Balance at December 31, 2017
|
$
|
402
|
|
Accretion of lease obligations
|
21
|
|
Adjustment of lease obligations
|
90
|
|
Payments
|
(163
|
)
|
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
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As a result of the restructuring actions and initiatives described above, we have reduced our operating expenses to be more commensurate with our sales volumes, however, we continue to incur losses and have a substantial accumulated deficit, and
substantial doubt about our ability to continue as a going concern continues to exist at December 31, 2019.
Since the executive transition on April 1, 2019, we have continued to evaluate and assess strategic options as we seek to achieve profitability. We plan to achieve profitability through growing our sales by continuing to execute on our direct sales strategy, complemented by our marketing outreach campaigns, channel partnerships, 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. 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 long sales cycle in our industry, the corresponding time required to ramp up sales from new products and markets into this sales cycle, the timing of introductions of additional new products, significant competition, 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 limited to, the following:
|
|
•
|
obtaining financing from traditional or non-traditional investment capital organizations or individuals;
|
|
|
•
|
obtaining funding from the sale of our common stock or other equity or debt instruments; and
|
|
|
•
|
obtaining debt financing with lending terms that more closely match our business model and capital needs.
|
There can be no assurance that we will obtain funding on acceptable terms, in a timely fashion, or at all. Obtaining additional funding contains risks, including:
|
|
•
|
additional equity financing may not be available to us on satisfactory terms and any equity we are able to issue could lead to dilution for current stockholders and have rights, preferences and privileges senior to our common stock;
|
|
|
•
|
loans or other debt instruments may have terms and/or conditions, such as interest rate, restrictive covenants, conversion features, refinancing demands, and control or revocation provisions, which are not acceptable to management or our board of directors; and
|
|
|
•
|
the current environment in capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing.
|
If we fail to obtain the required additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need to delay, scale back or eliminate our business plan and further reduce our operating costs and headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition. A lack of additional funding could also result in our inability to continue as a going concern and force us to sell certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire investment.
Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to obtain additional external funding, 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 our common stock had closed below the $1.00 per share minimum required for continued listing on NASDAQ pursuant to listing rules. Therefore, we could be subject to delisting if we did not regain compliance within the compliance period or extend the compliance period by filing for an extension. On October 15, 2019, the Company formally requested a 180-day extension beginning November 12, 2019 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 non-cancellable period of the lease, 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 New York, New York and Arlington, Virginia offices that were closed in 2017. The New York, New York lease expires in 2021 and the Arlington, 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 Company in accordance with Topic 420. The Company entered into sub-leases for both offices and included the estimated sub-lease payments as an offset to the remaining lease obligations, as required by Topic 420 at that time. In adopting Topic 842, the carrying value of the aforementioned net liabilities has been reclassified as a reduction of the restructured lease, right-of-use asset, which totaled $0.3 million as of January 1, 2019. As part of the lease agreement for the New York, New York office, there is $0.3 million in restricted cash in other long-term assets on the accompanying Consolidated Balance Sheets as of December 31, 2019 which represents collateral against the related Letter of Credit issued as part of this agreement. As of December 31, 2018, the $0.3 million in restricted cash is included in cash on the Consolidated Balance Sheet.
The restructured leases and sub-leases were not scoped out of the requirements of Topic 842 and were evaluated for impairment in accordance with the asset impairment provisions of ASC 360, Property, Plant and Equipment (“Topic 360”). The Company concluded its net right-of-use assets were not impaired and the carrying amount approximates expected sublease income in future years as of 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 done since the cease use date in 2017.
Due to the continued net losses, going concern, and 2019 restructuring actions discussed in Note 3, “Restructuring,” the Company also evaluated its Solon, Ohio operating lease right-of-use asset for potential impairment under Topic 360. As a result of this evaluation, the Company determined that the operating lease right-of-use asset for the Solon, 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
|
|
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
|
|
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,
|
|
2019
|
|
2018
|
Raw materials
|
$
|
4,064
|
|
|
$
|
4,041
|
|
Finished goods
|
5,749
|
|
|
8,229
|
|
Reserve for excess, obsolete, and slow-moving inventories
|
(3,645
|
)
|
|
(4,212
|
)
|
Inventories, net
|
$
|
6,168
|
|
|
$
|
8,058
|
|
During 2019, management implemented a purchasing 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, in conjunction with, a price adjustment strategy on products we have in excess inventory, resulted in a net reduction of our gross inventory levels and excess inventory reserves of $1.9 million compared to 2018.
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,
|
|
2019
|
|
2018
|
Equipment (useful life 3 - 15 years)
|
$
|
1,297
|
|
|
$
|
1,511
|
|
Tooling (useful life 2 - 5 years)
|
203
|
|
|
371
|
|
Vehicles (useful life 5 years)
|
47
|
|
|
47
|
|
Furniture and fixtures (useful life 5 years)
|
137
|
|
|
137
|
|
Computer software (useful life 3 years)
|
1,028
|
|
|
1,043
|
|
Leasehold improvements (the shorter of useful life or lease life)
|
211
|
|
|
211
|
|
Finance lease right-of-use asset
|
13
|
|
|
—
|
|
Construction in progress
|
48
|
|
|
55
|
|
Property and equipment at cost
|
2,984
|
|
|
3,375
|
|
Less: accumulated depreciation
|
(2,595
|
)
|
|
(2,765
|
)
|
Property and equipment, net
|
$
|
389
|
|
|
$
|
610
|
|
Depreciation expense was $0.3 million, $0.5 million, and $0.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Due to the specialized nature of the 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 during 2017. We completed 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 the property and equipment of the office was immaterial. There were no impairment charges for property and equipment during 2019 and 2018.
NOTE 7. PREPAID 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,
|
|
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 9. DEBT
Credit facilities
On December 11, 2018, we entered into a three-year $5.0 million revolving line of credit (“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 of, or $4.5 million, plus (ii) available inventory, which is the lesser of 20% of the net realizable value of eligible inventory of, or $500 thousand. The Credit Facility charges interest deeming a minimum borrowing requirement of $1.0 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 and 2018 was 6.75% and 7.75%, respectively. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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, 2% in the second year, and 1% in the third year.
Borrowings under the revolving line of credit were $0.7 million and $2.2 million at December 31, 2019 and 2018, respectively, are recorded in the Consolidated Balance Sheets as a current liability under the caption, “Credit line borrowings.” Outstanding balances include unamortized net issuance costs totaling $0.1 million at December 31, 2019. The balance at December 31, 2018 did not include unamortized net issuance costs.
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. 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 $1,815,041 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.
The Series A Preferred Stock was created by the filing of a Certificate of Designation with the Secretary of State of the State of Delaware on March 29, 2019, which authorized 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 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.
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 common stock with respect to any additional distributions, (b) shall receive any dividends declared and payable on our common stock on an as-converted basis, and (c) is convertible at the option of the holder into shares of our common stock on a one-for-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 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 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 redeem up to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$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 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 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 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 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.
The total liability for the Note Purchase Agreement, excluding financing fees, were $1.3 million at December 31, 2019. Unamortized loan discount and debt issuance costs were $0.2 million at December 31, 2019.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
As of December 31, 2019, we had approximately $0.7 million in outstanding purchase commitments for inventory, of which $0.5 million is expected to ship in the first quarter of 2020 and $0.2 million is expected to ship in the second quarter of 2020.
NOTE 11. STOCKHOLDERS’ EQUITY
Warrants
In the past, we have issued warrants in conjunction with various equity issuances, debt financing arrangements and sales incentives. During 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 2020, we offered and sold 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 our 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. Refer to Note 16 “Subsequent Events” for further information.
Stock-based compensation
On May 6, 2014, our board of directors 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 board of directors. At December 31, 2019, 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,
|
|
2019
|
|
2018
|
|
2017
|
Cost of sales
|
$
|
9
|
|
|
$
|
37
|
|
|
$
|
34
|
|
Product development
|
26
|
|
|
118
|
|
|
59
|
|
Selling, general, and administrative
|
581
|
|
|
753
|
|
|
714
|
|
Total stock-based compensation
|
$
|
616
|
|
|
$
|
908
|
|
|
$
|
807
|
|
At December 31, 2019 and 2018, we had unearned stock compensation expense of $0.6 million and $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 December 31, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Fair value of options issued
|
$
|
0.29
|
|
|
$
|
1.41
|
|
|
$
|
2.66
|
|
Exercise price
|
$
|
0.44
|
|
|
$
|
1.97
|
|
|
$
|
3.55
|
|
Expected life of option (in years)
|
4.8
|
|
|
5.9
|
|
|
5.8
|
|
Risk-free interest rate
|
1.8
|
%
|
|
2.7
|
%
|
|
2.1
|
%
|
Expected volatility
|
90.0
|
%
|
|
84.2
|
%
|
|
91.9
|
%
|
Dividend yield
|
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 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, 2019 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
|
Outstanding at December 31, 2016
|
530,734
|
|
|
$
|
7.48
|
|
Granted
|
192,984
|
|
|
3.55
|
|
Cancelled
|
(377,095
|
)
|
|
6.71
|
|
Expired
|
(56,111
|
)
|
|
10.65
|
|
Exercised
|
(42,000
|
)
|
|
2.30
|
|
Outstanding at December 31, 2017
|
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, 2019
|
578,486
|
|
|
$
|
1.25
|
|
|
|
|
|
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. No options were exercised during 2019. The total intrinsic value of options outstanding and options exercisable at December 31, 2019 was zero dollars each, which was calculated using the closing stock price at the end of the year of $0.46 per share less the option price of the in-the-money grants.
The options outstanding at December 31, 2019 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
|
$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
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
|
At December 31, 2016
|
250,115
|
|
|
$
|
6.34
|
|
Granted
|
375,542
|
|
|
3.18
|
|
Vested
|
(115,622
|
)
|
|
5.78
|
|
Forfeited
|
(203,893
|
)
|
|
5.30
|
|
At December 31, 2017
|
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 2019, 2018, and 2017, employees purchased 15,706, 25,953 and 16,004 shares, respectively. At December 31, 2019, 385,778 shares remained available for purchase under the 2013 Plan.
NOTE 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-U.S. income tax examinations by tax authorities for years before 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, 2019 and 2018, respectively, there were no accrued interest and penalties related to uncertain tax positions.
The following table shows the components of the provision for income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The principal items accounting for the difference between income taxes computed at the U.S. statutory rate and the provision for income taxes reflected in our Consolidated Statements of Operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
U.S. statutory rate
|
21.0
|
%
|
|
21.0
|
%
|
|
34.0
|
%
|
State taxes (net of federal tax benefit)
|
2.0
|
|
|
2.5
|
|
|
2.3
|
|
Valuation allowance
|
(20.7
|
)
|
|
(25.0
|
)
|
|
17.4
|
|
Deferred rate change due to changes in tax laws
|
—
|
|
|
—
|
|
|
(51.7
|
)
|
Other
|
(2.4
|
)
|
|
1.4
|
|
|
(1.0
|
)
|
|
(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,
|
|
2019
|
|
2018
|
|
2017
|
Accrued expenses and other reserves
|
$
|
1,505
|
|
|
$
|
1,964
|
|
|
$
|
1,749
|
|
Right-of-use-asset
|
(378
|
)
|
|
—
|
|
|
—
|
|
Lease liabilities
|
461
|
|
|
—
|
|
|
—
|
|
Tax credits, deferred R&D, and other
|
44
|
|
|
65
|
|
|
197
|
|
Net operating loss
|
12,758
|
|
|
10,793
|
|
|
8,610
|
|
Valuation allowance
|
(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 decrease in the valuation allowance.
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% to 21% 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 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. We may make adjustments to 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, 2019 and 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 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 in the valuation allowance on the portion of Alternative Minimum Tax Credits that are expected to be refunded.
NOTE 13. PRODUCT AND GEOGRAPHIC INFORMATION
We focus our efforts on the sale of LED lighting products, in particular our MMM and commercial tubular 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 LED lighting products and controls into the MMM and commercial markets.
The following table provides a breakdown of product net sales for the years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
12,599
|
|
|
$
|
17,736
|
|
|
$
|
19,446
|
|
International
|
106
|
|
|
371
|
|
|
400
|
|
Total net sales
|
$
|
12,705
|
|
|
$
|
18,107
|
|
|
$
|
19,846
|
|
At December 31, 2019 and 2018, approximately 100% and 98%, respectively, of our long-lived assets, which consist of property and equipment, were located in the United States.
NOTE 14. RELATED PARTY TRANSACTIONS
On December 12, 2012, our board of directors 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 our board of directors. On May 9, 2016, Mr. Tu also assumed the role of President. On August 11, 2016, our board of directors 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 5.0% of our common stock prior to the August 2014 registered offering. As of December 31, 2019, 5 Elements Global Fund LP beneficially owns approximately 2.5% 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 50.0% ownership interest in 5 Elements Energy Efficiencies (BVI) Ltd., a beneficial owner of approximately 2.4% of our common stock. Yeh-Mei Cheng controls 5 Elements Energy Efficiencies (BVI) Ltd. and owns the other 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 board of directors through February 19, 2017 and an employee of the Company through June 30, 2018 and rejoined the Company on August 5, 2019. Yeh-Mei Cheng is also the mother of Jennifer Cheng, a current member of our board of directors.
NOTE 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 retained H.C. Wainwright & Co., LLC to act as our exclusive placement agent in connection with the sale of 3,441,803 shares of the Company’s common stock to certain institutional investors, at a purchase price of $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. In accordance with the terms of the Iliad 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 Convertible Notes and the accumulated 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 financial impact, cannot be estimated at this time. Should the production and distribution closures continue for an extended period of time, the impact on our supply chain in China and globally could have a material adverse effect on our results of operations and cash flows.
SUPPLEMENTARY FINANCIAL INFORMATION TO ITEM 8.
The following table sets forth our selected unaudited financial information for the four quarters in the years ended December 31, 2019 and 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
|
)
|