UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

 

OR

ENERGY FOCUS, INC.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑    No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☑    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”,filer,” “accelerated filer”,filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.

The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, as of August 3, 2018July 19, 2019 was 12,047,272.12,370,030.

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

ENERGY FOCUS, INC.

(Unaudited)

ENERGY FOCUS, INC.

(in thousands, except per share amounts)

(in thousands)

(Unaudited)

(in thousands)

(Unaudited)

ENERGY FOCUS, INC.

(in thousands)

(Unaudited)

Energy Focus, Inc. and its subsidiary engage in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems. We operate in a single industry segment, developingdevelop, market and selling oursell high quality energy-efficient light-emitting diode (“LED”) lighting products intoin the general commercial industrial and military maritime markets. Our mission is to enable our customers to run their facilities 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 really matter. We specialize in LED lighting retrofit by replacing fluorescent lamps in institutional buildings and high-intensity discharge (“HID”) lighting in low-bay and high-bay applications with our innovative, high-quality commercial and military tubular LED (“TLED”) and other LED products.

Product development is a key focus for us. Our product development teams, including our teams located in our Solon, Ohio headquarters, at our San Jose, California technology center, and at our product development center in Taipei, Taiwan, areteam is dedicated to developing and designing leading-edge technology LED lighting products.

NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The unaudited condensed consolidated financial statements (“financial statements”) include the accounts of the Company and its subsidiary Energy Focus Europe, Ltd. located in the United Kingdom,LED Solutions, LLC, which is not active. Unless indicated otherwise, the information in the accompanying financial statements and Notesnotes to the unaudited condensed consolidated financial statements relates to our continuing operations.

We have prepared the accompanying financial data for the three and six months ended June 30,March 31, 2019 and 2018 and 2017 pursuant to the rules and regulations of the United States Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The accompanying financial data and information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 20172018 (“20172018 Annual Report”). The Condensed Consolidated Balance Sheet as of December 31, 20172018 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

In the opinion of management, the accompanying financial statements contain all normal and recurring adjustments necessary to present fairly our Condensed Consolidated Balance Sheets as of June 30, 2018March 31, 2019 and December 31, 2017,2018, Condensed Consolidated Statements of Operations for the three and six months ended June 30,March 31, 2019 and 2018, and 2017, Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended June 30,March 31, 2019 and 2018, and 2017, Condensed Consolidated Statements of Changes in Stockholders’ Equity for the sixthree months ended June 30,March 31, 2019 and 2018, and Condensed Consolidated Statements of Cash Flows for the sixthree months ended June 30,March 31, 2019 and 2018.

Other than the adoption of the new lease accounting standard, there have been no other material changes to our significant accounting policies, as compared to those described in our 2018 and 2017.Annual Report.

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact us in the future, actual results may vary from the estimates. Estimates include, but are not limited to, the establishment of reserves for accounts receivable, sales returns, inventory obsolescence and warranty claims; the useful lives of property and equipment; valuation allowance for net deferred

taxes; the cost and offsetting income related to subleased property; and stock-based compensation. In addition, estimates and

Certain amounts related to warranty accruals and settlements were reclassified to conform to current period reporting presentation with no impact on financial position, loss from operations or cash used in operations.

We have certain customers whose net sales individually represented 10 percent or more of our total net sales, or whose net trade accounts receivable balance individually represented 10 percent or more of our total net trade accounts receivable, as follows:

For the three months ended June 30, 2018,March 31, 2019, sales to our primary distributor for the U.S. Navy, a global healthcare system located in Northeast Ohioshipbuilder for the U.S. Navy, and a regional commercial lighting retrofit company located in Texas accounted for approximately 2922 percent, 1510 percent, and 1130 percent of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to a shipbuilder for the U.S. Navy, total sales of products for the U.S. Navy comprised approximately 3332 percent of net sales for the same period. For the three months ended June 30, 2017, sales to the global healthcare system located in Northeast Ohio and our primary distributor for the U.S. Navy each individually accounted for approximately 11 percent of net sales for the period. WhenMarch 31, 2018, sales to our primary distributor for the U.S. Navy areaccounted for approximately 46 percent of net sales for the period. When combined with sales to a shipbuilder for the U.S. Navy, sales of products for the U.S. Navy comprised approximately 1250 percent of net sales.sales for the same period. Additionally, a regional commercial lighting retrofit company located in California accounted for approximately 10 percent of net sales for the three months ended March 31, 2018.

For the six months ended June 30, 2018, sales toA regional commercial lighting retrofit company located in Texas, our primary distributor for the U.S. Navy, and a global healthcare system located in Northeast Oho accounted for approximately 37 percent and 12 percent, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to a shipbuilder for the U.S. Navy, sales of productsaccounted for the U.S. Navy comprised approximately 4134 percent, 19 percent, and 14 percent of net sales for the same period. For the six months ended June 30, 2017, sales to a global healthcare system located in Northeast Ohio andtrade accounts receivable, respectively, at March 31, 2019. At December 31, 2018, our primary distributor for the U.S. Navy accounted for approximately 15 percent and 12 percent, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to a shipbuilder for the U.S. Navy, sales of products for the U.S. Navy comprised approximately 17 percent of net sales.

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 will beto 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 interim and annualreporting periods beginning after December 15, 2018,January 1, 2019 are presented under Topic 842, while prior period amounts are not adjusted and will requirecontinue to be reported in accordance with legacy generally accepted accounting principles.

On adoption, we recognized additional operating lease liabilities of approximately $2.9 million, with corresponding right-of-use assets based on a modified retrospective basis. We are in the process of evaluating the impactpresent value of the standard.remaining minimum rental payments under prior leasing standards 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 Topic 420 and impairment charges totaling $273 thousand and $186 thousand, respectively.

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. 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, as we have elected the practical expedient included in ASC 606. 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 and we have elected the practical expedient included in ASC 606. 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.

The following table provides a disaggregation of product net sales for the periods presented:

Our trade accounts receivable consists of amounts billed to and currently due from customers. Credit is extended to customers based upon an evaluation of the customer’s financial condition and the amounts due are stated at their estimated net realizable value. We maintain an allowance for doubtful accounts receivable to provide for the estimated amount of 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. Our standard payment terms with customers are net 30 days, and we do not generally offer extended payment terms to our customers.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.

Approximately 9897 percent of our long-lived fixed assets are located in the United States, with the remainder located in our product development center in Taiwan. Net sales attributable to customers outside the United States accounted for approximately fiveless than one percent and approximately one percent of our net sales for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively. Net sales attributable to customers outside the United States accounted for approximately three percent and one percent of our total net sales for the six months ended June 30, 2018 and 2017, respectively. The geographic location of our net sales is derived from the destination to which we ship the product.

Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted loss per share gives effect to all dilutive potential common shares outstanding during the period. Dilutive potential common shares consist of incremental shares upon the exercise of stock options or release of restricted stock units unless the effect would be anti-dilutive.

As a result of the net loss we incurred for the three and six months ended June 30,March 31, 2019 and 2018, approximately 8728 thousand and 8390 thousand potentially dilutive equity awards, respectively, were excluded from the net loss per share calculation, as their inclusion would have been anti-dilutive. As a result of the net loss we incurred for the three and six months ended June 30, 2017, approximately 64 thousand and 99 thousand potentially dilutive equity awards, respectively, were excluded from the net loss per share calculation for this same reason. Therefore, for the three and six months ended June 30,March 31, 2019 and 2018, and 2017, the basic weighted average shares outstanding were used in calculating diluted loss per share.

The following is a reconciliation of the numerator and denominator of the basic and diluted net loss per share computations for the periods presented below (in thousands):

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 LED tubes, globes, and troffer luminaires for a period of ten 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 outstanding 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. Extending the warranty did not have a material impact on our condensed consolidated financial statements in 20172018 or for the three and six months ended June 30, 2018.March 31, 2019. The following table summarizes warranty activity for the periods presented (in thousands):

During the first quarter of 2017,2019, we announced a restructuring initiative with a goal of significantly reducing annual operatingimplemented phased actions to reduce costs from 2016 levels. The initiative included an organizational consolidation of management and oversight functions in order to streamlineminimize cash usage while continuing to pursue strategic alternatives. The actions taken were limited to an initial phase while the options under strategic review were considered and better alignevaluated, including the issuance of subordinated convertible notes as discussed in Note 7, “Debt.”

Our initial actions included the elimination of three positions, restructuring of the sales organization into more focused, efficient, and cost effective reporting relationships, and involved headcountincentive plan, flattening of the senior management team, additional operational streamlining, management compensation reductions, and office closures. This initiative was designedoutsourcing of certain functions including warehousing 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. Following the executive transition that occurred on April 1, 2019, we expect to returnincur additional restructuring charges totaling approximately $0.1 million during the Companysecond quarter of 2019. These additional restructuring charges primarily relate to profitabilityseverance and mitigate the substantial doubt that existed at December 31, 2016 about our ability to continuerelated benefits charges as a going concern. For additional information regarding the restructuring actions takenresult of eliminating nine positions, as well as costs associated with closing our offices in the 2017, please refer to Note 3., “Restructuring,” included under Item 8 of our 2017 Annual Report.San Jose, California and Taipei, Taiwan.

DuringFor the sixthree months ended June 30,March 31, 2018, we recorded net restructuring credits totaling approximately $50 thousand, primarily related to the revision of our initial estimates of the cost and offsetting sublease income for the remaining lease obligation for our former Arlington, Virginia office. Restructuring adjustments recorded during the three months ended June 30, 2018 related to the accretion of the remaining lease obligations for the former New York New York and Arlington, Virginia offices.

Our restructuring liabilities consist of one-time termination costs for severance and benefits to former employees and estimated ongoing costs related to long-term operating lease obligations. The recorded value of the termination severance and benefits to employees approximates fair value, as the remaining obligation is based on the arrangements made with the former employees, and these obligations will be completely satisfied in less than 12 months. The recorded value of the ongoing lease obligations is based on the remaining lease term and payment amount, net of estimated sublease income, discounted to present value. Changes in subsequent periods resulting from a revision to either the timing or the amount of estimated cash flows over the future period are measured using the credit adjusted, risk-freerisk free rate that was used to measure the restructuring liabilities initially. We expectPlease also refer to incur insignificant additional costs over the remaining life of our lease obligations, but we do not anticipate further major restructuring activitiesNote 6, “Leases” as certain amounts formerly included below in the near future. 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:liability as it relates to the 2017 restructuring plan (in thousands):

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 continuedcontinues to exist at June 30, 2018,March 31, 2019.

Since the executive transition on April 1, 2019, we had $8.6 millionhave continued to evaluate and assess strategic options as we seek to achieve a profitable business model and maximize value for our stockholders. Our plans to achieve profitability include continuing to develop new technologies into sustainable product lines that allow us to effectively compete to expand our customer base, execute our marketing and sales plans, and continue to improve our supply chain and organizational structure. The restructuring and cost cutting initiatives implemented during 2017 and 2019 were designed to allow us to effectively execute this strategy; however, our efforts may not occur as quickly as we envision or be successful, due to the long sales cycle in cashour industry, the corresponding time required to ramp up sales from new products 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:

There can be no debt obligations at the end of the quarter. In addition, the restructuring actions taken in 2017 resultedassurance that we will obtain funding on acceptable terms, in a decreasetimely fashion, or at all. Obtaining additional funding contains risks, including:

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 expenses, including restructuring charges,costs and headcount, each of approximately $3.4 millionwhich 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 first half of 2018 compared to the first half of 2017. Consequently, consideringCompany could lose their entire investment.

Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to obtain additional financing, restructuring actions noted above, current financial position, liquid resources, obligations due or anticipated within the next year, executive reorganization, and implementation of our product development and sales channel strategy, if adequately executed, will returnprovide us with an ability to break-even levels infinance our operations through 2019 and effectively mitigateswill mitigate the substantial doubt about our ability to continue as a going concern.

Inventories are stated at the lower of standard cost (which approximates actual cost determined using the first-in, first-out cost method) or net realizable value, and consist of the following (in thousands):

NOTE 5. PROPERTY AND EQUIPMENT AND ASSETS HELD FOR SALE

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):

Depreciation expense was $0.1 million and $0.2 million the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively. Depreciation expense was $0.3 million for each of the six months ended June 30, 2018 and 2017.

During the first quarter of 2018, we completed the sale of the equipment that we previously classified as held for sale. We received net proceeds from the sale of $0.2 million and recognized a gain on the sale of approximately $15 thousand.$18 thousand for the three months ended March 31, 2018. The gain on the sale is classified on our Condensed Consolidated Statements of Operations under the caption, “Other (income) expense.”

As a result of the operating loss incurred during each of the three and six months ended June 30,March 31, 2019 and 2018, and 2017, and after the application of the annual limitation set forth under Section 382 of the Internal Revenue Code (“IRC”), it was not necessary to record a provision for U.S. federal income tax or various states income taxes.

At June 30, 2018March 31, 2019 and December 31, 2017,2018, we had a full valuation allowance recorded against our deferred tax assets. The valuation allowance was recorded due to uncertainties related to our ability to realize the deferred tax assets, primarily consisting of certain net operating loss carry-forwards. The valuation allowance is based on management’s estimates of taxable income by jurisdiction and the periods over which the deferred tax assets will be recoverable.

NOTE 7.9. STOCKHOLDERS’ EQUITY

Stock-based compensation expense is attributable to stock options and restricted stock unit awards. For all stock-based awards, we recognize expense using a straight-line amortization method.

The following table summarizes stock-based compensation expense and the impact it had on operations for the periods presented (in thousands):

Total unearned stock-based compensation was $0.4 million at March 31, 2019, compared to $1.3 million at June 30, 2018, compared to $1.1 million at June 30, 2017.March 31, 2018. These costs will be charged to expense and amortized on a straight-line basis in future periods. The weighted average period over which the unearned compensation at June 30, 2018March 31, 2019 is expected to be recognized is approximately 2.11.4 years.

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:

A summary of option activity under all plans for the sixthree months ended June 30, 2018March 31, 2019 is presented as follows:

A summary of restricted stock unit activity under all plans for the sixthree months ended June 30, 2018March 31, 2019 is presented as follows:

NOTE 8.10. COMMITMENTS AND CONTINGENCIES

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. 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.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto, included under Item 1 of this Quarterly Report, as well as the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included under Item 7 of our 20172018 Annual Report.

Energy Focus, Inc. and its subsidiary engage in the design, development, manufacturing, marketing, and sale of energy-efficient lighting systems. We operate in a single industry segment, developingdevelop, market and selling oursell high quality energy-efficient light-emitting diode (“LED”) lighting products intoin the general commercial industrial, and military maritime markets. Our mission is to enable our customers to run their facilities 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 really matter. We specialize in LED lighting retrofit by replacing fluorescent lamps in general purpose and high-intensity discharge (“HID”) lighting in low-bay and high-bay applications with our innovative, high-quality commercial and military tubular LED (“TLED”) and other LED products.

Net sales decreased by 2.831.8 percent for the sixthree months ended June 30, 2018March 31, 2019 as compared to the sixthree months ended June 30, 2017. ForMarch 31, 2018, driven by a 51.3 percent decrease in military sales period over period. Net sales for the sixthree months ended June 30,March 31, 2018 netreflect the timing and fulfillment of U.S. Navy awards during the fourth quarter of 2017 and the first quarter of 2018. Net sales of our commercial products decreased by 37.310.1 percent while sales to our military maritime market more than doubled,for the three months ended March 31, 2019 as compared to the six months ended June 30, 2017. Despite the decline in our commercial sales compared to the first six months of 2017, we continued to expand sales through the national agency channel strategy we implemented in the middle of 2017, with agency sales increasing 5.9 percent during the second quarter of 2018 compared to the first quarter of 2018. In connection with this national strategy, we continue to achieve increased penetration in the Southeast and Western regions, where the total sales for these regions increased 90.7 percent during the first six months of 2018 compared to the first six months of 2017. The sale cycles for our commercial target markets typically span several months and our financial results reflect continued fluctuations in the timing, pace, and size of commercial projects. The ramp of the agency channel is subject to these same conditions, as well as the cycle of training and educating sales agents and their corresponding end customers.prior year period. The sale cycles for the military maritime market is dependent on many factors, including the availability of government funding, the timing and fulfillment of U.S. Navy awards, new ship construction and the timing of vessel maintenance schedules. The sale cycles for our commercial target markets can range from several months to over one year and our financial results reflect volatility from the continued fluctuations in the timing, pace, and size of commercial projects for a major healthcare customer.

The restructuring actions taken in 2017 resulted in a decrease in operating expenses of approximately $1.9 million in the first six months of 2018 over the first six months of 2017. At June 30, 2018,March 31, 2019, we had $8.6$3.9 million in cash and no debt. Ascash equivalents and a resulttotal of our$3.4 million in debt, including approximately $1.7 million in funding from the issuance of subordinated convertible notes. During the first quarter 2017 restructuring initiatives,and second quarters of 2019, we have reducedtook additional actions to reduce our operating expenses to be more commensurate with our sales volumes, however,volumes. These actions resulted in additional restructuring charges of $0.1 million in the first quarter of 2019 for severance and related benefits charges in connection with the elimination of three positions. In the second quarter of 2019, we further reduced headcount by nine positions and closed our offices in San Jose, California and Taipei, Taiwan. We expect to incur additional charges of $0.1 million, primarily related to severance and related benefits in connections with these actions. However, we continue to incur losses and have a substantial accumulated deficit, raising substantial doubt about our ability to continue as a going concern at June 30, 2018. March 31, 2019.

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 and implementation of our product development and sales channel strategy, if adequately executed, will returnprovide us with an ability to profitability infinance our operations through 2019 and effectively mitigateswill mitigate the substantial doubt about our ability to continue as a going concern.

Results of operations

The following table sets forth items in our Condensed Consolidated Statements of Operations as a percentage of net sales for the periods indicated:

A further breakdown of our net sales is presented in the following table (in thousands):

Net sales of $5.2$3.2 million for the secondfirst quarter of 20182019 decreased 14.031.8 percent compared to the secondfirst quarter of 2017 principally due to lower commercial product sales, partially offset2018 driven by an increasea decrease in military product sales. Net sales of our commercial products decreased 42.610.1 percent compared to the secondfirst quarter of 2017,2018, reflecting fluctuations in the timing, pace, and size of commercial projects. Net sales of our military maritime products increased 164.1decreased 51.3 percent primarily due to increased sales of our military globe, berth light, flood light and fixture product lines.

 

Gross profit was $1.3 million, or 25.1 percent of net sales, for the second quarter of 2018, compared to $1.5 million, or 25.0 percent of net sales, for the second quarter of 2017. As a result of current manufacturing and sales volumes, the second quarter 2018 gross margin includes unfavorable manufacturing variances and absorption of $0.3 million, or 5.6 percent of net sales, while the second quarter 2017 gross margin included unfavorable manufacturing variances and absorption of $0.1 million, or 2.3 percent of net sales.

 

Product development expenses include salaries and related expenses, contractor and consulting fees, legal fees, supplies and materials, as well as overhead, such as depreciation and facility costs. Product development costs are expensed as they are incurred.

Product development expenses were $0.7$0.5 million for the secondfirst quarter of 2018,2019, a $0.1 million decrease compared to $0.8$0.6 million for the secondfirst quarter of 2017.2018. The decrease was primarily a result of lower product testing expenses and legal fees due to the timing of new product introductions and new product patent activities.

Selling, general, and administrative

Selling, general, and administrative expenses were $2.4$2.2 million for the secondfirst quarter of 2018,2019, compared to $2.8$2.6 million for the secondfirst quarter of 2017.2018. The primary drivers of the lower expenses were decreases of $0.1 million in each of the following categories: salaries and related benefits, consultants and legal expenses. The lower expenses were partially offset by increased sales commissions of $0.1 million, as a result of the Company’s transition to the sales agency model.

InDuring the first quarter of 2017,2019, we announced a restructuring initiative with a goal of significantly reducing annual operatingimplemented phased actions to reduce costs from 2016 levels. The initiative included an organizational consolidation of management and oversight functions in order to streamlineminimize cash usage while continuing to pursue strategic alternatives. The actions taken were limited to an initial phase while the options under strategic review were considered and better alignevaluated, including the issuance of subordinated convertible notes as discussed in Note 7, “Debt,” included under Item 1 of the Quarterly Report.

Our initial actions included the elimination of certain positions, restructuring of the sales organization into more focused, efficient, and cost effective reporting relationships, and involved headcountincentive plan, flattening of the senior management team, additional operational streamlining, management compensation reductions, and office closures. This initiativeoutsourcing of certain functions including warehousing 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. Following the executive transition that occurred on April 1, 2019, we expect to incur additional restructuring charges totaling approximately $0.1 million during the second quarter of 2019. These additional restructuring charges primarily relate to severance and related benefits charges as a result of eliminating nine positions, as well as costs associated with closing our offices in San Jose, California and Taipei, Taiwan.

Our restructuring liabilities consist of estimated ongoing costs related to long-term operating lease obligations. 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 designedused to returnmeasure the Companyrestructuring liabilities initially. Please also refer to profitability and mitigateNote 6, “Leases” as certain amounts formerly included below in the substantial doubt that existed atrestructuring reserve as of December 31, 2016 about2018, have been reclassified on the balance sheet to be shown netted against the restructured lease, right-of-use asset in accordance with Topic 842.

For the three months ended March 31, 2018, we recorded restructuring credits totaling approximately $50 thousand, primarily related to the revision of our ability to continue as a going concern.initial estimates of the cost and offsetting sublease income for the remaining lease obligation for the former New York office. For additional information regarding the restructuring actions taken in the 2017, please refer to Note 3, “Restructuring,” included under Item 8 of our 20172018 Annual Report.

While substantial doubt about our ability to continue as a going concern continued to exist at June 30, 2018, we had $8.6 million in cash and no debt obligations atMarch 31, 2019, the endimpact of the quarter. In addition, the restructuring actions taken in 2017 resulted in a decrease in totaland initiatives described above, have reduced our operating expenses of $3.4 million during in the six months ended June 30,to be more commensurate with our sales volumes. Despite this, we continue to incur losses and have a substantial accumulated deficit, raising substantial doubt about our ability to continue as a going concern at both December 31, 2018 compared to the six months ended June 30, 2017. Consequently, consideringand March 31, 2019. Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to obtain additional financing, restructuring actions, current financial position, liquid resources, obligations due or anticipated within the next year, executive

reorganization, and implementation of our product development and sales channel strategy, if adequately executed, will returnprovide us with an ability to break-even levels infinance our operations through 2019 and effectively mitigateswill mitigate the substantial doubt about our ability to continue as a going concern. Please refer to Note 7, “Debt,” included under Item 1 of this Quarterly Report for more information on the additional financing we received on March 29, 2019 to fund our near-term operations.

Other expense was $2 thousand for the second quarter of 2018, compared to $14 thousand for the second quarter of 2017. Other income was $19 thousand for the six months ended June 30, 2018first quarter of 2019, compared to other expenseincome of $21 thousand for the same periodfirst quarter of 2017.2018. The expenses in 2019 primarily consisted of non-cash amortization of deferred financing costs related to the revolving credit facility we entered into on December 11, 2018. The income in 2018 related to the gain on the sale of equipment previously classified as held for sale.

Due to the operating losses incurred during the three and six months ended June 30,March 31, 2019 and 2018, and 2017, and after application of the annual limitation set forth under Section 382 of the IRC, it was not necessary to record a provision for U.S. federal income tax or various states income taxes.

For three months ended June 30, 2018,March 31, 2019, our net loss was $1.8$2.9 million, compared to $3.1$2.4 million for the three months ended June 30, 2017 .March 31, 2018. The reductionincrease in the net loss was principally due to our restructuring initiatives, resultingthe lower gross profit in the first quarter of 2019, partially offset by lower overall operating expenses, of $1.5 million, including a reduction of $1.1 million in restructuring expenses.

While we had cash and cash equivalents of $8.6$3.9 million at June 30, 2018March 31, 2019, we had a total of $3.4 million in debt, including $1.7 million outstanding on our revolving credit facility and no debt, we$1.7 million in subordinated convertible notes. We have historically incurred substantial losses, and as of June 30, 2018,March 31, 2019, we had an accumulated deficit of $112.4$120.4 million. Additionally, our sales have been concentrated in a few major customers and for the sixthree months ended June 30, 2018, twoMarch 31, 2019, three customers accounted for approximately 3722 percent, 10 percent, and 1230 percent of net sales.

Since the executive transition on April 1, 2019, we have continued to evaluate and assess strategic options as we seek to achieve a profitable business model and maximize value for usour stockholders. Our plans to operate our business profitably, we will need to continueachieve profitability include continuing to develop new technologies into sustainable product lines that allow us to effectively compete to expand our customer base, execute our marketing and sales plans, for our energy-efficient LED lighting products, and continue to improve our supply chain and organizational structure. The restructuring and cost cutting initiatives implemented during 2017 and 2019 were designed to allow us to effectively execute this strategy.

There can be no assurance that we will obtain funding on acceptable terms, in a timely fashion, or at all. Obtaining financing through the above-mentioned mechanismsadditional funding contains risks, including:

If we fail to generate cashobtain the required additional financing to growsustain our business before we wouldare able to produce levels of revenue to meet our financial needs, we will need to delay, or scale back or eliminate our business plan and further reduce our operating costs orand headcount, each of which couldwould 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.

Liquidity and capital resources

The following summarizes cash flows from operating, investing, and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows (in thousands):

Net cash used in operating activities was $2.3$3.6 million for the sixthree months ended June 30, 2018,March 31, 2019, and resulted primarily from the net loss incurred of $4.2$2.9 million, adjusted for non-cash items, including: depreciation, stock-based compensation, and provisions for inventory and warranty reserves, and working capital changes. During the sixthree months ended June 30, 2018,March 31, 2019, we generatedused $1.3 million in cash for accounts payable, primarily due to the timing of $1.5inventory receipts and payments, $0.2 million through an increase in accounts payable, due to our payment terms with our vendors; $0.4 million through reduction in our inventory, due to the volume and timing of inventory receipts; and $0.2 million through the collection of accounts receivable, due to the timing and volume of ourhigher shipments in December 2017March 2019 as compared to JuneDecember 2018. Partially offsetting these increases in cash, was an increase inIn addition, prepaid and other assets of $0.4decreased by $0.5 million related toas the inventory for which we paid deposits paid to our contract manufacturers on inventory to be shipped in subsequent quarters.prior quarters was received in the first quarter of 2019.

Net cash used in operating activities was $3.1$0.7 million for the sixthree months ended June 30, 2017,March 31, 2018, and resulted from the net loss incurred of $7.6$2.4 million, adjusted for non-cash items, including: depreciation, stock-based compensation, and provisions for inventory and warranty reserves, and working capital changes. In the first halfquarter of 2017,2018, trade accounts receivable decreased $2.2 millionpayable increased due to the timing of inventory receipts and volume of our shipments in December 2016 compared to June 2017. In addition, during the first half of 2017, inventory balances decreased, as we sold product on-hand, while trade accounts payable, principally related to inventory purchases, remained relatively flat, as we received inventory on orders that were placedpayment terms with our contract manufacturers during the first quarter of 2017.vendors.

Net cash used in investing activities was $4 thousand for the three months ended March 31, 2019, and resulted primarily from the purchase of tooling to support production operations. Net cash provided by investing activities was $183 thousand$0.2 million for the sixthree months ended June 30,March 31, 2018, and resulted primarily 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 $43 thousand for the six months ended June 30, 2017, and resulted primarily from acquisitions of software and equipment to support our production operations.

Net cash used inprovided by financing activities during the sixthree months ended June 30, 2018March 31, 2019 was $18 thousand,$1.1 million, primarily resulting from issuingthe $1.7 million in proceeds we received for the subordinated convertible notes we entered into on March 29, 2019, partially offset by net repayments of $0.5 million on borrowings under the credit facility we entered into on December 11, 2018. In addition, we used approximately $0.1 million to issue and immediately repurchasingrepurchase our stock for employee tax withholding related to restricted stock unit vesting during the period. Net cash provided byused in financing activities during the sixthree months ended June 30, 2017March 31, 2018 was $56$32 thousand, resulting from the proceeds received for the exercise of stock options and employee stock purchase plan purchases, partially offset by the effect of issuing and immediately repurchasing our stock for employee tax withholding related to restricted stock unit vesting.

There have been no other material changes to our contractual obligations as compared to those included in our 20172018 Annual Report.

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 table provides a disaggregationaccounting 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 product net sales for the periods presented:guidance to short-term leases.

Our trade accounts receivable consistsPlease refer to Note 6, “Leases,” included under Part I, Item 1 of amounts billed to and currently due from customers. Credit is extended to customers based upon an evaluation of the customer’s financial condition and the amounts due are stated at their estimated net realizable value. We maintain an allowancethis Quarterly Report for doubtful accounts receivable to provide for the estimated amount of 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 guaranteesmore information relating to the extent applicable. Past due amounts are written off when our internal collection efforts have been unsuccessful. Our standard payment terms with customers are net 30 days, and we do not generally offer extended payment terms to our customers. 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.Company’s leasing arrangements.

There have been no other material changes to our critical accounting policies as compared to those included in our 20172018 Annual Report.