UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

 

OR

ENERGY FOCUS, INC.

Securities registered pursuant to Section 12(b) of the Act:

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes ☑    No ☐

 

The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, as of July 19,November 11, 2019 was 12,370,030.

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

ENERGY FOCUS, INC.

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 develop, market and sell high quality energy-efficient light-emitting diode (“LED”) lighting products in the commercial and military 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 team is dedicated to developing and designing leading-edge technology LED lighting products.products based upon the very important input - voice of the customer.

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

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiary, Energy Focus LED Solutions, LLC, which is not active. Unless indicated otherwise, the information in the accompanying financial statements and notes to the unaudited condensed consolidated financial statements relates to our continuing operations.

We have prepared the accompanying financial data for the three and nine months ended March 31,September 30, 2019 and 2018 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, 2018 (“2018 Annual Report”). The Condensed Consolidated Balance Sheet as of December 31, 2018 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 condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly our Condensed Consolidated Balance Sheets as of March 31,September 30, 2019 and December 31, 2018, Condensed Consolidated Statements of Operations for the three and nine months ended March 31,September 30, 2019 and 2018, Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended March 31,September 30, 2019 and 2018, Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three and nine months ended March 31,September 30, 2019 and 2018, and Condensed Consolidated Statements of Cash Flows for the threenine months ended March 31,September 30, 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 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

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 March 31,September 30, 2019, sales to our primary distributor for the U.S. Navy, a shipbuilder for the U.S. Navy, and a regional commercial lighting retrofit company located in Texas and a global healthcare provider located in Northeast Ohio accounted for approximately 2227 percent, 1014 percent and 3015 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 net sales of products for the U.S. Navy comprised approximately 3230 percent of net sales for the same period. For the three months ended March 31,September 30, 2018, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company located in Texas accounted for approximately 4648 percent and 15 percent of net sales, respectively. When sales to our primary distributor for the period. WhenU.S. Navy are combined with sales to a shipbuilder for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 5053 percent of net sales for the same period. Additionally,

For the nine months ended September 30, 2019, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company located in CaliforniaTexas accounted for approximately 1020 percent and 23 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 net sales of products for the U.S. Navy comprised approximately 27 percent of net sales for the threesame period. For the nine months ended March 31, 2018.September 30, 2018, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company located in Texas accounted for approximately 41 percent and 10 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 net sales of products for the U.S. Navy comprised approximately 45 percent of net sales for the same period.

A regional commercial lighting retrofit company located in Texas, our primary distributor for the U.S. Navy and a primary shipbuilder for the U.S. Navy,global healthcare provider located in Northeast Ohio accounted for approximately 3411 percent, 1937 percent and 1413 percent of net trade accounts receivable, respectively, at March 31,September 30, 2019. At December 31, 2018, our primary distributor for the U.S. Navy accounted for approximately 40 percent of net trade accounts receivable.

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.

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 ASCTopic 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 ASCTopic 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 (in thousands):

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 on an actual basis 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, 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 97 percent of our long-lived fixed assets are located in the United States, with the remainder located in our recently closed product development center in Taiwan. There were no net sales attributable to customers outside the United States for the three months ended September 30, 2019 and such sales were less than one percent of net sales for the three months ended September 30, 2018. Net sales attributable to customers outside the United States accounted for less than one percent and approximately onetwo percent of our total net sales for the threenine months ended March 31,September 30, 2019 and 2018, 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 nine months ended MarchSeptember 30, 2019, zero and 31 2019 and 2018, approximately 28 thousand and 90 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 nine months ended September 30, 2018, approximately 62 thousand and 90 thousand potentially dilutive equity awards, respectively, were excluded from the net loss per share calculation for this same reason. Therefore, for the three and nine months ended March 31,September 30, 2019 and 2018, 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 LEDFL Tubular LED tubes, globes, andLamps (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 Red Caps) 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 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 2018 or for the three months ended March 31, 2019. The following table summarizes warranty activity for the periods presented (in thousands):

During the first quarterhalf of 2019, we implemented phased actions to reduce costs in order to minimize 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 evaluated, including the issuance of subordinated convertible notes as discussed in Note 7, “Debt.”

Our initial actions included the elimination of three positions,2019, 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 warehousing and marketing. In connection with these actions, we recorded severance and related benefits charges of $0.1$0.2 million during the threefirst six months ended March 31,of 2019. Following the executive transition that occurred on April 1, 2019, we expect to incur additionalThere were no material restructuring charges totaling approximately $0.1 millionrecorded during the secondthird 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.

For the threenine months ended March 31,September 30, 2018, we recorded net restructuring credits totaling approximately $50$(46) thousand, primarily related to the revision of our initial estimates of the cost and offsetting sublease income for the remaining lease obligationobligations for the former New York, office.New York and Arlington, Virginia offices. For additional information regarding the restructuring actions taken as part of the 2017 restructuring plan, please refer to Note 3, “Restructuring,” included under Item 8 of our 2018 Annual Report.

Our restructuring liabilities consist of estimated ongoing costs related to long-term operating lease obligations.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 6, “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):

At March 31,September 30, 2019, we had $3.9$0.6 million in cash and cash equivalents, which includes $0.3 million restricted cash held, and total debt of $3.4$3.0 million, including $1.7$1.3 million outstanding on the revolving credit facility we entered into on December 11, 2018 and $1.7 million in subordinated convertible notes we entered into on March 29, 2019. Please refer to Note 7, “Debt” for more information on the additional financing we received on March 29, 2019 to fund our near-term operations.

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 March 31,September 30, 2019.

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 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, expand into new and attractive geographic markets, execute our marketing and sales plans, evaluate our optimal organizational structure, 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 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:

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:

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 financing,external funding, restructuring actions, noted above, 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 strategy, if adequately executed, will provide us with an ability to finance our operations through 20192020 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 the The Nasdaq Capital Market pursuant to listing rules, and thereforerules. Therefore we could be subject to delisting if we did not regain compliance within the compliance period (oror extend the compliance period as may be extended). We continue to monitorby filing for an extension. On October 15, 2019, the Company formally requested a 180 day extension beginning November 12, 2019 and evaluate ouris evaluating options to cure this deficiency within the compliance period.regain compliance.

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 millionfor each of the three months ended March 31,September 30, 2019 and 2018, respectively.2018. Depreciation expense was $0.3 million and $0.4 million, respectively, for the nine months ended September 30, 2019 and 2018.

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 $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 expense (income) expense.”

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 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, restructuring and finance leases is three2.83 years, two1.75 years, and three2.58 years, respectively.

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

Components of the operating, restructured and finance lease costs for the first quarter ofthree and nine months ended September 30, 2019, were as follows (in thousands):

Supplemental balance sheet information related to the Company’s operating and finance leases as of March 31,September 30, 2019 are as follows (in thousands):

Future minimum lease payments required under operating, restructured and finance leases for each of the 12-month rolling periods below in effect at March 31,September 30, 2019 are as follows:follows (in thousands):

Supplemental cash flow information related to leases for the first quarter ofnine months ended September 30, 2019, was as follows (in thousands):

As of March 31,September 30, 2019, borrowings under our revolving line of credit (“Credit Facility”) with Austin Financial Services were $1.7$1.3 million and are recorded in the Condensed Consolidated Balance Sheets as a current liability under the caption, “Credit line borrowings.” Unamortized debt issuance costs related to the Credit Facility were $0.1 million at March 31,September 30, 2019. These costs are recorded as current and long-term assets on the Condensed Consolidated Balance Sheets and have not been netted against the liability due to immateriality. The borrowing rate as of March 31,September 30, 2019 was 7.50%7.25%. At March 31,September 30, 2019, we had $0.6$1.2 million available for us to borrow under the Credit Facility.

In September 2019, Austin Financial Services authorized a temporary increase of $0.5 million to the amounts available in our line of credit as it relates to the inventory component of the original Credit Facility agreement. Amounts available to us are based on the amount of our available inventory, which is the lesser of 50 percent of the net realizable value of eligible inventory, or now, $1.0 million. This increase included a fee of $5 thousand which has been recorded as a current asset (in-line with the original debt issuance costs noted above) and will be amortized through February 2020. Additional information regarding our Credit Facility is included in Note 9, “Debt” to our 2018 Annual Report on Form 10-K for the year ended December 31, 2018 which was filed with the SEC on April 1, 2019.

On March 29, 2019, the Company entered into a Note Purchase Agreement with Fusion Park LLC, F&S Electronic Technology (HK) Co., Ltd, Brilliant Start Enterprise Inc., Vittorio Viarengo and Amaury Furmin (collectively the “Investors”) for the purchase of an aggregate $1.7 million in subordinated convertible promissory notes (the “Notes”). The Notes, which were issued to the Investors on March 29, 2019 and amended on May 29, 2019, have a maturity date of December 31, 2021 and bear interest at a rate of 5 percent per annum until June 30, 2019, and at a rate of 10 percent thereafter. The outstanding principal amount of each Note, together with accrued interest (such principal and interest, the “Aggregate Outstanding Amount”), is convertible into shares of Series A Preferred Stock at a “Conversion Rate” determined by the arithmetic average of the volume-weighted average closing price of the Common Stock measured over a specified ten-trading-day period that ended on April 16, 2019, which equaled $0.67 per share. To calculate the number of shares of Series A Preferred Stock into which each Note may convert, the Aggregate Outstanding Amount of such Note will be divided by the Conversion Rate.

The Notes will automatically convert into shares of Series A Preferred Stock at the conversion rate on the first business day following the date that the Company’s stockholders approve the transactions contemplated by the Notes, including (a) the issuance of shares of Common Stock upon conversion of the shares of Series A Preferred Stock in excess of the number of shares of Common Stock permitted by NASDAQ Marketplace Rules, and (b) the increase in the number of authorized and available shares of Series A Preferred Stock pursuant to the Company’s Certificate of Incorporation, as amended.

The Company has accounted for this equity-linked hybrid instrument in accordance with applicable U.S. GAAP and, per analysis of the terms of the agreement, has determined it to be a debt-related instrument that does not require the equity-linked component to be bifurcated. The Company has recorded the Notes as short-term debt at cost in the amount of $1.7 million, as we expect the Notes to convert in less than 12 months. The issuance costs will be deferred and amortized until such time as the Notes convert. Unamortized debt issuance costs were $28$54 thousand at March 31,September 30, 2019. These costs are recorded as current and long-term assets on the Consolidated Balance Sheets and have not been netted against the liability due to immateriality.

As a result of the operating loss incurred during each of the three and nine months ended March 31,September 30, 2019 and 2018, 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 March 31,September 30, 2019 and December 31, 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.

At December 31, 2018, we had a net operating loss carry-forward of approximately $100.5 million for U.S. federal, state, and local income tax purposes. However, due to changes in our capital structure, approximately $46.0 million of the net operating loss carry-forward is available to offset future taxable income, and after the application of the limitations found under Section 382 of the IRC, we expect to have approximately $46.0 million of this amount available for use in 2019. If not used, these carry-forwards will begin to expire in 2021 for federal and have begun to expire for state and local purposes. For a full discussion of the estimated restrictions on our utilization of net operating loss carry-forwards, please refer to Note 12, “Income Taxes,” included under Item 8 of our 2018 Annual Report.

NOTE 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$0.2 million at March 31,September 30, 2019, compared to $1.3$1.1 million at March 31,September 30, 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 March 31,September 30, 2019 is expected to be recognized is approximately 1.42.2 years.

Pursuant to agreements dated March 29, 2019, and effective April 1, 2019, Theodore L. Tewksbury III resigned as Chairman of the Board, Chief Executive Officer and President, and Jerry Turin resigned as Chief Financial Officer and Secretary. In accordance with their separation agreements, Jerry Turin’sTheodore Tewksbury’s outstanding restricted stock units vested immediately and one-third of Theodore Tewksbury’sJerry Turin’s outstanding restricted stock units vested immediately. Any stock options vested for Theodore Tewksbury as of April 1, 2019, shall remain exercisable for one year following. All unvested stock options were cancelled. As such, theThe impact of the accelerated vesting of the restricted stock units and cancellation of the stock options is reflected inwas recognized during the tables below.

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 threenine months ended March 31,September 30, 2019 is presented as follows:

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

NOTE 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 the 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.

As of March 31,September 30, 2019, we had approximately $2.5$0.8 million in outstanding purchase commitments for inventory. Of this amount, approximately $1.9$0.7 million is expected to ship in the secondfourth quarter of 2019 with the balance expected to ship in the thirdfirst and fourthsecond quarters of 2019.2020.

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 2018 Annual Report.

Energy Focus, Inc. and its subsidiary engage in the design, development, manufacturing, marketing, and sale of energy-efficient lighting systems. We develop, market and sell high quality energy-efficient light-emitting diode (“LED”) lighting products in the commercial and military 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.

At March 31,September 30, 2019, we had $3.9$0.6 million in cash and cash equivalents, which includes $0.3 million restricted cash held, and a total of $3.4$3.0 million in debt, including approximately $1.7 million in funding from the issuance of subordinated convertible notes. Additionally, at September 30, 2019, we had $1.2 million available for us to borrow under the revolving line of credit facility. During the first and second quarterssix months of 2019, we took additional actions to reduce our operating expenses to be more commensurate with our sales volumes. These actions resulted in additional restructuring charges of $0.1$0.2 million in the first quarter of 2019 for severance and related benefits charges in connection with the elimination of three positions. Intwelve positions (three during the first quarter of 2019 and nine during the second quarter of 2019, we further reduced headcount by nine positions2019) and closedthe closing of our offices in San Jose, California and Taipei, Taiwan. We expect to incur additionalThere were no material restructuring charges of $0.1 million, primarily related to severance and related benefits in connections withrecorded during the third quarter 2019. Despite these actions. However,actions, we continue to incur losses and have a substantial accumulated deficit, raising substantial doubt about our ability to continue as a going concern at March 31,September 30, 2019.

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 our stockholders. Our plans to achieve profitably also 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. We will also continue to review and pursue selected external funding sources.

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 strategy, if adequately executed, will provide us with an ability to finance our operations through 20192020 and will 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 $3.2$2.9 million for the firstthird quarter of 2019 decreased 31.843.5 percent compared to the firstthird quarter of 2018 primarily driven by a decrease in military product sales. Net sales of our commercial products decreased 10.124.4 percent in the third quarter of 2019 compared to the third quarter of 2018, reflecting first, lower sales from our agency network that we have been consolidating and deemphasizing for sales and marketing efforts since our restructuring in April 2019, and second, fluctuations in the timing, pace and size of commercial projects. Net sales of our military products decreased 58.8 percent in the third quarter of 2019 as compared to the third quarter of 2018, reflecting the timing and fulfillment of U.S. Navy awards.

Net sales of $9.2 million for the first nine months of 2019 decreased 38.8 percent compared to the same period in 2018 primarily driven by a decrease in military product sales. Net sales of our commercial products decreased 21.7 percent in the first quarternine months of 2019 compared to the same period in 2018, reflecting fluctuations in the timing, pace and size of commercial projects. Net sales of our military products decreased 51.355.8 percent asin the first nine months of 2019 compared to the first quartersame period in 2018. The sale cycles for the military market is dependent on many factors, including the availability of 2018, reflectinggovernment funding, the timing and fulfillment of U.S. Navy awards, during the fourth quarter of 2017new ship construction and the first quartertiming of 2018.vessel maintenance schedules.