UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

Form 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

 

OR

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

    For the transition period from _____________ to _____________

       

Commission file number 0-24230

 

ENERGY FOCUS, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

94-3021850

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

     

32000 Aurora Rd., Solon, OH

(Address of principal executive offices)

     

44139

(Zip Code)

(Registrant’s telephone number, including area code): (440) 715-1300

 

None

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

 

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 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. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

  

 

Accelerated filer 

Non-accelerated filer  (do not check if a smaller reporting company)

  

Smaller reporting company ☑  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐    No

 

The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, as of November 8, 2013 was 51,352,799.

 



 

 
 

 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

     

Page

       

Item 1.

Financial Statements

 
       
 

a.

Condensed Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012

3

       
 

b.

Condensed Consolidated Statements of Operations for the  three and nine months ended September 30, 2013 and 2012 (Unaudited)

4
       
 

c.

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2013 and 2012 (Unaudited)

5
       
 

d.

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 (Unaudited)

6
       
 

e.

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

       

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

19

       

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

       

Item 4.

Controls and Procedures

26

       
PART II - OTHER INFORMATION
       

Item 1A.

Risk Factors

26

       

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

26

       

Item 5.

Other Information

26

       

Item 6.

Exhibits

27

       
 

Signatures

27

       
 

Exhibit Index

28

 

 
2

 
 

 

Item 1. Financial Statements

 

ENERGY FOCUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(amounts in thousands except share and per share data)

 
   

September 30,

2013

   

December 31,

2012

 
   

(unaudited)

         

ASSETS

               

Current assets:

               

Cash and cash equivalents, includes restricted cash of $0 and $252, respectively

  $ 952     $ 1,181  

Trade accounts receivable less allowances of $137 and $265, respectively

    3,807       5,319  

Retainage receivable

    381       634  

Inventories, net

    2,989       2,581  

Costs in excess of billings

    162       99  

Prepaid and other current assets

    1,681       1,012  

Total current assets

    9,972       10,826  
                 

Property and equipment, net

    1,466       1,800  

Intangible assets, net

    106       608  

Collateralized assets

    1,000       1,000  

Other assets

    319       119  

Total assets

  $ 12,863     $ 14,353  
                 

LIABILITIES

               

Current liabilities:

               

Accounts payable

  $ 4,854     $ 5,879  

Accrued liabilities

    1,325       2,265  

Deferred revenue

    -       751  

Billings in excess of costs

    1,461       464  

Credit line borrowings

    836       1,590  

Current maturities of long-term debt

    58       756  

Total current liabilities

    8,534       11,705  
                 

Other liabilities

    56       30  

Long-term debt

    4,252       1,793  

Total liabilities

    12,842       13,528  
                 

SHAREHOLDERS' EQUITY

               

Preferred stock, par value $0.0001 per share:

               

Authorized: 2,000,000 shares in 2013 and 2012

               

Issued and outstanding: no shares in 2013 and 2012

    -       -  

Common stock, par value $0.0001 per share:

               

Authorized: 100,000,000 shares in 2013 and 2012

               

Issued and outstanding: 49,158,886 at September 30, 2013 and 44,698,650 at December 31, 2012

    5       4  

Additional paid-in capital

    83,946       80,985  

Accumulated other comprehensive income

    452       460  

Accumulated deficit

    (84,382 )     (80,624 )

Total shareholders' equity

    21       825  

Total liabilities and shareholders' equity

  $ 12,863     $ 14,353  

 

The accompanying notes are an integral part of these financial statements.

 

 
3

 

 

ENERGY FOCUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(amounts in thousands except per share amounts)

(unaudited)  

 
   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Net sales

  $ 5,988     $ 7,904     $ 18,702     $ 20,878  

Cost of sales

    4,574       5,945       14,065       16,430  

Gross profit

    1,414       1,959       4,637       4,448  
                                 

Operating expenses:

                               

Research and development

    57       102       266       87  

Sales and marketing

    1,550       1,423       4,351       4,084  

General and administrative

    1,185       1,211       3,524       3,479  

Loss on impairment

    -       -       325       -  

Restructuring

    79       -       79       -  

Change in estimate of contingent liabilities

    -       -       12       -  

Total operating expenses

    2,871       2,736       8,557       7,650  

Loss from operations

    (1,457 )     (777 )     (3,920 )     (3,202 )
                                 

Other income (expense):

                               

Settlement of acquisition obligations

    -       -       892          

Other expense

    (26 )     (26 )     (265 )     (98 )

Interest income

    -       -       -       1  

Interest expense

    (166 )     (123 )     (459 )     (388 )
                                 

Loss before income taxes

    (1,649 )     (926 )     (3,752 )     (3,687 )
                                 

Provision for income taxes

    (2 )     (2 )     (6 )     (8 )
                                 

Net loss

  $ (1,651 )   $ (928 )   $ (3,758 )   $ (3,695 )
                                 

Net loss per share - basic and diluted

  $ (0.03 )   $ (0.02 )   $ (0.08 )   $ (0.09 )
                                 

Shares used in computing net loss per share - basic and diluted

    49,158       44,542       46,712       40,241  

 

The accompanying notes are an integral part of these financial statements.

 

 
4

 

 

ENERGY FOCUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(amounts in thousands)

(unaudited)

 
   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Net loss

  $ (1,651 )   $ (928 )     (3,758 )   $ (3,695 )
                                 

Other comprehensive income:

                               

Foreign currency translation adjustments

    31       26       (8 )     37  

Comprehensive loss

  $ (1,620 )   $ (902 )     (3,766 )   $ (3,658 )

 

The accompanying notes are an integral part of these financial statements.

 

 
5

 

 

E NERGY FOCUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(amounts in thousands)

(unaudited)

 

   

Nine months ended

September 30,

 
   

2013

   

2012

 

Cash flows from operating activities:

               

Net loss

  $ (3,758 )   $ (3,695 )

Adjustments to reconcile net loss to net cash used in operating activities:

               
                 

Loss on impairment

    325       -  

Depreciation

    496       478  

Stock-based compensation

    149       146  

Settlement of acquisition obligations

    (892 )     -  

Provision for doubtful accounts receivable

    (26 )     104  

Amortization of intangible assets

    177       314  

Amortization of discounts on long-term borrowings and acquisition related liabilities

    168       180  

Amortization of loan origination fees

    106       -  

Loss on disposal of fixed assets

    6       -  

Changes in assets and liabilities:

               

Accounts receivable, inventories, and other assets

    319       (1,274 )

Accounts payable and accrued liabilities

    (1,579 )     (1,655 )

Deferred revenue and billings in excess of costs

    246       (766 )

Total adjustments

    (505 )     (2,473 )

Net cash used in operating activities

    (4,263 )     (6,168 )
                 

Cash flows from investing activities:

               

Acquisition of property and equipment

    (168 )     (159 )

Net cash used in investing activities

    (168 )     (159 )
                 

Cash flows from financing activities:

               

Proceeds from issuances of common stock, net

    15       4,805  

Proceeds from other borrowings, net of origination fees

    5,224       -  

Payments on other borrowings

    (290 )     (873 )

Net (repayments) proceeds on credit line borrowings

    (754 )     629  

Net cash provided by financing activities

    4,195       4,561  
                 

Effect of exchange rate changes on cash

    7       10  
                 

Net increase (decrease) in cash and cash equivalents

    (229 )     (1,756 )

Cash and cash equivalents at beginning of period

    1,181       2,136  

Cash and cash equivalents at end of period

  $ 952     $ 380  
                 

Classification of cash and cash equivalents:

               

Cash and cash equivalents

  $ 952     $ 353  

Restricted cash held

    -       27  

Cash and cash equivalents at end of period

  $ 952     $ 380  

 

The accompanying notes are an integral part of these financial statements.

 

 
6

 

  

ENERGY FOCUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(Unaudited)

 

NOTE 1. NATURE OF OPERATIONS

 

Energy Focus, Inc. and its subsidiaries (the “Company”) engage in the design, development, manufacturing, marketing, and installation of energy-efficient lighting systems and solutions where the Company serves two segments:

 

 

solutions segment providing turnkey, high-quality, energy-efficient lighting application alternatives primarily to the existing public-sector building market; and

 

products segment providing military, general commercial and industrial lighting and pool lighting offerings, each of which markets and sells energy-efficient lighting systems.

 

The Company continues to evolve its business strategy to include providing its customers with turnkey, comprehensive energy-efficient lighting solutions, which use, but are not limited to, its patented and proprietary technology. The Company’s products segment includes light-emitting diode (“LED”), fiber optic, high-intensity discharge (“HID”), fluorescent tube and other highly energy-efficient lighting technologies. Typical savings related to current technology of the Company approximates 80% in electricity costs, while providing full-spectrum light closely simulating daylight colors. The Company’s strategy also incorporates continued investment into the research of new and emerging energy sources including LED and solar energy applications.

 

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

 

Basis of Presentation

 

The financial statements include the accounts of the Company and its subsidiaries, Stones River Companies, LLC (“SRC”) doing business as Energy Focus LED Solutions in Nashville, Tennessee, and Crescent Lighting Limited (“CLL”) located in the United Kingdom. All significant inter-company balances and transactions have been eliminated.

 

We have prepared the accompanying financial data for the three and nine months ended September 30, 2013 and 2012 pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. have been condensed or omitted pursuant to such rules and regulations. The accompanying financial data and information should be read in conjunction with our 2012 Annual Report on Form 10-K.

 

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 September 30, 2013 and December 31, 2012 , Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30 , 2013 and 2012, Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012 , and Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012 .

 

The preparation of condensed consolidated financial statements in accordance with GAAP in the U.S. requires management to make estimates and assumptions that affect the amounts reported in our condensed consolidated 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 the company in the future, actual results may be different 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 for property, equipment, and intangible assets; revenues recognized on a percentage-of-completion basis; and stock-based compensation. In addition, estimates and assumptions associated with the evaluation of long-lived assets for impairment requires considerable judgment. Actual results could differ from those estimates and such differences could be material.

 

 
7

 

 

ENERGY FOCUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(Unaudited)

 

The Company’s independent registered public accounting firm has issued an opinion in connection with the Company’s 2012 Annual Report on Form 10-K raising substantial doubt about the Company’s ability to continue as a going concern. The interim financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The interim financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to our ability to continue as a going concern.

 

Update to Significant Accounting Policies

 

There have been no material changes to our significant accounting policies, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.

 

Earnings (Loss) per Share

 

Basic loss per share is computed by dividing the net loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted loss per share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of incremental shares upon exercise of stock options, warrants, and conversion of convertible subordinated promissory notes unless the effect would be anti-dilutive.

 

A reconciliation of basic and diluted loss per share is provided as follows (in thousands, except per share amounts):

 
   

Three months ended

September 30,

   

Nine Months Ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 

Basic and diluted loss per share:

                               

Net loss

  $ (1,651 )   $ (928 )   $ (3,758 )   $ (3,695 )
                                 

Basic and diluted loss per share:

                               

Weighted average shares outstanding

    49,158       44,542       46,712       40,241  
                                 

Basic and diluted net loss per share

  $ (0.03 )   $ (0.02 )   $ (0.08 )   $ (0.09 )

 

Options and warrants to purchase approximately 14,319,000 and 15,283,000 shares of common stock, were outstanding at September 30, 2013 and 2012, respectively, but were not included in the calculation of diluted net loss per share because their inclusion would have been anti-dilutive.

 

 
8

 

 

ENERGY FOCUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(Unaudited)

 

Stock-Based Compensation

 

The Company’s stock-based compensation plan is described in detail in its 2012 Annual Report on Form 10-K. The following table summarizes the Company’s stock-based compensation (in thousands):

 
   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Cost of sales

  $ 1     $ -     $ 2     $ -  

Research and development

    11       7       26       19  

Sales and marketing

    8       6       23       20  

General and administrative

    33       29       98       107  

Total stock-based compensation

  $ 53     $ 42     $ 149     $ 146  

 

At September 30, 2013 and 2012, the Company has unamortized stock-based compensation expense of $249 thousand and $241 thousand, respectively. These costs will be charged to expense and amortized using a straight-line amortization method in future periods through the third quarter of 2016. The weighted average period over which this unearned compensation is expected to be recognized is approximately 1.6 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:

 
   

Nine months ended

September 30,

 
   

2013

   

2012

 
                 

Fair value of options issued

  $ 0.17     $ 0.15  

Exercise price

  $ 0.25     $ 0.27  

Expected life of option (years)

    7.2       5.6  

Risk-free interest rate

    1.3 %     0.8 %

Expected volatility

    90.2 %     59.0 %

Dividend yield

    0 %     0 %

 

Option activity under the Company’s stock plans during the nine months ended September 30, 2013 was as follows:

 
   

Options

   

Weighted

Average

Exercise Price

   

Weighted

Average

Remaining

Contractural

Term (in Years)

 

Outstanding as of December 31, 2012

    2,184,583     $ 2.20          

Granted

    1,684,500       0.25          

Exercised

    -       -          

Cancelled/forfeited

    (651,377 )     0.52          

Outstanding as of September 30, 2013

    3,217,706     $ 1.52       7.3  

Exercisable as of September 30, 2013

    1,875,274     $ 2.35       6.0  

 

Additionally, the Company granted 51,219 restricted stock units during the third quarter ended September 30, 2013. The fair market value on the date of grant was $0.41 per share. The shares vest one year from the grant date.

 

 
9

 

 

ENERGY FOCUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(Unaudited)

 

Product Warranties

 

The Company warrants finished goods against defects in material and workmanship under normal use and service for periods generally between one and five years for products and labor. Settlement costs consist of actual amounts expensed for warranty services which are largely a result of third-party service calls and the costs of replacement products. A liability for the estimated future costs under product warranties is maintained for products outstanding under warranty and is included in “Accrued liabilities” in the Condensed Consolidated Balance Sheets. The warranty activity for the respective periods is as follows (in thousands):

 
   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Balance at the beginning of the period

  $ 150     $ 125     $ 159     $ 100  

Accruals for warranties issued

    7       52       46       110  

Settlements made during the period (in cash or in kind)

    (17 )     (18 )     (65 )     (51 )

Balance at the end of the period

  $ 140     $ 159     $ 140     $ 159  

 

NOTE 3. INVENTORIES

 

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

 

   

September 30,

2013

   

December 31,

2012

 
                 

Raw materials

  $ 1,305     $ 1,649  

Finished goods

    1,684       932  

Inventories, net

  $ 2,989     $ 2,581  
 

NOTE 4. PROPERTY AND EQUIPMENT

 

Property and equipment is stated at cost and depreciated using the straight-line method over the estimated useful lives of the related assets and consists of the following (in thousands):

 
   

September 30,

2013

   

December 31,

2012

 
                 

Equipment (useful life 3 - 15 years)

  $ 5,101     $ 5,963  

Tooling (useful life 2 - 5 years)

    2,576       2,600  

Furniture and fixtures (useful life 5 years)

    132       132  

Computer software (useful life 3 years)

    541       462  

Leasehold improvements (the shorter of useful life or lease life)

    633       633  

Construction in progress

    11       50  

Property and equipment at cost

    8,994       9,840  

Less: accumulated depreciation

    (7,528 )     (8,040 )

Property and equipment, net

  $ 1,466     $ 1,800  

 

 
10

 

 

ENERGY FOCUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(Unaudited)

 

NOTE 5. INTANGIBLE ASSETS

 

The following table summarizes information related to net carrying value of intangible assets (in thousands):

 
   

Amortization

Life (in years)

   

September 30,

2013

   

December 31,

2012

 
                         

Definite-lived intangible assets:

                       

Tradenames

    10       -       350  

Customer relationships

    5       106       258  

Total definite-lived intangible assets

            106       608  
                         

Total intangible assets, net

          $ 106     $ 608  

 

Amortization expense for intangible assets subject to amortization was $51 thousand and $104 thousand for the three months ended September 30, 2013 and 2012, respectively. For the nine months ended September 30, 2013 and 2012, amortization expense was $177 thousand and $314 thousand, respectively.

 

In conjunction with the settlement agreement between the Company and the former owners of SRC, the Company agreed to discontinue the use of the name “Stones River Companies, LLC” and various derivatives including SRC. Therefore, at June 30, 2013, the remaining unamortized balance of Tradenames of $325 thousand was written off. See Note 9, Settlement of Acquisition Obligations.

 

Customer relationships are amortized over their expected useful lives on an accelerated method that approximates the cash flows associated with those relationships. Based on the carrying value of amortized intangible assets, the Company estimates amortization expense for future years to be as follows (in thousands):

 

Year ending December 31,

 

Amount

 

2013 October through December

  $ 51  

2014

    55  

Total amortization expense

  $ 106  

 

NOTE 6. CONTRACTS IN PROGRESS

 

Costs and estimated earnings on contracts in progress as of the periods indicated are summarized in the following table (in thousands):

 
   

September 30,

2013

   

December 31,

2012

 

Costs incurred on uncompleted contracts

  $ 11,107     $ 7,067  

Estimated earnings

    1,817       1,330  

Total revenues

    12,924       8,397  

Less: billings to date

    14,223       8,762  

Total

  $ (1,299 )   $ (365 )
                 

Balance sheet classification:

               

Costs in excess of billings on uncompleted contracts

  $ 162     $ 99  

Billings in excess of costs on uncompleted contracts

    (1,461 )     (464 )

Total

  $ (1,299 )   $ (365 )

 

 
11

 

 

ENERGY FOCUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(Unaudited)

 

NOTE 7. DEBT

 

Credit Facilities

 

On December 22, 2011, the Company entered into a $4.5 million revolving line of credit (“credit facility”) with Rosenthal & Rosenthal. The total loan amount available to the Company under the line of credit is equal to 85% of its net amount of eligible receivables, plus available inventory (the lesser of 50% of the lower of cost or market value of eligible inventory, or $250 thousand). The credit facility is secured by a lien on the domestic assets of the Company. The interest rate for borrowing on accounts receivable is 8.5%, on inventories 10.0% and on overdrafts 13.0%. Additionally, there is an annual 1% facility fee on the entire amount of the credit facility payable at the beginning of the year. The credit facility is a three year agreement, expiring on December 31, 2014, unless terminated sooner. There are liquidated damages if the credit facility is terminated prior to December 31, 2014, which are based on the maximum credit facility amount then in effect. The damages are: 2% if terminated prior to December 31, 2013, and 1% if terminated prior to December 31, 2014. The Company is required to comply with certain financial covenants, measured quarterly, including, as defined in the agreement: a tangible net worth amount and a working capital amount. The Company was in compliance with the financial covenants at September 30, 2013. Borrowings under the revolving line of credit were $836 thousand at September 30, 2013, and $1.6 million at December 31, 2012, and are recorded in the Company’s Condensed Consolidated Balance Sheets as a current liability under the caption “Credit line borrowings.”

 

Borrowings

 

The components of the Company’s debt at September 30, 2013 and December 31, 2012 were as follows (in thousands):

 
   

September 30,

2013

   

December 31,

2012

 

Unsecured Convertible Notes

  $ 5,745     $ 1,500  

Convertible Promissory Note - TLC Investments LLC

    -       500  

Cognovit Note - Keystone Ruby, LLC

    237       277  

Letter of Credit Agreement - Mark Plush

    -       250  

Unsecured Promissory Note - Quercus Trust

    70       70  

Discounts on long-term borrowings

    (1,742 )     (48 )
                 

Subtotal

    4,310       2,549  
                 

Less: Current maturies of long-term debt

    (58 )     (756 )
                 

Long-term debt

  $ 4,252     $ 1,793  

 

The unsecured convertible debt has a five percent annual interest rate, and is convertible into common stock of the Company at the rate of $0.23 per share as follows (in thousands):

 

April 30, 2013

  $ 500  

July 31, 2013

    1,750  

September 30, 2013

    2,350  

October 31, 2013

    700  

December 31, 2013

    150  

January 31, 2014

    295  
    $ 5,745  

 

 
12

 

 

ENERGY FOCUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(Unaudited)

 

$500 thousand of the convertible debt matures on December 31, 2015 and the remaining $5.2 million matures on December 31, 2016. During the second quarter, $1 million of the debt was converted into 4.3 million shares of Common Stock of the Company. Additionally, effective October 16, 2013, an additional $500 thousand of the debt was converted into 2.2 million shares of Common Stock of the Company.

 

As a provision of the settlement agreement between the Company and the former owners of SRC, the Company’s obligation to pay a $500 thousand convertible promissory note was cancelled in its entirety during the second quarter of 2013. See Note 9, Settlement of Acquisition Obligations.

 

On July 3, 2013, the Letter of Credit Agreement with Mark Plush was paid in full. See Note 13, Related Party Transactions.

 

For a full description of the Company’s debt financing, reference is made to Note 8, Debt, of the Company’s 2012 Annual Report on Form 10-K.

 

Future maturities of remaining borrowings are (in thousands):

 

Year ending December 31,

 

Long-Term

Debt

 

2013 October through December

  $ 14  

2014

    59  

2015

    566  

2016

    5,317  

2017

    26  

2018 and thereafter

    70  

Gross long-term borrowings

    6,052  

Less: discounts on long-term borrowings

    (1,742 )

Total commitment, net

    4,310  
         

Less: portion classified as current

    (58 )

Long-term borrowings, net

  $ 4,252  

 

 

NOTE 8. RESTRUCTURING

 

During the third quarter of 2013, the Company relocated its manufacturing operation from a contract manufacturing facility located in Mexico to its existing facilities in Pleasanton, California and Solon, Ohio. The Condensed Consolidated Statements of Operations includes $79 thousand in “Restructuring” for severance for the Mexican contract employees as required by the production share agreement, as amended, between the Company and the contract manufacturer.

 

NOTE 9. SETTLEMENT OF ACQUISITION OBLIGATIONS

 

On June 28, 2013, the Company entered into a Settlement Agreement with SRC, TLC Investments, LLC, Jamie Hall and Robert E. Wilson, terminating the Membership Interest Purchase Agreement and related agreements that the parties had entered into at the end of December 2009 in connection with the Company’s acquisition of SRC. As part of the Settlement Agreement, the Company’s obligation to pay a $500 thousand special fee and a $500 thousand convertible promissory note including interest of $92 thousand were cancelled in their entirety in exchange for a $200 thousand payment and the forgiveness of a net receivable due to the Company of $78 thousand. Additionally, the Company recognized a $66 thousand favorable adjustment related to the change in the estimate of a performance-related contingent obligation for a 2.5% payout based upon the fair value of projected annual billings of SRC. See Note 12, Commitments and Contingencies.

 

 
13

 

 

 

  ENERGY FOCUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(Unaudited)

 

The classification of these items in the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2013 is shown below (in thousands):

 

Change in estimate of contingent liabilities:

       

Forgiveness of net receivable due the Company

  $ 78  

Adjustment to performance-related contingent obligation

    (66 )

Net line item expense

  $ 12  
         

Settlement of acquisition obligations:

       

Forgiveness of special fee

  $ 500  

Forgiveness of convertible promissory note, including interest

    592  

Payment by the Company

    (200 )

Net line item income

  $ 892  

 

As a provision of the Settlement Agreement, the Company agreed to discontinue using the name Stones River Companies by July 1, 2014. As a result of this provision, the Company wrote off the remaining $325 thousand of the intangible asset for the Tradename during the second quarter of 2013. See Note 5, Intangible Assets.

 

NOTE 10. SEGMENTS AND GEOGRAPHIC INFORMATION

 

The Company has two reportable segments: products segment featuring pool lighting, general commercial and industrial lighting, government products, and research and development services, each of which markets and sells energy-efficient lighting systems; and solutions segment providing turnkey, high-quality, energy-efficient lighting application alternatives. The Company’s products are sold through a combination of direct sales employees, independent sales representatives and distributors in different geographic markets throughout the world. The Company’s solutions sales are designed to enhance total value by positively impacting customers’ profitability, the environment, and the communities it serves. These solutions are sold through the Company’s direct sales employees, as well as our SRC subsidiary, and include not only its proprietary energy-efficient lighting solutions, but also sourced lighting systems, energy audits and service agreements.

 

 
14

 

 

ENERGY FOCUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(Unaudited)

 

The following summarizes the Company’s reportable segment data for periods indicated (in thousands):

 
   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 

Solutions:

                               

Net sales

  $ 2,104     $ 2,066     $ 5,894     $ 5,811  

Cost of sales

    1,888       1,672       5,186       4,912  

Gross profit

    216       394       708       899  

Operating expenses:

                               

Sales and marketing

    397       320       934       1,004  

General and administrative

    115       244       526       558  

Loss on impairment

    -       -       325       -  

Total operating expenses

    512       564       1,785       1,562  

Segment loss

  $ (296 )   $ (170 )   $ (1,077 )   $ (663 )
                                 

Products:

                               

Net sales

  $ 3,884     $ 5,838     $ 12,808     $ 15,067  

Cost of sales

    2,686       4,273       8,879       11,518  

Gross profit

    1,198       1,565       3,929       3,549  

Operating expenses:

                               

Research and development

    57       102       266       87  

Sales and marketing

    821       957       2,616       2,708  

General and administrative

    106       119       307       261  

Restructuring expense

    79       -       79       -  

Total operating expenses

    1,063       1,178       3,268       3,056  

Segment income

  $ 135     $ 387     $ 661     $ 493  
                                 

Reconciliation of segment income (loss) to net loss:

                               

Segment (loss) income:

                               

Solutions

  $ (296 )   $ (170 )   $ (1,077 )   $ (663 )

Products

    135       387       661       493  

Total segment (loss) income

    (161 )     217       (416 )     (170 )

Operating expenses:

                               

Sales and marketing

    332       146       801       372  

General and administrative

    964       848       2,691       2,660  

Change in estimate of contingent liabilities

    -       -       12       -  

Total operating expenses

    1,296       994       3,504       3,032  

Other (expense) income

    (192 )     (149 )     168       (485 )

Loss before income taxes

    (1,649 )     (926 )     (3,752 )     (3,687 )

Provision for income taxes

    (2 )     (2 )     (6 )     (8 )

Net loss

  $ (1,651 )   $ (928 )   $ (3,758 )   $ (3,695 )

 

 
15

 

 

ENERGY FOCUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(Unaudited)

 

The following table provides additional business unit gross profitability detail for the Company’s products segment for the periods indicated (in thousands):

 
   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 

Products segment net sales:

                               

Pool and commercial products

  $ 2,612     $ 4,159     $ 8,503     $ 11,354  

Government products/R&D services

    1,272       1,679       4,305       3,713  

Total products segment net sales

    3,884       5,838       12,808       15,067  
                                 

Products segment cost of sales:

                               

Pool and commercial products

    1,668       2,892       5,490       8,077  

Government products/R&D services

    1,018       1,381       3,389       3,441  

Total products segment cost of sales

    2,686       4,273       8,879       11,518  
                                 

Products segment gross profit:

                               

Pool and commercial products

    944       1,267       3,013       3,277  

Government products/R&D services

    254       298       916       272  

Total products segment gross profit

  $ 1,198     $ 1,565     $ 3,929     $ 3,549  

 

A geographic summary of net sales is as follows (in thousands):

 
   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

United States

  $ 5,348     $ 6,976     $ 16,683     $ 18,700  

International

    640       928       2,019       2,178  

Net sales

  $ 5,988     $ 7,904     $ 18,702     $ 20,878  

 

A geographic summary of long-lived assets, which consists of fixed assets and intangible assets, is as follows (in thousands):

 
   

September 30,

2013

   

December 31,

2012

 

United States

  $ 1,533     $ 2,350  

International

    39       58  

Long-lived assets, net

  $ 1,572     $ 2,408  

 

 

NOTE 11. INCOME TAXES

 

At September 30, 2013, the Company has recorded a full valuation allowance against its deferred tax assets in the United States, due to uncertainties related to the Company’s ability to utilize its deferred tax assets, primarily consisting of certain net operating losses carried forward. The valuation allowance is based upon the Company’s estimates of taxable income by jurisdiction and the period over which its deferred tax assets will be recoverable.

 

 
16

 

 

ENERGY FOCUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(Unaudited)

 

As of December 31, 2012, the Company had a net operating loss carry-forward of approximately $70.7 million for federal, state and local income tax purposes. Due to changes in the Company’s capital structure, the net operating loss carry-forward available to the Company in future years to offset future taxable liabilities may be limited under Section 382 of the Internal Revenue Code (the “Code”). Management is currently reviewing the rules under this section of the Code, but believes that the limitation on the Company’s net operating loss carry-forward may be significant.

 

NOTE 12. COMMITMENTS AND CONTINGENCIES

 

In connection with the acquisition of SRC, the Company recorded a performance-related contingent obligation in December 2010 related to a 2.5% payout payable over 42 months commencing January 1, 2010 and based upon the fair value of projected annual billings of the acquired business, and a $500 thousand fee if the market price of the Company’s common stock is not equal to or greater than $2.00 per share for at least twenty trading days between June 30, 2010 and June 30, 2013 (due on June 30, 2013). The Company accrued for each of these contingent liabilities at their respective fair values at the time of the acquisition. For the three and nine months ended September 30, 2013, the Company paid $0 and $206 thousand, respectively, relating to the 2.5% payout. For the three and nine months ended September 30, 2012, the Company paid $51 thousand and $140 thousand, respectively, relating to the payout.

 

On June 28, 2013, the Company entered into a Settlement Agreement with Stones River Companies, LLC, TLC Investments, LLC, Jamie Hall and Robert E. Wilson, terminating the Membership Interest Purchase Agreement related to the acquisition of SRC. As part of the Settlement Agreement, the Company’s obligation to pay a $500 thousand special fee and a $500 thousand convertible promissory note including interest of $92 thousand were cancelled in their entirety. Additionally, the Company recorded at $66 thousand favorable adjustment related to the 2.5% payout discussed above. See Note 9, Settlement of Acquisition Obligations. At December 31, 2012, the Company had recorded a current liability related to these contingent obligations of $728 thousand under the caption “Accrued liabilities” in its Condensed Consolidated Balance Sheets.

 

NOTE 13. RELATED PARTY TRANSACTIONS

 

On August 11, 2011, the Company entered into a Letter of Credit Agreement (“LOC”) with Mark Plush, its former Chief Financial Officer, in the amount of $250 thousand. Effective July 8, 2013, Mr. Plush stepped down from his role and left the Company. For a full description of the terms of the LOC, reference is made to Note 10, Debt, of the Company’s 2012 Annual Report on Form 10-K. On July 3, 2013, the LOC was paid in full.

 

On December 12, 2012, the Board of Directors of the Company appointed James Tu to serve as its non-executive Chairman, and on April 30, 2013, Mr. Tu became the Executive Chairman assuming the duties of the Company’s Principal Executive Officer. Mr. Tu is also the Founder, Chief Executive Officer and Chief Investment Officer of 5 Elements Global Advisors, an investment advisory and management company managing the holdings of 5 Elements Global Fund LP, and 5 Elements Energy Efficiencies Ltd, a beneficial owner of more than ten percent (10%) of the Company’s Common Stock. 5 Elements Global Advisors focuses on investing in clean energy companies with breakthrough, commercialized technologies and near-term profitability potential. Mr. Tu is also Co-Founder and Managing Partner of Communal International Ltd. “(Communal”), a British Virgin Islands Company dedicated to assisting clean energy solutions companies maximize their technology and product potential and gain access to global marketing, distribution licensing, manufacturing and financing resources. Communal has a fifty percent (50%) ownership interest in 5 Elements Efficiencies (BVI) Ltd.

 

On February 27, 2012, the Company entered into an Asian Business Development/Collaboration Agreement with Communal International Ltd. The agreement had a 60 month term, under which the Company paid $523 thousand to Communal. Additionally, during the term of the agreement, the Company will pay Communal a five percent (5%) commission on the Company’s net sales which occur within the Territory, as defined by the agreement. The Company has incurred no commissions due under this agreement through September 30, 2013.

 

 
17

 

 

ENERGY FOCUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2013

(Unaudited)

 

Effective on January 1, 2013, the Asian Business Development/Collaboration Agreement with Communal was amended to reflect the extension of the terms of the agreement for an additional 12 months, and the addition of certain services and countries in the territory covered by the agreement. In connection with the amended and restated agreement, the Company agreed to pay an additional $425 thousand through December 2013. After December 31, 2013, the Company may terminate the agreement upon 30 days written notice. The Company paid $262 thousand related to this agreement during the first nine months of 2013, and recorded expense of $169 thousand during the first nine months 2013.

 

NOTE 14. SHAREHOLDERS EQUITY

 

During the first nine months of 2013, the Company entered into unsecured convertible notes totaling $5.2 million. The notes are convertible into shares of Common Stock of the Company at $.23 per share at various dates beginning on July 31, 2013. See Note 7, Debt. The fair market value of the Company’s Common Stock ranged from $0.21 per share to $0.42 per share during the period the note agreements were consummated. In accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic Number 420, Debt, $1.8 million was recorded as a discount on these notes under the captions “Long-term debt” and “Additional paid-in capital” in its Condensed Consolidated Balance Sheets at September 30, 2013. The discount will be amortized over the term of the applicable notes through December 31, 2016 unless the notes are converted prior to maturity.

 

During the second quarter of 2013, an unsecured convertible noted entered into in December 2012 for $1 million was converted into 4.3 million shares of Common Stock of the Company. Additionally, effective October 16, 2013, an additional $500 thousand of the debt was converted into 2.2 million shares of Common Stock of the Company.

 

NOTE 15. SUBSEQUENT EVENT

 

On November 13, 2013, the Company announced that it was in negotiations to sell its “Fiberstars” brand pool product lines. The sale is subject to the successful negotiation of terms satisfactory to both parties, completion of the potential buyer’s due diligence review, lender consent, entry into a definitive agreement and other conditions. There is no current binding obligation on either party and, accordingly, Energy Focus makes no assurance that the negotiations will lead to a transaction.

 

 
18

 

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements (“financial statements”) and related notes included in Item 1 of this report and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2012.

 

All references to “Energy Focus,” “we,” “us,” “our,” or “the Company” means Energy Focus, Inc. and its subsidiaries, except where it is made clear that the term means only the parent company.

 

When used in this discussion, the words “believes,” “expects,” “anticipates,” “intends,” “assumes,” “estimates,” “evaluates,” “opinions,” “forecasts,” “may,” “could,” “future,” “forward,” “plans,” “potential,” “probable,” and similar expressions are intended to identify forward-looking statements. These statements, which include statements as to our expected sales and gross profit margins, expected operating expenses and capital expenditure levels, our sales and marketing expenses, our general and administrative expenses, the adequacy of capital resources and necessity to raise additional funds, our critical accounting policies, expected benefits from our consolidation and statements regarding pending litigation are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, those risks discussed below and under the caption “Risk Factors” in our Annual Report on Form 10-K, as well as  our ability to negotiate and enter into a definitive agreement to sell the Fiberstars business on terms acceptable to both parties; the receipt of lender consent to the sale; the occurrence of any other event, change or other circumstances that could give rise to the termination of a definitive agreement or the inability to complete the proposed transaction due to, among other things, the failure to satisfy the conditions set forth in a definitive agreement; that the proposed transaction disrupts Energy Focus’ current plans and operations;  our ability to manage expenses; our ability to reduce manufacturing overhead and general and administrative expenses as a percentage of sales; our ability to collect on doubtful accounts receivable; our ability to increase cash balances in future quarters; the cost of enforcing or defending intellectual property; unforeseen adverse competitive, economic or other factors that may impact our cash position; and risks associated with raising additional funds. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

 

Overview

 

Energy Focus, Inc. and its subsidiaries engage in the design, development, manufacturing, marketing, and installation of energy-efficient lighting systems and solutions where we serve two segments:

 

 

solutions segment providing turnkey, high-quality, energy-efficient lighting application alternatives primarily to the existing public-sector building market; and

 

products segment providing military, general commercial and industrial lighting, and pool lighting offerings, each of which markets and sells energy-efficient lighting systems.

 

We continue to evolve our business strategy to include providing our customers with comprehensive energy-efficient lighting solutions, which use, but are not limited to, our patented and proprietary technology. Our products segment includes LED and other highly energy-efficient lighting technologies. Typical savings related to current technology approximates 50% in electricity costs for fluorescent retrofits and 80% or more for incandescent retrofits, while providing full-spectrum light closely simulating daylight colors. Our strategy also incorporates continued investment into the research of new and emerging energy efficient LED light sources and applications.

 

 
19

 

 

Results of Operations

 

The following table sets forth the percentage of net sales represented by certain items reflected on our Consolidated Statements of Operations for the following periods:

 
   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 
                                 

Net sales

    100.0

%

    100.0

%

    100.0

%

    100.0

%

Cost of sales

    76.4       75.2       75.2       78.7  

Gross profit

    23.6       24.8       24.8       21.3  
                                 

Operating expenses:

                               

Research and development

    1.0       1.3       1.4       0.4  

Sales and marketing

    25.9       18.0       23.4       19.5  

General and administrative

 

19.8

      15.3       18.8       16.7  

Loss on impairment

    -       -       1.7       -  

Restructuring

    1.3       -       0.4       -  

Change in estimate of contingent liabilities

    -       -       0.1       -  

Total operating expenses

    48.0       34.6       45.8       36.6  

Loss from operations

    (24.4 )     (9.8 )     (21.0 )     (15.3 )
                                 

Other income (expense):

                               

Settlement of acquisition obligations

    -       -       4.8       -  

Other expense

    (0.4 )     (0.3 )     (1.4 )     (0.5 )

Interest income

    -       -       -       0.0  

Interest expense

    (2.8 )     (1.6 )     (2.5 )     (1.9 )
                                 

Loss before income taxes

    (27.6 )     (11.7 )     (20.1 )     (17.7 )
                                 

Provision for income taxes

    (0.0 )     (0.0 )     (0.0 )     (0.0 )
                                 

Net loss

    (27.6

) %

    (11.7

) %

    (20.1

) %

    (17.7

) %

 

 

Our net sales breakdown by business segment is as follows (in thousands):

 
   

Three months ended

September 30,

   

Nine months ended

September 30,

 
   

2013

   

2012

   

2013

   

2012

 

Solutions:

                               

Net sales - solutions

  $ 2,104     $ 2,066     $ 5,894     $ 5,811  
                                 

Products:

                               

Net sales - pool and commercial

    2,612       4,159       8,503       11,354  

Net sales - government products/R&D services

    1,272       1,679       4,305       3,713  

Total net sales - product segment

    3,884       5,838       12,808       15,067  
                                 

Total net sales

  $ 5,988     $ 7,904     $ 18,702     $ 20,878  

 

 
20

 

 

Net sales of $6.0 million for the third quarter of 2013, decreased 24 percent from the prior year’s third quarter. Solutions segment sales increased two percent, while products segment sales decreased 33 percent due to lower pool, commercial and government product sales. Net sales of $18.7 million for the first nine months of 2013, decreased ten percent from the prior year’s nine month period. Solutions segment sales increased one percent, while product segment sales decreased 15 percent, due to lower pool and commercial product sales. Our solutions segment backlog at September 30, 2013 and 2012 was $4.0 million and $2.6 million, respectively.

 

Revenues from our products segment include, but are not limited to, revenues recognized upon shipping, and service at completion of installation. Revenues from our solutions segment include, but are not limited to, revenues recognized from long-term contracts on a percentage-of-completion basis or the fair value of certain contract deliverables. For a detailed discussion on our revenue recognition policy, see our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Gross Profit

 

Total gross profit was $1.4 million, or 23.6 percent of net sales, for the third quarter ended September 30, 2013, compared to $2.0 million, or 24.8 percent of net sales, for the prior year’s quarter. Solutions segment gross profit decreased $178 thousand and was 10.3 percent of net sales for the 2013 quarter compared to 19.1 percent of net sales for the prior year’s quarter. A few lower margin projects, as well as a few large projects where material was shipped to the project site, but no significant installation had occurred, accounted for the decrease. Gross profit is not recognized on materials until installation has been completed. Products segment gross profit decreased $367 thousand, but increased as a percentage of net sales to 30.8 percent from 26.8 percent in the prior year. The decrease in dollars resulted primarily from lower sales of pool and commercial products. Additionally, the gross margin percentage improved as a result of improvements to our supply chains. For the first nine months of 2013, total gross profit was $4.6 million, or 24.8 percent of net sales, compared to $4.4 million, or 21.3 percent of net sales, in the prior year’s comparable period. Solutions segment gross profit decreased $191 thousand on slightly higher net sales, and was 12.0 percent of net sales for the 2013 period compared to 15.5 percent of net sales for the prior year’s period. Products segment gross profit increased $380 thousand, despite 15 percent lower net sales, to 30.7 percent of net sales from 23.6 percent in the prior year. The increase resulted primarily from improvements to our supply chains.

 

Operating Expenses

 

Research and Development

 

Gross research and development expenses were $905 thousand for third quarter of 2013, a 46 percent increase from $621 thousand in the 2012 quarter. The increase in spending is primarily related to two projects to develop LED lighting; one for the commercial market and one for the Navy. For the first nine months of 2013, gross research and development expenses increased six percent from the prior year’s comparable period.

 

Research and development expenses include salaries, contractor and consulting fees, supplies and materials, as well as overhead costs such as depreciation and facilities costs. Research and development costs are expensed as they are incurred.

 

Total government reimbursements are the combination of revenues and credits from government contracts.

 

The gross and net research and development expense along with credits from government contracts is shown in the following table (in thousands):

 

   

Three months ended

September 30,

   

Nine months ended

September 30,

 
Net Research & Development Expense  

2013

   

2012

   

2013

   

2012

 
                                 

Total gross research and development expenses

  $ 905     $ 621     $ 2,664     $ 2,509  

Cost recovery through cost of sales

    (574 )     (398 )     (1,742 )     (1,792 )

Cost recovery and other credits

    (274 )     (121 )     (656 )     (630 )

Research and development, net

  $ 57     $ 102     $ 266     $ 87  

 

 
21

 

 

Sales and Marketing

 

Sales and marketing expenses were $1.5 million, or 25.9 percent of net sales, in the third quarter of 2013, compared to $1.4 million, or 18.0 percent of net sales, in last year’s comparable period; an increase of nine percent. For the first nine months of 2013, sales and marketing expenses were $4.4 million, or 23.4 percent of net sales, compared to $4.1 million, or 19.5 percent of net sales; a seven percent increase. The increase in both periods was primarily due to higher consulting costs, and salaries and related personnel expenses, partially offset by lower commission expense.

 

General and Administrative

 

General and administrative expenses were $1.2 million, or 19.8 percent of net sales, for the third quarter of 2013 compared to $1.2 million, or 15.3 percent of net sales, for the third quarter of 2012. For the first nine months of 2013, general and administrative expenses were $3.5 million, or 18.8 percent of net sales, compared to $3.5 million, or 16.7 percent of net sales. For third quarter, lower amortization, incentives and bad debt expenses was offset by higher legal fees. Included in the second quarter of 2013 was approximately $250 thousand accrued for salary, payroll taxes and medical benefits per the terms of a separation agreement with the Company’s former Chief Executive Officer. This was partially offset by lower amortization and bad debt expenses.

 

Loss on impairment

 

In conjunction with the settlement agreement between the Company and the former owners of SRC, the Company agreed to discontinue the use of the name “Stones River Companies, LLC” and various derivatives thereof including SRC. Therefore, at June 30, 2013, the remaining unamortized balance of Tradenames of $325 thousand was written off. See Note 9, Settlement of Acquisition Obligations.

 

Restructuring

 

During the third quarter of 2013, the Company relocated its manufacturing operation from a contract manufacturing facility located in Mexico to its existing facilities in Pleasanton, California and Solon, Ohio. The Condensed Consolidated Statements of Operations includes $79 thousand in “Restructuring” for severance for the Mexican contract employees as required by the production share agreement, as amended, between the Company and the contract manufacturer. See Note 8, Restructuring.

 

Change in estimate of contingent liabilities

 

As a provision of the settlement agreement between the Company and the former owners of SRC, the net receive due to the Company of $78 thousand was forgiven. Additionally, the Company recognized a $66 thousand favorable adjustment related to the change in the estimate of a performance-related contingent obligation for a 2.5% payout based upon the fair value of projected annual billings of SRC. The Company recognized a net expense of $12 thousand related to these items in June 2013. See Note 9, Settlement of Acquisition Obligations.

 

Other Income and Expenses

 

Settlement of acquisition obligations

 

As a provision of the settlement agreement between the Company and the former owners of SRC, the Company’s obligation to pay a $500 thousand special fee and a $500 thousand convertible promissory note including interest of $92 thousand were cancelled in their entirety in exchange for a $200 thousand payment. The Company recognized a net gain of $892 thousand related to these items in June 2013. See Note 9, Settlement of Acquisition Obligations.

 

Other expense

 

For the three months ended September 30, 2013 and 2012, other expense was $26 thousand. For the nine months ended September 30, 2013 and 2012, other expense was $265 thousand and $98 thousand, respectively. Other expense consists primarily of amortization of loan origination costs, facility and other fees related to the line of credit agreement.

 

 
22

 

 

Interest expense

 

For the three months ended September 30, 2013 and 2012, interest expense was $166 thousand and $123 thousand, respectively. For the nine months ended September 30, 2013 and 2013, other expense was $459 thousand and $388 thousand, respectively. Interest expense is primarily related to our debt, which includes the amortization of debt discounts and interest on our line of credit facility.

 

Net Loss

 

For the three months ended September 30, 2013 and 2012, the net loss was $1.7 million and $928 thousand, respectively. For the nine months ended September 30, 2013 and 2012, the net loss was $3.8 million and $3.7 million, respectively.

 

Liquidity and Capital Resources

 

Cash and Cash Equivalents

 

At September 30, 2013, the Company’s cash and cash equivalents were $952 thousand, compared to $1.2 million at December 31, 2012; a decrease of $229 thousand. The balance at September 30, 2013 includes no restricted cash, compared to $252 thousand of restricted cash at December 31, 2012. The restricted cash at December 31, 2012 relates to funds received from a grant from/for a branch of the United States government. Total debt, including credit line borrowings, was $5.1 million at September 30, 2013 and $4.1 million as of December 31, 2012.

 

Cash Used in Operating Activities

 

For the nine months ended September 30, 2013, net cash used in operating activities was $4.3 million compared to net cash used of $6.2 million in 2012. Cash used in operating activities primarily consists of net losses adjusted for non-cash items, including loss on impairment, depreciation, amortization, and stock-based compensation; and the effect of changes in working capital. The decrease in cash used in operating activities for the 2013 nine month period was primarily due to a decrease in accounts receivable during the 2013 period versus an increase in 2012. Additionally, the 2013 period includes an $892 thousand gain on the settlement of acquisition obligations. See Note 9, Settlement of Acquisition Obligations.

 

Cash Used in Investing Activities

 

Net cash used in investing activities was $168 thousand for the nine months ended September 30, 2013, and $159 thousand for the same period in 2012, and consisted of the purchase of property and equipment.

 

Cash Provided by Financing Activities

 

Net cash provided by financing activities was $4.2 million for the nine months ended September 30, 2013 and $4.6 million for the 2012 comparable period. The 2013 period includes $5.2 million in net proceeds from unsecured convertible debt. See Note 7, Debt, for further discussion of these transactions. The 2012 period includes $4.8 million in net cash proceeds from stock issuances primarily from the Company entering into Securities Purchase Agreements with ten investors, under which it sold 19.6 million units, each of which consists of one share of the Company’s Common Stock, par value $0.0001 per share, and one-half warrant to purchase one share of Common Stock. The purchase price of each unit was $0.25, based on a formula involving the stock’s 30 day average price prior to February 24, 2012. Each warrant entitles the holder to purchase one share of common stock at an exercise price of $0.54. Each warrant is immediately separable from the unit and immediately exercisable, and expires three years from the date of issuance. The Company used the proceeds of the offering to retire debt and for working capital purposes.

 

 
23

 

 

Debt

 

Credit Facilities

 

On December 22, 2011, the Company entered into a $4.5 million revolving line of credit (“credit facility”) with Rosenthal & Rosenthal. The total loan amount available to the Company under the line of credit is equal to 85% of our net amount of eligible receivables, plus available inventory (the lesser of 50% of the lower of cost or market value of eligible inventory, or $250 thousand). The credit facility is secured by a lien on the domestic assets of the Company. The interest rate for borrowing on accounts receivable is 8.5%, on inventories 10.0% and on overdrafts 13.0%. Additionally, there is an annual 1% facility fee on the entire amount of the credit facility, $4.5 million, payable at the beginning of the year. The credit facility is a three year agreement, expiring on December 31, 2014, unless terminated sooner. There are liquidated damages if the credit facility is terminated prior to December 31, 2014, which are based on the maximum credit facility amount then in effect. The damages are: 2% if terminated prior to December 31, 2013, and 1% if terminated prior to December 31, 2014. The Company is required to comply with certain financial covenants, measured quarterly, including, as defined in the agreement: a tangible net worth amount and a working capital amount. The company was in compliance with the financial covenants at September 30, 2013. Borrowings under the revolving line of credit were $836 thousand at September 30, 2013, and $1.6 million at December 31, 2012, and are recorded in the Condensed Consolidated Balance Sheets as a current liability under the caption “Credit line borrowings.”

 

Borrowings

 

Long-term debt, including current maturities, totaled $4.3 million at September 30, 2013 and $2.5 million at December 31, 2012. The change in long-term debt is shown below (in thousands):

 

Balance, December 31, 2012

  $ 2,549  

Unsecured convertible notes entered into

    5,245  

Discounts on unsecured convertible notes, net

    (1,694 )

Conversion of unsecured convertible note

    (1,000 )

Forgiveness of convertible promissory note

    (500 )

Principal payments on long-term debt

    (290 )

Balance, September 30, 2013

  $ 4,310  

 

Liquidity

 

Historically, we have incurred losses attributable to operational performance which has negatively impacted cash flows. As of September 30, 2013, we have an accumulated deficit of $84.4 million. Although management continues to address many of the legacy issues that have historically burdened the Company’s financial performance, the Company still faces challenges in order to reach profitability. In order for it to attain profitability and growth, management will need to improve gross margins, successfully execute the marketing and sales plans for its turnkey energy-efficient lighting solutions business, receive additional orders on and fulfill the $23.1 million U.S. Navy supply contract it was awarded in 2011, develop new technologies into sustainable product lines, continue cost reduction efforts throughout the Company, and continue to improve supply chain performance .

 

During the first quarter of 2013, the Company embarked on a program to raise additional unsecured convertible debt, of which $5.2 million was received during the first nine months of 2013 and $900 thousand during the fourth quarter through November 13, 2013. Management remains optimistic about obtaining the funding necessary to meet on-going tactical and strategic capital requirements; however, there can be no assurances that this objective will be successful. As such, the Company continues to review and pursue selected external funding sources, if necessary, to execute these objectives including, but not limited to, the following:

 

 

obtain financing from traditional and non-traditional investment capital organizations or individuals,

 

potential sale or divestiture of one or more operating units, and

 

obtain funding from the sale of common stock or other equity or debt instruments.

 

 
24

 

 

Obtaining financing through the above-mentioned mechanisms contains risks, including:

 

 

loans or other debt instruments may have terms and/or conditions, such as interest rate, restrictive covenants, and control or revocation provisions, which are not acceptable to management or the Board of Directors,

 

the current environment in capital markets combined with the Company’s capital constraints may prevent the Company from obtaining additional debt financing,

 

financing may not be available for parties interested in pursuing the acquisition of one or more of the operating units of the Company, and

 

additional equity financing may not be available in the current capital environment and could lead to further dilution of shareholder value for current shareholders of record.

 

On November 13, 2013, the Company announced that it was in negotiations to sell its “Fiberstars” brand pool product lines. The sale is subject to the successful negotiation of terms satisfactory to both parties, completion of the potential buyer’s due diligence review, lender consent, entry into a definitive agreement and other conditions. There is no current binding obligation on either party and, accordingly, Energy Focus makes no assurance that the negotiations will lead to a transaction.

 

Critical Accounting Policies

 

The preparation of financial statements requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingencies, and the reported amounts of net sales and expenses in the financial statements. Material differences may result in the amount and timing of net sales and expenses if different judgments or different estimates were utilized. Critical accounting policies, judgments, and estimates which the Company believes have the most significant impact on the financial statements include, but are not limited to, the establishment of reserves for accounts receivable, sales returns, inventory obsolescence and warranty claims; the useful lives for property, equipment, and intangible assets; revenues recognized on a percentage-of-completion basis; stock-based compensation; and accounting for income taxes. In addition, estimates and assumptions associated with the evaluation of long-lived assets for impairment requires considerable judgment. For the detailed discussion of the application of policies critical to our business operations, see our Annual Report on Form 10-K for the year ended December 31, 2012.

 

Recent Accounting Pronouncements

 

 

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, under Topic 220 , which requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component (the respective line items of net income). This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. The adoption of this ASU did not materially impact our disclosures.

 

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists , which amends ASC 740, Income Taxes . The amendments provide guidance on the financial statement presentation of an unrecognized tax benefit, as either a reduction of a deferred tax asset or as a liability, when a net operating loss carryforward, similar tax loss, or a tax credit carryforward exists. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 and may be applied on either a prospective or retrospective basis. The provisions are effective for the Company’s Annual Report on Form 10-K for the year ending December 31, 2014. We do not expect the adoption of these provisions to have a significant impact on the Company’s consolidated financial statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As of September 30, 2013, we had British pounds sterling-denominated cash valued at $317 thousand held in the United Kingdom, based on the exchange rate at that date. The balances for cash held in the United Kingdom are subject to exchange rate risk. We have a policy of maintaining cash balances in local currency unless an amount of cash is occasionally transferred in order to repay inter-company debts.

 

 
25

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of disclosure controls and procedures

 

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet, and management believes that they meet, reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. Any design of disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chairman of the Board of Directors and Chief Financial Officer have concluded that, subject to the limitations noted above, our disclosure controls and procedures were effective to ensure that material information relating to us, including our consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

 

(b) Changes in internal control over financial reporting

 

There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter. Further, there were no other items identified in connection with our internal evaluations that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

 

 

ITEM 1A. RISK FACTORS

 

Reference is made to the Risk Factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2012 (the “Annual Report”). There have been no significant changes in those risk factors as set forth in the Annual Report.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

 
26

 

 

ITEM 6. EXHIBITS

 

The information required by this Item is set forth on the Exhibit Index that follows the signature page of this report.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

     

ENERGY FOCUS, INC.

       

Date: November 13, 2013

 

By:

/s/ James Tu

 
     

James Tu

 
     

Executive Chairman of the Board of Directors

 
       
       

Date: November 13, 2013

 

By:

/s/ Frank Lamanna

 
     

Frank Lamanna

 
     

Chief Financial Officer

 

     

 

 

 
27

 

 

EXHIBIT INDEX

 

Exhibit

Number

 

Description of Documents

   

3.1

Form of Certificate of Incorporation of the Registrant.

   

10.1

Energy Focus, Inc. 2013 Employee Stock Purchase Plan (1).

   

10.2

Amended Form of Notice of Stock Option Grant for 2008 Stock Incentive Plan

   

31.1

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

31.2

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

32.1

Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

*101

The following financial information from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at September 30, 2013 and December 31, 2012, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2013 and 2012, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September, 30 2013 and 2012, (vi) the Notes to Condensed Consolidated Financial Statements.

 

 

*Pursuant to Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

 

(1)

Incorporated by reference from Appendix A to the company’s definitive proxy statement on Form DEF14A filed on August 16, 2013.

   

 

 

Exhibit 3.1

 

FORM OF

CERTIFICATE OF INCORPORATION

OF

ENERGY FOCUS, INC.

 

ARTICLE I

 

The name of this corporation is Energy Focus, Inc. (the “Corporation”).

 

ARTICLE II

 

The address of the Corporation’s registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company.

 

ARTICLE III

 

The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware.

 

ARTICLE IV

 

(A) The Corporation is authorized to issue two classes of stock to be designated, respectively, “Common Stock” and “Preferred Stock.” The total number of shares which the Corporation is authorized to issue is One Hundred-Fifty-Two Million (152,000,000) shares, each with a par value of $0.0001 per share. One Hundred Fifty Million (150,000,000) shares shall be Common Stock and Two Million (2,000,000) shares shall be Preferred Stock.

 

(B) The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate pursuant to the applicable law of the State of Delaware and within the limitations and restrictions stated in this Certificate of Incorporation, to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and the number of shares constituting any such series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series.

 

ARTICLE V

 

The number of directors of the Corporation shall be fixed from time to time pursuant to the Bylaws.

 

ARTICLE VI

 

In the election of directors, each holder of shares of any class or series of capital stock of the Corporation shall be entitled to one vote for each share held. The candidates receiving the highest number of affirmative votes, up to the number of directors to be elected, shall be elected; votes against any candidate and votes withheld shall have no legal effect.

 

ARTICLE VII

 

The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation.

 

 
1

 

 

ARTICLE VIII

 

(A) Except as otherwise provided in the Bylaws, the Bylaws may be amended or repealed or new Bylaws adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote generally in the election of directors. The Board of Directors of the Corporation is expressly authorized to adopt, amend or repeal Bylaws.

 

(B) Advance notice of stockholder nominations for the election of directors or of business to be brought by the stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the Bylaws.

 

ARTICLE IX

 

Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision of the General Corporation Law of Delaware) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws.

 

ARTICLE X

 

The Corporation shall have perpetual existence.

 

ARTICLE XI

 

(A) To the fullest extent permitted by the General Corporation Law of Delaware, as the same may be amended from time to time, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director. If the General Corporation Law of Delaware is hereafter amended to authorize, with the approval of a corporation’s stockholders, further reductions in the liability of a corporation’s directors for breach of fiduciary duty, then a director of the Corporation shall not be liable for any such breach to the fullest extent permitted by the General Corporation Law of Delaware, as so amended.

 

(B) Any repeal or modification of the foregoing provisions of this Article XI shall not adversely affect any right or protection of a director of the Corporation with respect to any acts or omissions of such director occurring prior to such repeal or modification.

 

ARTICLE XII

 

(A) To the fullest extent permitted by applicable law, the Corporation is also authorized to provide indemnification of (and advancement of expenses to) directors, officers, employees and other agents of the Corporation (and any other persons to which Delaware law permits the Corporation to provide indemnification) through Bylaw provisions, agreements with such agents or other persons, vote of stockholders or disinterested directors or otherwise, in excess of the indemnification and advancement otherwise permitted by Section 145 of the General Corporation Law of Delaware, subject only to limits created by applicable Delaware law (statutory or non-statutory), with respect to actions for breach of duty to a corporation, its stockholders, and others.

 

(B) Any repeal or modification of any of the foregoing provisions of this Article XII shall not adversely affect any right or protection of any such agent or other person existing at the time of, or increase the liability of any such agent or other person with respect to any acts or omissions of such agent or other person occurring prior to such repeal or modification.

 

 
2

 

 

ARTICLE XIII

 

The name and mailing address of the incorporator are as follows:

James Tu

c/o Energy Focus, Inc.

32000 Aurora Rd.

Solon, Ohio 44139

 

Executed this 24 day of October 2013.

 

 

/s/ James Tu

 

James Tu

Incorporator

 

 

 

 

3

Exhibit 10.2

 

Energy Focus, Inc.

 

2008 Stock Incentive Plan

 

Notice of Stock Option Grant

 

You have been granted the following Option to purchase Common Stock of Energy Focus, Inc. (the “Company”) under the Company’s 2008 Stock Incentive Plan as amended (the “Plan”):

 

 

Name of Optionee: 

_____________

     
  Number of Option Shares Granted _____________
     
  Type of Option :

Incentive Stock Option
Nonstatutory Stock Option

     
  Exercise Price Per Share : $ _____
     
  Grant Date:  ___________________
     
  Vesting Commencement Date : ________________________
     
 

Vesting Schedule:

__________________________

     
 

Expiration Date:

__________________________

 

 

 

 

Energy Focus, Inc.

Notice of Stock Option Grant

 

 
-1-

 

 

 

By your signature and the signature of the Company’s representative below, you and the Company agree that this Option is granted under and governed by the term and conditions of the Plan and the Stock Option Agreement, both of which are attached to and made a part of this document.

 

OPTIONEE :

Energy Focus, Inc.

 

 

 

 

__________________________

By: __________________________

Optionee’s Signature

 
 

Title: _________________________

__________________________

 

Optionee’s Printed Name

 

 

Energy Focus, Inc.

Notice of Stock Option Grant

 

 
-2-

 

 

ENERGY FOCUS, INC.

2008 STOCK INCENTIVE PLAN

 

STOCK OPTION AGREEMENT

 

Tax Treatment

This Option is intended to be an incentive stock option under Section 422 of the Internal Revenue Code or a nonstatutory option, as provided in the Notice of Stock Option Grant. Even if this Option is designated as an incentive stock option, it shall be deemed to be a nonstatutory option to the extent required by the $100,000 annual limitation under Section 422(d) of the Internal Revenue Code.

   

Vesting

This Option becomes exercisable in installments, as shown in the Notice of Stock Option Grant. This Option will in no event become exercisable for additional shares after your Service has terminated for any reason.

   

Term

This Option expires in any event at the close of business at Company headquarters on the day before the 10th anniversary of the Grant Date, as shown on the Notice of Stock Option Grant (fifth anniversary for a more than 10% stockholder as provided under the Plan if this is an incentive stock option). This Option may expire earlier if your Service terminates, as described below.

   

Regular Termination

If your Service terminates for any reason except death or “Total and Permanent Disability” (as defined in the Plan), then this Option will expire at the close of business at Company headquarters on the date three (3) months after the date your Service terminates (or, if earlier, the Expiration Date). The Company has discretion to determine when your Service terminates for all purposes of the Plan and its determinations are conclusive and binding on all persons.

   

Death

If you die, then this Option will expire at the close of business at Company headquarters on the date six (6) months after the date your Service terminates (or, if earlier, the Expiration Date). During that period of up to six (6) months, your estate or heirs may exercise the Option.

   

Disability

If your Service terminates because of your Total and Permanent Disability, then this Option will expire at the close of business at Company headquarters on the date six (6) months after the date your Service terminates (or, if earlier, the Expiration Date).

 

Energy Focus, Inc.

Notice of Stock Option Grant

 

 
-3-

 

 

Leaves of Absence

For purposes of this Option, your Service does not terminate when you go on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing and if continued crediting of Service is required by the terms of the leave or by applicable law. But your Service terminates when the approved leave ends, unless you immediately return to active work.

 

If you go on a leave of absence, then the vesting schedule specified in the Notice of Stock Option Grant may be adjusted in accordance with the Company’s leave of absence policy or the terms of your leave. If you commence working on a part-time basis, then the vesting schedule specified in the Notice of Stock Option Grant may be adjusted in accordance with the Company’s part-time work policy or the terms of an agreement between you and the Company pertaining to your part-time schedule.

   

Restrictions on Exercise

The Company will not permit you to exercise this Option if the issuance of shares at that time would violate any law or regulation. The inability of the Company to obtain approval from any regulatory body having authority deemed by the Company to be necessary to the lawful issuance and sale of the Company stock pursuant to this Option shall relieve the Company of any liability with respect to the non-issuance or sale of the Company stock as to which such approval shall not have been obtained. However, the Company shall use its best efforts to obtain such approval.

   

Notice of Exercise

When you wish to exercise this Option you must notify the Company by completing the attached “Notice of Exercise of Stock Option” form and filing it with the Finance Department of the Company. You notice must specify how many shares you wish to purchase. Your notice must also specify how your shares should be registered. The notice will be effective when it is received by the Company. If someone else wants to exercise this Option after your death, that person must prove to the Company’s satisfaction that he or she is entitled to do so.

 

Energy Focus, Inc.

Notice of Stock Option Grant

 

 
-4-

 

 

Form of Payment

When you submit your notice of exercise, you must include payment of the Option exercise price for the shares you are purchasing. Payment may be made in the following form(s):

   
 

●      Your personal check, a cashier’s check or a money order.

   
 

●      Certificates for shares of Company stock that you own, along with any forms needed to affect a transfer of those shares to the Company. The value of the shares, determined as of the effective date of the Option exercise, will be applied to the Option exercise price. Instead of surrendering shares of Company stock, you may attest to the ownership of those shares on a form provided by the Company and have the same number of shares subtracted from the Option shares issued to you. However, you may not surrender, or attest to the ownership of shares of Company stock in payment of the exercise price if your action would cause the Company to recognize a compensation expense (or additional compensation expense) with respect to this Option for financial reporting purposes.

   
 

●      By delivering on a form approved by the Committee of an irrevocable direction to a securities broker approved by the Company to sell all or part of your Option shares and to deliver to the Company from the sale proceeds in an amount sufficient to pay the Option exercise price and any withholding taxes. The balance of the sale proceeds, if any, will be delivered to you. The directions must be given by signing a special “Notice of Exercise” form provided by the Company.

   
 

●      Irrevocable directions to a securities broker or lender approved by the Company to pledge Option shares as security for a loan and to deliver to the Company from the loan proceeds an amount sufficient to pay the Option exercise price and any withholding taxes. The directions must be given by signing a special “Notice of Exercise” form provided by the Company.

   
 

Notwithstanding the foregoing, payment may not be made in any form that is unlawful, as determined by the Company in its sole discretion.

   

Withholding Taxes and Stock Withholding

You will not be allowed to exercise this Option unless you make arrangements acceptable to the Company to pay any withholding taxes that may be due as a result of the Option exercise. These arrangements may include withholding shares of Company stock that otherwise would be issued to you when you exercise this Option. The value of these shares, determined as of the effective date of the Option exercise, will be applied to the withholding taxes.

 

Energy Focus, Inc.

Notice of Stock Option Grant

 

 
-5-

 

 

Restrictions on Resale

By signing this Agreement, you agree not to sell any Option shares at a time when applicable laws, Company policies or an agreement between the Company and its underwriters prohibit a sale. This restriction will apply as long as you are an employee, consultant or director of the Company or a subsidiary of the Company.

   

Transfer of Option

In general, only you can exercise this Option prior to your death. You cannot transfer or assign this Option, other than as designated by you by will or by the laws of descent and distribution, except as provided below. For instance, you may not sell this Option or use it as security for a loan. If you attempt to do any of these things, this Option will immediately become invalid. You may in any event dispose of this Option in your will. Regardless of any marital property settlement agreement, the Company is not obligated to honor a notice of exercise from your former spouse, nor is the Company obligated to recognize your former spouse’s interest in your Option in any other way.

 

However, if this Option is designated as a nonstatutory stock option in the Notice of Stock Option Grant, then the “Committee” (as defined in the Plan) may, in its sole discretion, allow you to transfer this Option as a gift to one or more family members. For purposes of this Agreement, “family member” means a child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law or sister-in-law (including adoptive relationships), any individual sharing your household (other than a tenant or employee), a trust in which one or more of these individuals have more than 50% of the beneficial interest, a foundation in which you or one or more of these persons control the management of assets, and any entity in which you or one or more of these persons own more than 50% of the voting interest.

 

In addition, if this Option is designated as a nonstatutory stock option in the Notice of Stock Option Grant, then the Committee may, in its sole discretion, allow you to transfer this option to your spouse or former spouse pursuant to a domestic relations order in settlement of marital property rights.

 

The Committee will allow you to transfer this Option only if both you and the transferee(s) execute the forms prescribed by the Committee, which include the consent of the transferee(s) to be bound by this Agreement.

 

Energy Focus, Inc.

Notice of Stock Option Grant

 

 
-6-

 

 

Retention Rights

Neither your Option nor this Agreement gives you the right to be retained by the Company or a subsidiary of the Company in any capacity. The Company and its subsidiaries reserve the right to terminate your Service at any time, with or without cause.

   

Change in Control

The Options subject to this Agreement shall become exercisable in the event that both of the following events have occurred: (i) a Change in Control occurs with respect to the Company as defined by the Plan; and (ii) The Board has determined to activate the triggering of acceleration upon the occurrence of a Change in Control.

   

Stockholder Rights

You, or your estate or heirs, have no rights as a stockholder of the Company until you have exercised this Option by giving the required notice to the Company and paying the exercise price. No adjustments are made for dividends or other rights if the applicable record date occurs before you exercise this Option, except as described in the Plan.

   

Adjustments

In the event of a stock split, a stock dividend or a similar change in Company stock, the number of shares covered by this Option and the exercise price per share may be adjusted pursuant to the Plan.

   

Applicable Law

This Agreement will be interpreted and enforced under the laws of the State of Delaware without regard to their choice-of-law provisions.

   

The Plan and Other Agreements

The Company adopted the Plan on May 6, 2008 and amended it on November 19, 2008, February 25, 2010 and May 8, 2012. The Plan as amended is referred to as the “Plan”. The text of the Plan is incorporated in this Agreement by reference. All capitalized terms in the Stock Option Agreement shall have the meanings assigned to them in the Plan. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this Option. Any prior agreements, commitments or negotiations concerning this Option are superseded. This Agreement may be amended only by another written agreement, signed by both parties.

 

BY SIGNING THE COVER SHEET OF THIS AGREEMENT,

YOU AGREE TO ALL OF THE TERMS AND CONDITIONS

DESCRIBED ABOVE AND IN THE PLAN.

 

Energy Focus, Inc.

Notice of Stock Option Grant

 

 
-7-

 

 

EXHIBIT A

 

NOTICE OF EXERCISE

 

To:

Energy Focus, Inc.

Attn:

Chief Financial Officer

Subject:

Notice of Intention to Exercise Stock Option

 

This is official notice that the undersigned ("Optionee") intends to exercise Optionee's option to purchase __________ shares of Energy Focus, Inc. Common Stock, under and pursuant to the Company's 2008 Stock Incentive Plan, as amended, and the Stock Option Agreement dated ________________________ as follows:

 

GrantNumber:

________________________________

   
Number of Shares:

________________________________

   
Date of Purchase:

________________________________

   
Total Purchase Price:

________________________________

   
Social Security No.:

________________________________

  

The shares should be issued as follows:

 

 

Name:

________________________________

     
  Address:

________________________________ ________________________________

 

Energy Focus, Inc.

Notice of Stock Option Grant

 

 

-8-

 

EXHIBIT 31.1

 

CERTIFICATION

 

I, James Tu, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Energy Focus, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

 

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

(d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

 

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.

 

Date: November 13, 2013

 

    /s/ James Tu                    

James Tu
Executive Chairman and Chief Executive Officer

 

EXHIBIT 31.2

 

CERTIFICATION

 

I, Frank Lamanna, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Energy Focus, Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

 

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

(c)

Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

 

(d)

Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

 

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

 

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

 

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.

 

Date: November 13, 2013

 

    /s/ Frank Lamanna         

Frank Lamanna
Chief Financial Officer

EXHIBIT 32.1

 

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report on Form 10-Q of Energy Focus, Inc. (the “Company”) for the quarterly period ended September 30, 2013 (the “Report”), I, James Tu, Executive Chairman of the Board of Directors of the Company, and I, Frank Lamanna, Chief Financial Officer of the Company, each certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

 

(i)

the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and

 

(ii)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

/s/ James Tu

 
 

James Tu

Executive Chairman and Chief Executive Officer

 

November 13, 2013

   

 

 

/s/ Frank Lamanna

 
 

Frank Lamanna

Chief Financial Officer

 

November 13, 2013

 

A signed original of this written statement required by Section 906 has been provided to Energy Focus, Inc. and will be retained by Energy Focus, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.