ENERGY FOCUS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes thereto included in Part I, Item 1, "Financial Statements" of this Quarterly Report, as well as Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the year endedDecember 31, 2019 ("2019 Annual Report").
Overview
Energy Focus, Inc. engages in the design, development, manufacturing, marketing and sale of energy-efficient lighting systems and controls and recently announced development of ultraviolet light disinfection ("UVCD") products. We develop, market and sell high quality light-emitting diode ("LED") lighting products and UVCD products and controls in the commercial and military maritime markets ("MMM"). Our mission is to enable our customers to run their facilities and offices with greater energy efficiency, productivity, and wellness through advanced LED retrofit and UVCD solutions. Our goal is to be the LED and human-centric lighting ("HCL") technology and market leader for the most demanding applications where performance, quality and health impacts are considered paramount. We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge lighting and other types of lamps in institutional buildings for primarily indoor lighting applications with our innovative, high-quality commercial and military tubular LED ("TLED"), as well as other LED and lighting control products. OnOctober 14, 2020 , we also announced the launch of our UVCD product portfolio. Net sales increased 42.6% for the nine months endedSeptember 30, 2020 as compared to the nine months endedSeptember 30, 2019 , primarily driven by a 165% increase in military sales period-over-period, partially offset by a decrease in net sales of our commercial products of 27% for the nine months endedSeptember 30, 2020 as compared to the same prior year period. The sales cycles for the MMM is dependent on many factors, including the availability of government funding, the timing and fulfillment ofU.S. Navy awards, new ship construction, diversion of funds to other government needs, and the timing of vessel maintenance schedules. The sales cycles for our commercial target markets can range from several months to over one year and our financial results reflect volatility from the continued fluctuations in the timing, pace and size of commercial projects. Despite continuing progress in the last four quarters in reducing our operating losses significantly, by 44.6% from the third quarter of 2019, the Company's results reflect the challenges due to long and unpredictable sales cycles, unexpected delays in customer retrofit budgets and project starts, and unexpected supply chain issues exacerbated by the COVID-19 pandemic. There has also been continuing aggressive price competition in the lighting industry. We continued to incur losses and we have a substantial accumulated deficit, which continues to raise substantial doubt about our ability to continue as a going concern atSeptember 30, 2020 . The COVID-19 pandemic in particular has, and may continue to have, a significant economic and business impact on our company. In the third quarter of 2020, following a slowdown in the second quarter of 2020, we have seen a continuing weakness in commercial sales as customers in the healthcare, education, and commercial and industrial sectors delayed order placements in reaction to the impacts of the COVID-19 pandemic. We continue to monitor the impact of the COVID-19 pandemic on our customers, suppliers, and logistics providers, as well as evaluate governmental actions being taken to curtail and respond to the spread of the virus. The significance and duration of the ongoing impact on us is still uncertain. Material adverse effects of the COVID-19 pandemic on market drivers, our customers, suppliers, or logistics providers could significantly impact our operating results. We also plan to continue to actively follow, assess and analyze the development of the COVID-19 pandemic and stand ready to adjust our organizational structure, strategies, plans and processes to respond to the impacts from the virus spread in the timeliest manner. Because the situation continues to evolve, we cannot reasonably estimate the ultimate impact to our business, results of operations, cash flows and financial position that the COVID-19 pandemic may have. Continuation of the COVID-19 pandemic and government actions in response thereto could cause further disruptions to our operations and the operations of our customers, suppliers and logistics partners and could significantly adversely affect our near-term and long-term revenues, earnings, liquidity and cash flows.
Nevertheless, during the first nine months of 2020, we continued to see the benefits from the relaunch efforts, described in our 2019 Annual Report, undertaken by the new, current management team in the last three quarters of 2019, in addition to a
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number of strategic sourcing projects completed during 2020. It is our belief
that the continued momentum of the efforts undertaken in 2019 and into 2020,
along with the development and launch of new and innovative products, will over
time result in improved sales and bottom-line performance for the Company.
We launched our EnFocus™ platform during the second quarter of 2020 and
continued to receive positive feedback from existing, new, and potential new
customers. The EnFocus™ platform offers two immediately available product lines:
EnFocus™ DM, which provides a dimmable lighting solution, and EnFocus™ DCT,
which provides both a dimmable and color tunable lighting solution. EnFocus™
enables buildings to have dimmable, color tunable and circadian-ready lighting
using existing wiring, without requiring any wireless communications, through a
relatively simple upgrade with EnFocus™ switches and tubular LEDs, a more
environmentally sustainable solution compared with replacing each lighting
fixture.
In addition, in response to an anticipated increase in sanitation and hygiene
demand for buildings, facilities and homes, we started developing advanced UVCD
products for both consumer as well as the commercial and industrial markets in
the first quarter of 2020. We announced the following three UVCD products in
October 2020 : abUV™, circadian lighting and UVCD air disinfection integrated
troffers controlled by the EnFocus™ platform technology, nUVo™, a portable
disinfection device for offices and homes, and mUVe™, an autonomous robot
designed for surface disinfection.
In our MMM business, significant efforts undertaken to reduce costs in our
product offerings have positioned us to be more competitive in this segment.
Such efforts allowed us to continue to win bids and proposals that helped grow
our MMM sales during 2020, offsetting some of the weakness being experienced in
our commercial business. While we continue to aggressively pursue growth on the
commercial side of our business due to its much larger potential and size, the
MMM business does offer us continued sales, in addition to validating our
product quality and strengthening our brand trust in the marketplace.
Meanwhile, we continue to seek additional external funding alternatives and
sources to support our growth strategies, plans and initiatives. We plan to
achieve profitability through developing and launching new, innovative products
such as EnFocusTM and our UVCD products, as well as executing on our
multi-channel sales strategy that targets key verticals, such as government,
healthcare, education and commercial and industrial, complemented by our
marketing outreach campaigns and expanding channel partnerships. We also plan to
continue to develop advanced lighting and lighting control applications built
upon the EnFocusTM platform. In addition, we intend to continue to apply
rigorous financial discipline in our organizational structure, business
processes and policies, strategic sourcing activities and supply chain practices
to help accelerate our path towards profitability.
At September 30, 2020 , we had $2.6 million in cash, which excludes $0.3 million
of restricted cash held, and a total of $3.0 million of debt. On August 11,
2020 , we entered into two debt financing arrangements (together, the "New Credit
Facilities"). Total debt at September 30, 2020 included $1.1 million outstanding
under our inventory financing facility (the "Inventory Facility"), $0.9 million
outstanding under our receivables financing facility (the "Receivables
Facility"), $0.2 million aggregate principal amount outstanding under our
promissory note (the "Iliad Note") issued to Iliad Research and Trading, L.P.
("Iliad") and an $0.8 million PPP (as defined below) loan. In addition, at
September 30, 2020 , we had $2.9 million of warrant liabilities. At September 30,
2020 , we had additional availability for us to borrow of $1.1 million under the
Inventory Facility and $1.2 million under the Receivables Facility.
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--------------------------------------------------------------------------------Results of operations
The following table sets forth items in our Condensed Consolidated Statements of Operations as a percentage of net sales for the periods indicated:
Three months ended Nine months ended
September 30, September 30,
2020 2019 2020 2019
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 76.9 64.7 71.3 88.9
Gross profit 23.1 35.3 28.7 11.1
Operating expenses:
Product development 6.7 6.6 7.6 11.3
Selling, general, and administrative 33.6 57.9 45.9 60.2
Restructuring (0.3) (0.7) (0.3) 2.6
Total operating expenses 40.0 63.8 53.2 74.1
Loss from operations (16.9) (28.5) (24.5) (63.0)
Other expenses (income):
Interest expense 2.1 2.3 2.6 1.5
Loss on extinguishment of debt 2.7 - 1.2 -
(Gain) loss from change in fair value of
warrants (2.6) - 17.4 -
Other expenses 0.4 1.6 0.5 1.6
Net income before income taxes
Benefit from income taxes - - - -
Net loss (19.5) % (32.4) % (46.2) % (66.1) %
Net sales
A further breakdown of our net sales is presented in the following table (in
thousands):
Three months ended Nine months ended
September 30, September 30,
2020 2019 2020 2019
Commercial $ 1,456 $ 1,733 $ 4,250 $ 5,847
MMM products 4,508 1,182 8,832 3,327
Total net sales $ 5,964 $ 2,915 $ 13,082 $ 9,174
Net sales of $6.0 million and $13.1 million for the three and nine months ended
September 30, 2020 , respectively, represented increases of 104.6% and 42.6%,
respectively, compared to the same periods of 2019, primarily driven by an
increase in MMM product sales. Net sales of our commercial products decreased in
the three and nine months ended September 30, 2020 compared to the same periods
of 2019, mainly reflecting (i) a decrease in sales, caused by delayed orders
that have occurred mainly in the healthcare, education, commercial and
industrial sectors because of the continuing macroeconomic slowdown and
purchasing decisions being put on hold due to the COVID-19 pandemic, (ii) lower
sales from our agency network which was also impacted by the COVID-19 pandemic,
and (iii) fluctuations in the timing, pace and size of commercial projects.
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--------------------------------------------------------------------------------Gross profit
Gross profit was$1.4 million , or 23.1% of net sales, for the third quarter of 2020, compared to$1.0 million , or 35.3% of net sales, for the third quarter of 2019. As a result of supply chain challenges relating primarily to our MMM products, we incurred unexpected additional manufacturing cost which impacted our gross profit adversely for the third quarter of 2020 by approximately 4.1% of net sales. Gross margin for the third quarter of 2020 included favorable price and usage variances for material and labor of$0.4 million or 7.2% of net sales. Gross margin for the third quarter of 2019 included favorable inventory reserves of$0.4 million or 13.5% of net sales, partially offset by unfavorable outbound freight costs of approximately$0.1 million . Gross profit was$3.8 million , or 28.7% of net sales, for the first nine months of 2020 compared to$1.0 million or 11.1% of net sales, for the first nine months of 2019. We incurred unexpected additional manufacturing costs as a result of supply chain challenges relating primarily to our MMM products, which adversely impacted our gross profit by approximately 2.1% of net sales, for the nine months endedSeptember 30, 2020 . The remaining increase is primarily related to relatively higher profit margin of sold product, favorable price and usage variances for material and labor of$0.7 million or 5.5% of net sales, and favorable inventory reserves recorded of$0.4 million , or 3.0% of net sales. The gross margin for the first nine months of 2019 was primarily related to unfavorable warranty costs during the first nine months of 2019 of$0.1 million , or 1.2% of net sales,$0.3 million in outbound freight costs and$0.2 million in unfavorable manufacturing and absorption.
Operating expenses
Product development
Product development expenses include salaries and related expenses, contractor and consulting fees, legal fees, supplies and materials, as well as overhead, such as depreciation and facility costs. Product development costs are expensed as they are incurred. Product development expenses were$0.4 million for the third quarter of 2020, a$0.2 million increase compared to$0.2 million for the third quarter of 2019. The increase is mainly related to payroll expense and product testing.
Product development expenses were
Selling, general and administrative
Selling, general and administrative expenses were$2.0 million for the third quarter of 2020, compared to$1.7 million for the third quarter of 2019. The primary driver of the increase in selling, general and administrative expenses is an increase in payroll due to our growth initiatives that expanded our staff. Selling, general and administrative expenses were$6.0 million for the first nine months of 2020, compared to$5.5 million for the first nine months of 2019. The increase is primarily due to an increase in payroll, partly offset by a decrease in stock-based compensation.
Restructuring
For the three and nine months endedSeptember 30, 2020 , we recorded restructuring credits totaling approximately$16 thousand and$44 thousand , respectively, and for the three and nine months endedSeptember 30, 2019 , we recorded restructuring credits and charges totaling approximately$19 thousand and$243 thousand , respectively, related to the cost and offsetting sub-lease income for the remaining lease obligations for the formerNew York, New York andArlington, Virginia offices. For additional information regarding the restructuring actions taken in 2017 and 2019, please refer to Note 3, "Restructuring," included under Item 8, "Financial Statements and Supplementary Data," of our 2019 Annual Report. During the three and nine months endedSeptember 30, 2020 , we recorded no restructuring-related severance and related benefits charges and during the first half of 2019, we recorded severance and related benefits charges of$0.2 million with no material restructuring charges recorded during the third quarter of 2019. 32 --------------------------------------------------------------------------------
Interest expense
Interest expense was$124 thousand for the third quarter of 2020, compared to interest expense of$67 thousand for the third quarter of 2019. The increase in interest expense of$57 thousand was partially a result of increased amortization of the debt financing costs of$31 thousand in the third quarter of 2020 over the third quarter 2019. The remaining increase is primarily due to interest expense related to the Iliad Note and the New Credit Facilities. The actual cash interest paid in the third quarter of 2020 was$40 thousand compared to$24 thousand in the third quarter of 2019. Interest expense was$344 thousand for the first nine months of 2020, compared to interest expense of$136 thousand for the first nine months of 2019. The increase in interest expense of$208 thousand was partially a result of increased amortization of the debt financing costs of$90 thousand in the first nine months of 2020 over the first nine months of 2019. The remaining increase is primarily due to interest expense related to the Iliad Note as well as the New Credit Facilities. The actual cash interest paid for the nine months endedSeptember 30, 2020 was$125 thousand compared to$68 thousand for the nine months endedSeptember 30, 2019 .
Loss on extinguishment of debt
A loss of$159 thousand on the extinguishment of our former revolving line of credit withAustin Financial Services, Inc. (the "Austin Credit Facility") was recognized during the three and nine months endedSeptember 30, 2020 , consisting of a$100 thousand termination fee and the write-off of the remaining related debt acquisition costs of$59 thousand .
Loss from change in fair value of warrants
A loss of$2.3 million was recognized during the nine months endedSeptember 30, 2020 for the market value change in our warrant liabilities. The loss recognized in the first nine months of 2020 was a result of the revaluation of the warrant liability using the market price of the Company's common stock atSeptember 30, 2020 versus the market price of the Company's common stock at the time of initial issuance of the warrants (January 13, 2020 ).
Other expenses
Other expenses were$25 thousand for the third quarter of 2020, compared to other expenses of$46 thousand for the third quarter of 2019. Other expenses were$67 thousand for the nine months endedSeptember 30, 2020 compared to other expenses of$144 thousand for the nine months endedSeptember 30, 2019 . Other expenses are mainly comprised of bank and collateral management fees.
Provision for income taxes
Due to the operating losses incurred during the three and nine months endedSeptember 30, 2020 and 2019, and after application of the annual limitation set forth under Section 382 of the Internal Revenue Code of 1986, as amended, it was not necessary to record a provision forU.S. federal income tax or various state income taxes as income tax benefits are fully offset by a valuation allowance recorded. The Company recorded a 2019 provision to return benefit of$2 thousand for various state income tax returns filed during the period endedSeptember 30, 2020 . Net loss For the three months endedSeptember 30, 2020 , our net loss was$1.2 million , compared to a net loss of$0.9 million for the three months endedSeptember 30, 2019 . Despite an increase in net sales of$3.0 million , the increase in the net loss was primarily driven by increases in (i) overall cost of sales of$2.7 million ; (ii) product development costs of$210 thousand ; (iii) selling, general and administrative costs of$314 thousand ; and (iv) interest expense and loss upon extinguishment of debt of$216 thousand . These factors are discussed in detail above. For the nine months endedSeptember 30, 2020 , our net loss of$6.0 million was flat as compared to a net loss of$6.1 million for the nine months endedSeptember 30, 2019 . The net loss for the nine months endedSeptember 30, 2020 included a loss of$2.3 million driven by the change in the warrant liability fair value from inception atJanuary 13, 2020 .
Financial condition
AtSeptember 30, 2020 , we had$2.6 million in cash, which excludes$0.3 million of restricted cash held, and a total of$3.0 million of debt, including$1.1 million outstanding under our Inventory Facility,$0.9 million outstanding under our 33 -------------------------------------------------------------------------------- Receivables Facility,$0.2 million aggregate principal amount outstanding under the Iliad Note and an$0.8 million PPP loan. In addition, atSeptember 30, 2020 , we had$2.9 million of warrant liabilities. AtSeptember 30, 2020 , we had additional availability for us to borrow of$1.1 million under the Inventory Facility and$1.2 million under the Receivables Facility. We have historically incurred substantial losses, and as ofSeptember 30, 2020 , we had an accumulated deficit of$130.9 million . Additionally, our sales have been concentrated among a few major customers and for the nine months endedSeptember 30, 2020 , two customers accounted for approximately 66% of net sales. As a result of the restructuring actions and initiatives described above, we have reduced our operating expenses to be more commensurate with our sales volumes. However, we continue to incur losses and have a substantial accumulated deficit, and substantial doubt about our ability to continue as a going concern continues to exist atSeptember 30, 2020 . Since the executive transition onApril 1, 2019 , we have continued to evaluate and assess strategic options as we seek to achieve profitability. We plan to achieve profitability through growing our sales by continuing to execute on our multi-channel sales strategy that targets key verticals, such as government, healthcare, education, and commercial and industrial, complemented by our marketing outreach campaigns and expanding channel partnerships. We also plan to continue to develop advanced lighting and lighting control technologies and introduce impactful new products such as EnFocus™, a breakthrough lighting control platform we officially launched during the second quarter of 2020. In addition, during the third quarter of 2020, we developed advanced UVCD products for both consumer, as well as commercial and industrial, markets. We continue to apply rigorous and financial discipline in our organizational structure, business processes and policies, strategic sourcing activities and supply chain practices to help accelerate our path towards profitability. As described in Note 9, "Stockholders' Equity," included under Part I, Item 1, "Financial Statements," of this Quarterly Report, inJanuary 2020 , we also raised approximately$2.3 million of net proceeds upon the issuance of common stock and warrants as part of the registered direct offering for the sale 688,360 shares of our common stock to certain institutional investors as well as the sale of warrants to the same institutional investors and the placement agent, to purchase up to 688,360 and 48,185 shares, respectively, of common stock (the "January 2020 Equity Offering"). Additionally, we have entered into the New Credit Facilities as described in Note 7, "Debt," which allow for expanded borrowing capacity. The restructuring and cost cutting initiatives implemented during 2019, as well as theJanuary 2020 Equity Offering that significantly strengthened our balance sheet, were designed to allow us to effectively execute these strategies. However, our efforts may not occur as quickly as we envision or be successful due to the long sales cycle in our industry, the corresponding time required to ramp up sales from new products and markets into this sales cycle, the timing of introductions of additional new products, significant competition, potential sales volatility given our customer concentration, and the recent and lingering economic impact from the COVID-19 pandemic, among other factors. As a result, we will continue to review and pursue selected external funding sources to ensure adequate financial resources to execute across the timelines required to achieve these objectives including, but not limited to, the following: •obtaining financing from traditional or non-traditional investment capital organizations or individuals; •obtaining funding from the sale of our common stock or other equity or debt instruments; and •obtaining debt financing with lending terms that more closely match our business model and capital needs.
There can be no assurance that we will obtain funding on acceptable terms, in a timely fashion, or at all. Obtaining additional funding contains risks, including:
•additional equity financing may not be available to us on satisfactory terms,
and any equity we are able to issue could lead to dilution for current
stockholders and have rights, preferences and privileges senior to our common
stock;
•loans or other debt instruments may have terms and/or conditions, such as
interest rate, restrictive covenants, conversion features, refinancing demands,
and control or revocation provisions, which are not acceptable to management or
our board of directors; and
•the current environment in the capital markets combined with our capital
constraints may prevent us from being able to obtain adequate debt financing.
If we fail to obtain the required additional financing to sustain our business
before we are able to produce levels of revenue to meet our financial needs, we
will need to delay, scale back or eliminate our growth plans and further reduce
our operating costs and headcount, each of which would have a material adverse
effect on our business, future prospects, and financial condition. A lack of
additional funding could also result in our inability to continue as a going
concern and force us to sell
34
--------------------------------------------------------------------------------certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire investment.
Considering both quantitative and qualitative information, we continue to
believe that the combination of our plans to obtain additional external funding,
timely re-organizational actions, current financial position, liquid resources,
obligations due or anticipated within the next year, development and
implementation of an excess inventory reduction plan, application and successful
acquisition of a Paycheck Protection Program ("PPP") loan during April 2020 ,
plans and initiatives in our research and development, product development and
sales and marketing, and development of potential channel partnerships, if
adequately executed, will provide us with an ability to finance our operations
through the next twelve months and will mitigate the substantial doubt about our
ability to continue as a going concern.
On August 17, 2020 , we received a letter from the Listing Qualifications staff
of Nasdaq notifying us that we are no longer in compliance with the minimum
stockholders' equity requirement for continued listing on the Nasdaq Capital
Market. Nasdaq Listing Rule 5550(b)(1) requires listed companies to maintain
stockholders' equity of at least $2,500,000 if they do not meet the alternative
compliance standards relating to the market value of listed securities or net
income from continuing operations. Our Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2020 , filed on August 13, 2020 , reflected that
our stockholders' equity as of June 30, 2020 was $1,714,000 . In addition, as of
August 13, 2020 , we did not meet the alternative compliance standards relating
to the market value of listed securities or net income from continuing
operations.
The notification letter had no immediate effect on the listing of our common
stock on the Nasdaq Capital Market. Nasdaq provided us with 45 calendar days, or
until October 1, 2020 , to submit a plan to regain compliance with Nasdaq's
listing standards. On October 5, 2020 , based on the Company's timely submission
of its plan, Nasdaq granted the Company an extension through February 15, 2021
to regain compliance with Rule 5550(b)(1), subject to the Company complying with
certain terms of the extension.
Liquidity and capital resources
Cash
At
The following summarizes cash flows from operating, investing, and financing
activities, as reflected in the Condensed Consolidated Statements of Cash Flows
included in Part I, Item 1, "Financial Statements," of this Quarterly Report (in
thousands):
Nine months ended
September 30,
2020 2019
Net cash used in operating activities $ (1,583) $ (6,329)
Net cash used in investing activities $ (171) $ (57)
Net cash provided by financing activities $ 3,978 $ 686 Net cash used in operating activities
Net cash used in operating activities was$1.6 million for the nine months endedSeptember 30, 2020 . The net loss was$6.0 million and was adjusted for non-cash items, including depreciation and amortization, stock-based compensation, change in fair value of warrant liabilities, provisions for inventory, warranty and accounts receivable reserves and working capital changes. During the nine months endedSeptember 30, 2020 , we generated$1.8 million in cash for accounts payable due to the timing of inventory receipts and payments, and$1.1 million for inventories primarily due to the timing of inventory receipts, and we used$0.5 million of prepaid and other assets due to prepaid deposits to our contract manufacturers for inventory for the new EnFocus™ platform. During the nine months endedSeptember 30, 2020 , we used cash of$1.1 million through the timing of collection of accounts receivable. 35 -------------------------------------------------------------------------------- For the nine months endedSeptember 30, 2019 , net cash used in operating activities was$6.3 million , and resulted primarily from the net loss incurred of$6.1 million , adjusted for non-cash items, including depreciation, stock-based compensation, and provisions for inventory and warranty reserves, and working capital changes. During the nine months endedSeptember 30, 2019 , we used$2.3 million in cash for accounts payable, primarily due to the timing of inventory receipts and payments, and$0.4 million through a decrease in accounts receivable, due to the higher shipments in the first nine months of 2019 as compared toDecember 2018 . In addition, prepaid and other assets decreased by$0.4 million as the inventory for which we paid deposits to our contract manufacturers in prior quarters was received in the first quarter of 2019.
Net cash used in investing activities
Net cash used in investing activities was
For the nine months ended
Net cash provided by financing activities
Net cash provided by financing activities during the nine months endedSeptember 30, 2020 was$4.0 million , primarily resulting from the$2.7 million in proceeds received from theJanuary 2020 Equity Offering, partially offset by$0.5 million in offering costs. Investors in theJanuary 2020 Equity Offering received warrants to purchase shares of our common stock, of which warrants to purchase an aggregate of 539,152 shares remain outstanding atSeptember 30, 2020 with a weighted average exercise price of$3.50 per share. The exercise of warrants could provide us with cash proceeds of up to$1.9 million in the aggregate. During the nine months endedSeptember 30, 2020 , 197,394 warrants were exercised resulting in$0.7 million in proceeds. During the nine months endedSeptember 30, 2020 , we received$0.8 million in proceeds from the PPP loan,$1.2 million from borrowings under the Inventory Facility and$1.0 million from borrowings under the Receivables Facility and paid$0.7 million , net, on the Austin Credit Facility. Also during the nine months endedSeptember 30, 2020 , we paid$0.2 million in deferred financing fees on the Inventory and Receivables Facilities combined. OnAugust 11, 2020 , we paid the outstanding balance of$1.4 million to close out our formerAustin Credit Facility, which included a$100 thousand termination fee.
During the nine months ended
Net cash provided by financing activities during the nine months endedSeptember 30, 2019 was$0.7 million , primarily resulting from the$1.7 million in proceeds we received for the subordinated convertible notes we issued onMarch 29, 2019 , partially offset by net repayments of$0.9 million on borrowings under the Austin Credit Facility we entered into onDecember 11, 2018 . In addition, we used approximately$0.1 million to issue and immediately repurchase our stock for employee tax withholding related to restricted stock unit vesting during the period. Contractual obligations As ofSeptember 30, 2020 , we had approximately$9.8 million in outstanding purchase commitments for inventory. Of this amount, approximately$3.8 million is expected to ship in the fourth quarter of 2020, with the balance expected to ship in the first quarter of 2021 and thereafter.
There have been no other material changes to our contractual obligations as compared to those included in our 2019 Annual Report.
36
--------------------------------------------------------------------------------Critical accounting policies
Fair value of warrant liabilities
The estimated fair value of warrants accounted for as liabilities, representing a Level 3 fair value measure, was determined on the issuance date and subsequently marked to market at each financial reporting date. We use the Black-Scholes valuation model to value the warrant liabilities at fair value. The fair value is estimated using the expected volatility based on our historical volatility and is determined using probability weighted average assumptions, when appropriate.
There have been no other material changes to our critical accounting policies as compared to those included in our 2019 Annual Report.
Certain risks and concentrations
We have certain customers whose net sales individually represented 10% or more of our total net sales, or whose net trade accounts receivable balance individually represented 10% or more of our total net trade accounts receivable; we have certain suppliers, which individually represent 10% or more of our total purchases, or whose trade accounts payable balance individually represented 10% or more of our total trade accounts payable balance, as follows: For the three months endedSeptember 30, 2020 , sales to our primary distributor for theU.S. Navy and a regional commercial lighting retrofit company accounted for approximately 67% and 12% of net sales, respectively. When sales to our primary distributor for theU.S. Navy are combined with sales to shipbuilders for theU.S. Navy , total net sales of products for theU.S. Navy comprised approximately 68% of net sales for the same period. For the three months endedSeptember 30, 2019 , sales to our primary distributor for theU.S. Navy , a regional commercial lighting retrofit company and a global healthcare provider accounted for approximately 27%, 14%, and 15% of net sales, respectively. When sales to our primary distributor for theU.S. Navy are combined with sales to a shipbuilder for theU.S. Navy , total net sales of products for theU.S. Navy comprised approximately 30% of net sales for the same period. For the nine months endedSeptember 30, 2020 , sales to our primary distributor for theU.S. Navy and a regional commercial lighting retrofit company accounted for approximately 52% and 14% of net sales, respectively. When sales to our primary distributor for theU.S. Navy are combined with sales to shipbuilders for theU.S. Navy , total net sales of products for theU.S. Navy comprised approximately 58% of net sales for the same period. For the nine months endedSeptember 30, 2019 , sales to our primary distributor for theU.S. Navy and a regional commercial lighting retrofit company accounted for approximately 20% and 23% of net sales, respectively, for the same period. When sales to our primary distributor for theU.S. Navy are combined with sales to a shipbuilder for theU.S. Navy , total net sales of products for theU.S. Navy comprised approximately 27% of net sales for the same period. Our primary distributor for theU.S. Navy accounted for approximately 73% and 10% of net trade accounts receivable, respectively, atSeptember 30, 2020 andDecember 31, 2019 . A large regional retrofit company accounted for 41% of our net trade accounts receivable atDecember 31, 2019 . Two offshore suppliers accounted for approximately 25% and 20%, respectively, of our total expenditures for the three months endedSeptember 30, 2020 . These same two suppliers accounted for approximately 19% and 14%, respectively, of our total expenditures for the nine months endedSeptember 30, 2020 . AtSeptember 30, 2020 , these offshore suppliers accounted for approximately 24% and 35% of our trade accounts payable balance. For the three and nine months endedSeptember 30, 2019 , one offshore supplier accounted for approximately 18% and 20% total purchases, respectively. This same offshore supplier accounted for approximately, 36.7% of our trade accounts payable balance atSeptember 30, 2019 . One domestic supplier accounted for approximately 16% of our trade accounts payable balance atSeptember 30, 2019 .
Recent accounting pronouncements
For information on recent accounting pronouncements, please refer to Note 2,
"Basis of Presentation and Summary of Significant Accounting Policies," included
under Part I, Item 1, "Financial Statements," of this Quarterly Report.
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