Item 2.02. Results of Operations and Financial Condition.
The information in Item 7.01 below regarding the estimated stockholders' equity
of Energy Focus, Inc. (the "Company") as of December 31, 2020 is incorporated in
this Item 2.02 by reference.
Item 7.01. Regulation FD Disclosure.
As previously reported, on August 17, 2020, the Company received a letter from
the Listing Qualifications staff of The Nasdaq Stock Market ("Nasdaq") notifying
the Company that it was no longer in compliance with the minimum stockholders'
equity requirement for continued listing on the Nasdaq Capital Market. Nasdaq
Listing Rule 5550(b)(1) (the "Rule") requires listed companies to maintain
stockholders' equity of at least $2,500,000 or meet the alternatives of market
value of listed securities or net income from continuing operations.
In accordance with Nasdaq Listing Rules, the Company had 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 the Rule, subject to the Company complying with
certain terms of the extension that were included in the Company's plan that was
presented to Nasdaq.
In December 2020, the Company entered into amendments with holders of all
outstanding warrants to purchase its common stock. The terms of the amendments
are described in further detail below. The amendments are intended to reclassify
the outstanding warrants for equity accounting treatment, eliminating the
mark-to-market adjustment at each balance sheet date, as of the effective date
of the amendments. As a result of the amendments, the final mark-to-market
adjustment as of the amendment date is expected to result in a positive income
statement impact of approximately $1.2 million in non-cash income during the
fourth quarter of 2020. In addition, the amendments result in reclassification
of approximately $1.4 million from liabilities to stockholders' equity on the
balance sheet.
The total impact resulting from the amendments made to the terms of the warrants
to stockholders' equity will be a $2.6 million increase upon the effective date
of the amendments compared to the end of third quarter 2020. As a result of
these amendments, as of the date of this Current Report on Form 8-K, the Company
believes it has regained compliance with the minimum stockholders' equity
requirement for continued listing on the Nasdaq Capital Market.
Nasdaq will continue to monitor the Company's ongoing compliance with the
minimum stockholders' equity requirement, and if at the time of the Company's
next periodic report (its Annual Report on Form 10-K for the year ended December
31, 2020, expected to be filed in March 2021) the Company does not evidence
compliance, it may be subject to delisting. Further, if the Company fails to
maintain compliance with the Rule, the Company may be subject to delisting. In
such an event, Nasdaq Listing Rules permit the Company to appeal any delisting
determination to a Nasdaq Hearing Panel. There can be no assurance that the
Company will be able to maintain compliance with the Rule or maintain its
listing on the Nasdaq Capital Market.
Description of the Warrant Amendments
In January 2020, the Company completed a registered direct offering for the sale
of 688,360 shares of its common stock to certain institutional investors, at a
purchase price of $3.37 per share. It also sold, to the same institutional
investors, warrants to purchase up to 688,360 shares of common stock at an
exercise price of $3.37 per share in a concurrent private placement for a
purchase price of $0.625 per warrant. In addition to cash commission and
expenses paid to the placement agent, the Company also issued warrants to the
placement agent to purchase up to 48,185 shares of common stock at an exercise
price of $4.99 per share. Net proceeds from the sale of common stock and
warrants were approximately $2.3 million in the aggregate, net of expenses.
During the year ended December 31, 2020, 269,240 warrants were exercised
resulting in total proceeds of $918 thousand. Warrants to purchase an aggregate
of 467,306 shares remain outstanding at December 31, 2020 with a
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weighted average exercise price of $3.51 per share. The exercise of warrants
could provide the Company with cash proceeds of up to $1.6 million in the
aggregate.
The warrants originally contained a provision for net cash settlement in the
event that there is a fundamental transaction involving the Company (e.g.,
merger, sale of substantially all assets, tender offer, or share exchange). If a
fundamental transaction occurred in which the consideration issued consisted of
all cash or stock in a non-public company, then the warrant holder would have
had the option to receive cash equal to a Black-Scholes value of the remaining
unexercised portion of the warrant. As a result of the amendments to the
warrants, the remaining Black-Scholes value of the warrant will now be satisfied
in the same form of consideration as all other common stockholders receive in
the fundamental transaction, eliminating the option to require cash payment to a
warrant holder notwithstanding if common stockholders receive another form of
consideration.
Previously, the warrants were classified as liabilities, as opposed to equity,
due to the potential difference in the form of settlement upon occurrence of a
fundamental transaction between warrant holders and equity holders, and as a
result were recorded at their fair values at each balance sheet date. The
warrant liabilities were then revalued at fair value at each balance sheet date
subsequent to the initial issuance. Changes in the fair market value of the
warrant were reflected in the consolidated statement of operations as income
(expense) based upon the change in fair value of warrants. As a result of the
amendments to the warrants, a final revaluation was made as of the amendment
date. As of the amendment date, the changes in the fair value since September
30, 2020 are expected to result in a positive income statement impact of
approximately $1.2 million in non-cash income during the fourth quarter of 2020.
The reclassification of the warrants also transfers approximately $1.4 million
from liabilities to stockholders' equity on the balance sheet. The total impact
to stockholders' equity will be a $2.6 million increase on the effective date
for the warrant amendments and will be the same at the end of the fourth quarter
2020 compared to the end of the third quarter of 2020.
The information provided above is being furnished under Items 2.02 and 7.01 of
Form 8-K and shall not be deemed to be "filed" for the purposes of Section 18 of
the Securities Exchange Act of 1934, or otherwise subject to the liabilities of
such section, nor shall such information be deemed incorporated by reference in
any filing under the Securities Act of 1933 or the Securities Exchange Act of
1934, except as shall be expressly set forth by specific reference in such a
filing.
Forward-looking statements in this report are made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Generally,
these statements can be identified by the use of words such as "believes,"
"estimates," "anticipates," "expects," "feels," "seeks," "forecasts",
"projects," "intends," "plans," "may," "will," "should," "could," "would" and
similar expressions intended to identify forward-looking statements, although
not all forward-looking statements contain these identifying words. These
forward-looking statements include all matters that are not historical facts and
include statements regarding our intentions, beliefs or current expectations
concerning, among other things, our results of operations, financial condition,
liquidity, prospects, growth, strategies, capital expenditures and the industry
in which we operate. By their nature, forward-looking statements involve risks
and uncertainties because they relate to events and depend on circumstances that
may or may not occur in the future. Although we base these forward-looking
statements on assumptions that we believe are reasonable when made in light of
the information currently available to us, we caution you that forward-looking
statements are not guarantees of future performance and that our actual results
of operations, financial condition and liquidity, and industry developments may
differ materially from statements made in or suggested by the forward-looking
statements contained in this report. We believe that important factors that
could cause our actual results to differ materially from forward-looking
statements include, but are not limited to: (i) disruptions and a slowing in the
U.S. and global economy and business interruptions experienced by us, our
customers and our suppliers as a result of the COVID-19 pandemic and related
stay-at-home orders, quarantine policies, school attendance restrictions and
restrictions on travel, trade and business operations; (ii) our ability to
realize the expected novelty, disinfection effectiveness, affordability and
estimated delivery timing of our UVCD products and their performance and cost
compared to other products; (iii) market acceptance of our LED lighting, control
and UVCD technologies and products; (iv) our need for additional financing in
the near term to continue our operations; (v) our ability to refinance or extend
maturing debt on acceptable terms or at all; (vi) our ability to continue as a
going concern for a
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reasonable period of time; (vii) our ability to implement plans to increase
sales and control expenses; (viii) our reliance on a limited number of customers
for a significant portion of our revenue, and our ability to maintain or grow
such sales levels; (ix) our ability to add new customers to reduce customer
concentration; (x) our reliance on a limited number of third-party suppliers and
research and development partners, our ability to manage third-party product
development and obtain critical components and finished products from such
suppliers on acceptable terms and of acceptable quality, and the impact of our
fluctuating demand on the stability of such suppliers; (xi) our ability to
timely and efficiently transport products from our third-party suppliers to our
facility by ocean marine channels; (xii) our ability to increase demand in our
targeted markets and to manage sales cycles that are difficult to predict and
may span several quarters; (xiii) the timing of large customer orders,
significant expenses and fluctuations between demand and capacity as we invest
in growth opportunities; (xiv) our ability to compete effectively against
companies with lower cost structures or greater resources, or more rapid
development efforts, and new competitors in our target markets; (xv) our ability
to successfully scale our network of sales representatives, agents, and
distributors to match the sales reach of larger, established competitors; (xvi)
our ability to attract and retain qualified personnel, and to do so in a timely
manner; (xvii) the impact of any type of legal inquiry, claim or dispute;
(xviii) general economic conditions in the United States and in other markets in
which we operate or secure products; (xix) our dependence on military maritime
customers and on the levels and timing of government funding available to such
customers, as well as the funding resources of our other customers in the public
sector and commercial markets; (xx) the possible impact on our military maritime
customers and their ability to honor the timing for existing orders or place
future orders due to COVID-19 breakouts amongst personnel that might impact the
use of ships in service; (xxi) business interruptions resulting from
geopolitical actions, including war and terrorism, natural disasters, including
earthquakes, typhoons, floods and fires, or from health epidemics or pandemics
or other contagious outbreaks; (xxii) our ability to respond to new lighting
technologies and market trends, and fulfill our warranty obligations with safe
and reliable products; (xxiii) any delays we may encounter in making new
products available or fulfilling customer specifications; (xxiv) any flaws or
defects in our products or in the manner in which they are used or installed;
(xxv) our ability to protect our intellectual property rights and other
confidential information, and manage infringement claims by others; (xxvi) our
compliance with government contracting laws and regulations, through both direct
and indirect sale channels, as well as other laws, such as those relating to the
environment and health and safety; (xxvii) risks inherent in international
markets, such as economic and political uncertainty, changing regulatory and tax
requirements and currency fluctuations, including tariffs and other potential
barriers to international trade; (xxviii)our ability to maintain effective
internal controls and otherwise comply with our obligations as a public company;
and (xxix) our ability to regain compliance with the continued listing standards
of The Nasdaq Stock Market. For additional factors that could cause our actual
results to differ materially from the forward-looking statements, please refer
to our most recent annual report on Form 10-K and quarterly reports on Form 10-Q
filed with the Securities and Exchange Commission.
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