ENERGY FOCUS, INC/DE 10-Q

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 financial statements and related notes thereto, included under Item 1 of this Quarterly Report, as well as the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included under Item 7 of our Annual Report on Form 10-K for the year ended December 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. We develop, market and sell high quality light-emitting diode (“LED”) lighting 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 solutions. Our goal is to be the LED lighting technology and market leader for the most demanding applications where performance, quality and health are considered paramount. We specialize in LED lighting retrofit by replacing fluorescent, high-intensity discharge (“HID”) 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”) and other LED products and controls. Net sales increased 13.7% for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019, primarily driven by a 102% increase in military sales period over period offset by a decrease in net sales of our commercial products of 32% for the six months ended June 30, 2020 as compared to the same prior year period. The sale cycles for the military market is dependent on many factors, including the availability of government funding, the timing and fulfillment of U.S. Navy awards, new ship construction, diversion of funds to other government needs, and the timing of vessel maintenance schedules. The sale cycles for our commercial target markets can range from several months to over one year and our financial results reflect volatility from the continued fluctuations in the timing, pace and size of commercial projects for a major healthcare customer. Despite continuing progress in the last four quarters in reducing our operating losses significantly from second 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, continuing aggressive price competition and an intensely competitive lighting industry going through constant change. 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 at June 30, 2020. The COVID-19 pandemic has and may continue to have a significant economic and business impact on our Company. In the second quarter, as in the first quarter, we have seen a slowdown in commercial sales as some customers in the healthcare, education, and commercial and industrial sectors delayed order placements in reaction to the crisis. We continue to monitor the potential impact of the COVID-19 pandemic. This includes evaluating the impact on our customers, suppliers, and logistics providers as well as evaluating governmental actions being taken to curtail the spread of the virus. The significance and duration of the ongoing impact on us is still uncertain. Material adverse effects on 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. Nevertheless, during the first half of 2020 we continued to see benefits from the relaunch efforts, described in our 2019 Annual Report, undertaken in the last three quarters of 2019. It is our belief that the continued momentum of the efforts undertaken in 2019, along with the launch of new and innovative products will over time result in improved sales and bottom-line performance for the Company. Our newly launched EnFocus™ platform during the second quarter of 2020 continues to receive positive feedback from existing, new, and potential new customers. The EnFocus™ platform was launched with 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. Furthermore, we have been accelerating our initiatives to develop ultraviolet (UV) disinfection technologies and products for both consumer as well as commercial and industrial markets. In addition, significant efforts undertaken to reduce costs and become more competitive in the Company’s MMM business segment offerings have positioned us to be more competitive in this business segment to win bids and proposals that have allowed us to generate additional business during 2020, offsetting some of the slowdown 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. 27 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 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 EnFocus TM platform. In addition, we intend to continue to apply rigorous and financial disciplines in our organizational structure, business processes and policies, and supply chain practices to help accelerate our path towards profitability. At June 30, 2020, we had $2.7 million in cash, which excludes $0.3 million restricted cash held, and a total of $2.7 million in debt, including $1.3 million outstanding under our prior revolving line of credit (the “Austin Credit Facility”) with Austin Financial Services, $0.6 million relating to our promissory note (“Iliad Note”) with Iliad Research and Trading, L.P. (“Iliad”) and $0.8 million for the PPP (as defined below) loan. In addition, we hold $4.0 million in warrant liability. At June 30, 2020, we had $1.2 million of additional availability for us to borrow under the Austin Credit Facility. In August 2020, we secured two new working capital financing facilities which replaced the Austin Credit Facility. For details regarding the new credit facilities, please see “Liquidity and capital resources - New Credit Facilities” below as well as Part II, Item 5 of this Quarterly Report. 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 June 30, Six months ended June 30, 2020 2019 2020 2019 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 59.7 103.5 66.6 100.2 Gross profit (loss) 40.3 (3.5) 33.4 (0.2) Operating expenses: Product development 9.4 10.3 8.4 13.5 Selling, general, and administrative 59.2 51.7 56.2 61.3 Restructuring (0.4) 4.2 (0.4) 4.2 Total operating expenses 68.2 66.2 64.2 79.0 Loss from operations (27.9) (69.7) (30.8) (79.2) Other expenses (income): Interest expense 2.6 0.8 3.1 1.1 Loss from change in fair value of warrants 99.0 — 34.1 — Other expenses 0.7 2.6 0.6 1.6 Net loss (130.2) % (73.1) % (68.6) % (81.9) % Net sales A further breakdown of our net sales is presented in the following table (in thousands): Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 Commercial $ 1,058 $ 2,131 $ 2,794 $ 4,114 MMM products 2,277 951 4,324 2,145 Total net sales $ 3,335 $ 3,082 $ 7,118 $ 6,259 28 Net sales of $3.3 million for the second quarter of 2020 increased compared to the second quarter of 2019 primarily driven by an increase in MMM product sales. Net sales of our commercial products decreased in the second quarter of 2020 compared to the second quarter of 2019, reflecting (i) a decrease in sales, caused by delayed orders, have occurred mainly in the healthcare, education, commercial and industrial sectors because of the 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 COVID-19, (iii) fluctuations in the timing, pace and size of commercial projects. Net sales of $7.1 million for the first six months of 2020 increased 13.7% compared to the same period in 2019 primarily driven by an increase in MMM product sales. Net sales of our commercial products decreased in the first six months of 2020 compared to the same period of 2019, reflecting (i) a decrease in sales, caused by delayed orders, have occurred mainly in the healthcare, education, commercial and industrial sectors because of the 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 COVID-19, (iii) fluctuations in the timing, pace and size of commercial projects. Gross profit Gross profit (loss) was $1.3 million, or 40.3% of net sales, for the second quarter of 2020, compared to $(0.1) million, or (3.5)% of net sales, for the second quarter of 2019. As a result of current manufacturing and sales volumes, gross margin for the second quarter of 2020 included favorable warranty and inventory reserves of $0.3 million or 8.4% of net sales. Gross margin for the second quarter of 2019 included unfavorable inventory reserves of $0.5 million or 14.7% of net sales. Gross profit (loss) was $2.4 million or 33.4% of net sales, for the first six months of 2020 compared to $(11) thousand or (0.2)% of net sales, for the first six months of 2019. The increase is primarily related to relatively higher profit margin of sold product, favorable price and usage variances for material and labor of $0.3 million or 4.0% of net sales, and favorable inventory reserves recorded of $0.4 million, or 5.5% of net sales. The gross margin for the first six months of 2019 was primarily related to unfavorable inventory reserves recorded during the first six months of 2019 of $0.4 million, or 6.8% of net sales. 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 $0.3 million for the second quarter of 2020, which is flat compared to $0.3 million for the second quarter of 2019. Product development expenses were $0.6 million for the first six months of 2020, a $0.2 million decrease compared to $0.8 million for the first six months of 2019. The decrease is primarily related to favorable payroll cost largely due to the close of the Taiwan office during the second quarter of 2019. Selling, general and administrative Selling, general and administrative expenses were $2.0 million for the second quarter of 2020, compared to $1.6 million for the second quarter of 2019. The primary drivers of the increased expense were an increase in payroll due to our growth initiatives that expanded our staff and an increase in professional services, partly offset by a decrease in cost for marketing and travel partly due to COVID-19 and a decrease in stock- based compensation. Selling, general and administrative expenses were $4.0 million for the first six months of 2020, compared to $3.8 million for the first six months of 2019. The increase is primarily due to increase in payroll and professional services, mostly offset by a decrease in marketing and travel cost. Restructuring For the three and six months ended June 30, 2020, we recorded restructuring credits totaling approximately $14 thousand and $28 thousand respectively, and for the three and six months ended June 30, 2019, we recorded restructuring charges totaling approximately $128 thousand and $262 thousand related to the cost and offsetting sublease income for the remaining lease obligations for the former New York, New York office. For additional information regarding the 29 restructuring actions taken in 2017 and 2019, please refer to Note 3, “Restructuring,” included under Item 8 of our 2019 Annual Report. During the three and six months ended June 30, 2020, we recorded no severance and related benefits charges and during each of the three and six months ended June 30, 2019, we recorded severance and related benefits charges of $0.1 million. Interest expense Interest expense was $87 thousand for the second quarter of 2020, compared to interest expense of $26 thousand for the second quarter of 2019. The increase in interest expense of $61 thousand was a result of increased amortization of the debt financing costs in the second quarter of 2020. The actual cash interest paid in the second quarter of 2020 was $18 thousand compared to $23 thousand in the second quarter of 2019. Interest expense was $220 thousand for the first six months of 2020, compared to interest expense of $69 thousand for the first six months of 2019. The increase in interest expense of $151 thousand was a result of increased amortization of the debt financing costs in the first six months of 2020. The actual cash interest paid for the six months ended June 30, 2020 was $85 thousand compared to $44 thousand for the six months ended June 30, 2019. Loss from change in fair value of warrants A loss of $2.4 million was recognized during the six months ended June 30, 2020 for the market value change in our warrant liabilities. The loss recognized in the first six months of 2020 was a result of the revaluation of the warrant liability using the market price of the Company’s stock at June 30, 2020 versus the market price of the Company’s stock at the time of initial issuance of the warrants (January 13, 2020). Other expenses Other expense was $24 thousand for the second quarter of 2020, compared to other expense of $79 thousand for the second quarter of 2019. Other expense was $42 thousand for the six months ended June 30, 2020 compared to other expense of $98 thousand for the six months ended June 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 six months ended June 30, 2020 and 2019, and after application of the annual limitation set forth under Section 382 of the IRC, it was not necessary to record a provision for U.S. federal income tax or various states income taxes as income tax benefits are fully offset by a valuation allowance recorded. Net loss For the three months ended June 30, 2020, our net loss was $4.3 million, compared to $2.3 million for the three months ended June 30, 2019. The increase in the net loss was primarily driven by the change in the warrant liability fair value from inception at January 13, 2020 through June 30, 2020. For the six months ended June 30, 2020, our net loss was $4.9 million compared to $5.1 million for the six months ended June 30, 2019. The decrease in the net loss was primarily driven by higher sales at more favorable gross profit margin. Financial condition We had cash of $2.7 million at June 30, 2020, which excludes $0.3 million restricted cash held, and a total of $2.7 million in debt, including $1.3 million outstanding under the Austin Credit Facility, $0.6 million relating to our Iliad Note and $0.8 million relating to the PPP (as defined below) loan. In addition we hold $4.0 million in warrant liability. At June 30, 2020, we had $1.2 million of additional availability for us to borrow under the Austin Credit Facility. We have historically incurred substantial losses, and as of June 30, 2020, we had an accumulated deficit of $129.8 million. Additionally, our sales have been concentrated in a few major customers and for the six months ended June 30, 2020, two customers accounted for approximately 54% 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 30 substantial doubt about our ability to continue as a going concern continues to exist at June 30, 2020. Since the executive transition on April 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 the EnFocus™, a breakthrough lighting control platform we officially launched during the second quarter of 2020. Furthermore, we have been developing ultraviolet (UV) disinfection technologies and products which we have filed provisional patents on and which we expect to launch by the end of 2020. In addition, we continue to apply rigorous and financial disciplines in our organizational structure, business processes and policies, and supply chain practices to help accelerate our path towards profitability. As described in Note 9, 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 agents, to purchase up to 688,360 and 48,185 shares, respectively, of common stock (“January 2020 Equity Offering”). The restructuring and cost cutting initiatives implemented during 2019 as well as the January 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 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 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 R&D, product development and sales and marketing, 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. 31 On May 15, 2019, we received a letter from the Nasdaq Stock Market advising us that for 30 consecutive trading days preceding the date of the letter, the bid price of our common stock had closed below the $1.00 per share minimum required for continued listing on Nasdaq pursuant to listing rules. Therefore we could be subject to delisting if we did not regain compliance within the compliance period or extend the compliance period by filing for an extension. On October 15, 2019, the Company formally requested a 180-day extension beginning November 12, 2019 to regain compliance. On April 16, 2020, Nasdaq announced that, in response to the COVID-19 pandemic and related extraordinary market conditions, it is providing temporary relief through June 30, 2020 from, among other rules, the $1.00 minimum bid price rule. As a result, we had until July 24, 2020 to come into compliance with the $1.00 minimum bid price rule. To become compliant with the $1.00 minimum bid price requirement, we effected a 1-for-5 reverse stock split to increase the per share trading price of the common stock. At the Company’s annual meeting of stockholders held on December 17, 2019, the Company’s stockholders approved a form of the certificate of amendment (the “Certificate of Amendment”) to the Company’s Certificate of Incorporation, as amended (the “Certificate of Incorporation”), and authorized the board of directors of the Company to amend the Certificate of Incorporation to effect a reverse stock split of the outstanding shares of the Company’s common stock, par value $0.0001 per share, at a ratio ranging from any whole number of at least 1-for-2 and up to 1-for-20, with the exact ratio within the foregoing range to be determined by the board of directors in its sole discretion. On June 2, 2020, our board of directors determined to set the reverse stock split ratio at 1-for-5. The Certificate of Amendment to our Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on June 11, 2020, upon which the reverse stock split became effective immediately (the “Effective Time”). At the Effective Time, every five shares of common stock issued and outstanding automatically combined into one validly issued, fully paid and non-assessable share of common stock. The common stock began trading on Nasdaq on a split-adjusted basis at the opening of trading on June 12, 2020. On April 17, 2020, the Company was granted a loan from KeyBank National Association in the amount of approximately $795 thousand, pursuant to the PPP under Division A of the Coronavirus Aid, Relief and Economic Securities Act (the "CARES Act"), which was enacted on March 27, 2020. The loan accrues interest at a rate of 1.0% per annum and matures on April 17, 2022. The funds were received on April 20, 2020. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The Company intends to use the loan for qualifying expenses, however there is no assurance that the Company will obtain forgiveness for any portion of the loan. Liquidity and capital resources Cash At June 30, 2020, our cash balance was approximately $2.7 million, compared to approximately $0.4 million at December 31, 2019. The balance at June 30, 2020 and December 31, 2019 excluded restricted cash of $0.3 million for a letter of credit requirement under a lease obligation. The following summarizes cash flows from operating, investing, and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows (in thousands): Six months ended June 30, 2020 2019 Net cash used in operating activities $ (703) $ (5,120) Net cash used in investing activities $ (118) $ (28) Net cash provided by financing activities $ 3,198 $ 1,015 Net cash used in operating activities Net cash used in operating activities was $0.7 million for the six months ended June 30, 2020. The net loss was $4.9 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 reserves and working capital changes. During the six months ended June 30, 2020, we generated $1.3 million in cash for accounts payable due to the timing of inventory receipts and 32 payments, and $0.6 million for inventories primarily due to the timing of inventory receipts and we used $0.2 million of prepaid and other assets due to prepaid deposits to our contract manufacturers for inventory for the new EnFocus™ platform. We used cash of $0.2 million through the timing of collection of accounts receivable and generated $0.3 million cash through an increase of other accrued liabilities, primarily related to accrued payroll and benefits and commissions. For the six months ended June 30, 2019, net cash used in operating activities was $5.1 million, and resulted primarily from the net loss incurred of $5.1 million, adjusted for non-cash items, including: depreciation, stock-based compensation, and provisions for inventory and warranty reserves, and working capital changes. During the six months ended June 30, 2019, we used $1.5 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 half of 2019 as compared to December 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 $118 thousand for the six months ended June 30, 2020 and resulted primarily from the purchase software and tooling to support production operations and development of the e-commerce platform. For the six months ended June 30, 2019, net cash used in investing activities was $28 thousand, and resulted primarily from the purchase of tooling to support production operations. Net cash provided by financing activities Net cash provided by financing activities during the six months ended June 30, 2020 was $3.2 million, primarily resulting from the $2.8 million in proceeds received from the January 2020 Equity Offering, partially offset by $0.5 million in offering costs for the issuance. Investors in our equity offering have received warrants to purchase shares of our common stock, of which warrants to purchase an aggregate of 721,546 shares remain outstanding at June 30, 2020 with a weighted average exercise price of $3.48 per share. The exercise of warrants could provide us with cash proceeds of $2.5 million. During the six months ended June 30, 2020, 15 thousand warrants were exercised. Additionally we received $0.8 million in proceeds from the PPP loan and $0.6 million proceeds from borrowing under the Austin Credit Facility. We had $0.5 million in repayments of the Iliad Note which includes a share issuance related mandatory repayment of the Iliad Note of which $0.2 million was allocated against principal. At June 30, 2020, we had $1.2 million of additional availability for us to borrow under the Austin Credit Facility. Net cash provided by financing activities during the six months ended June 30, 2019 was $1.0 million, primarily resulting from the $1.7 million in proceeds we received for the subordinated convertible notes we entered into on March 29, 2019, partially offset by net repayments of $0.6 million on borrowings under the Austin Credit Facility we entered into on December 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. New Credit Facilities In August 2020, we secured two new working capital financing facilities which replaced the Austin Credit Facility. These new facilities will significantly expand the credit capacity at a lower blended borrowing cost than the previous Austin Credit Facility. For detail regarding the new facilities, please refer to Part II, Item 5 of this Quarterly Report. Contractual obligations As of June 30, 2020, we had approximately $8.5 million in outstanding purchase commitments for inventory. Of this amount, approximately $1.9 million is expected to ship in the third quarter of 2020 with the balance expected to ship in the fourth quarter of 2020 and thereafter. There have been no other material changes to our contractual obligations as compared to those included in our 2019 Annual Report. 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 33 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 had certain customers whose net sales individually represented 10 percent or more of our total net sales, or whose net trade accounts receivable balance individually represented 10 percent or more of our total net trade accounts receivable, as follows: For the three months ended June 30, 2020, sales to our primary distributor for the U.S. Navy, a regional commercial lighting retrofit company and a primary shipbuilder for the U.S. Navy, accounted for approximately 40%, 15% and 11% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 60% of net sales for the same period. For the three months ended June 30, 2019, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company accounted for approximately 13% and 26% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 20% of net sales for the same period. For the six months ended June 30, 2020, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company accounted for approximately 39% and 15% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 53% of net sales for the same period. For the six months ended June 30, 2019, sales to our primary distributor for the U.S. Navy and a regional commercial lighting retrofit company accounted for approximately 17% and 28% of net sales, respectively. When sales to our primary distributor for the U.S. Navy are combined with sales to shipbuilders for the U.S. Navy, total net sales of products for the U.S. Navy comprised approximately 26% of net sales for the same period. A regional commercial lighting retrofit company and our primary distributor for the U.S. Navy accounted for approximately 19% and 47% of net trade accounts receivable, respectively, at June 30, 2020. At December 31, 2019, our primary distributor for the U.S. Navy accounted for approximately 10% of net trade accounts receivable and a large regional retrofit company accounted for 41% of our net trade accounts receivable. 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 of this Quarterly Report. 34 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a “smaller reporting company” as defined by Item 10 of Regulation S-K, the company is not required to provide information required by this item.