Energy Focus, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Financial statements are unaudited. Energy Focus designs, manufactures, markets and sells energy-efficient LED lighting products to commercial and military customers.
Financial performance and position
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Net sales | $3.177 million | $4.659 million; down 31.8% |
| Gross profit and margin | $98,000; 3.1% | $816,000; 17.5% |
| Operating expenses | $2.901 million | $3.226 million |
| Operating loss | $2.803 million | $2.410 million |
| Net loss / diluted loss per share | $2.865 million / $0.24 | $2.390 million / $0.20 |
| Cash used in operating activities | $3.556 million | $743,000 |
| Cash and cash equivalents, March 31 | $3.861 million | $6.335 million at Dec. 31, 2018 |
| Total debt, March 31 | Approximately $3.4 million | Includes $1.7 million credit-facility borrowings and $1.7 million convertible notes |
Cash and cash equivalents included $342,000 of restricted cash. The company reported $600,000 available to borrow under its revolving credit facility. Stockholders’ equity was $8.433 million, and accumulated deficit was $120.366 million at March 31, 2019.
Changes versus the prior-year quarter
- Military sales declined 51.3% to $1.194 million; commercial sales declined 10.1% to $1.983 million. Management attributed the military comparison primarily to the timing and fulfillment of U.S. Navy awards in late 2017 and early 2018, and commercial results to variable project timing, pace and size.
- Gross margin fell to 3.1% from 17.5%. Management cited $0.4 million of unfavorable manufacturing variances and absorption, compared with $0.2 million in the prior-year quarter, and noted that Q1 2018 margin benefited from efforts to liquidate excess inventory.
- Operating expenses decreased, including lower product-development and selling, general and administrative costs, but the reduction did not offset the lower gross profit. Net loss increased by $475,000.
- Operating cash use rose to $3.556 million from $743,000, partly reflecting the net loss and working-capital movements, including lower accounts payable.
Liquidity, outlook and risks
- Going concern: The company stated that substantial doubt about its ability to continue as a going concern remained at March 31, 2019. Management believed its financing plans, cost actions, available resources, executive reorganization and sales and product strategy, if successfully executed, could fund operations through 2019; there is no assurance those plans will succeed.
- Financing: The company issued $1.7 million of subordinated convertible notes on March 29, 2019. The notes mature December 31, 2021, bear interest at 5% through June 30, 2019 and 10% thereafter, and were recorded as short-term debt because the company expected conversion within 12 months. Conversion terms include a $0.67 per-share conversion rate and require stockholder approval for specified matters. The agreement was amended May 29, 2019.
- Cost reductions and management changes: Q1 actions included eliminating three positions and restructuring operations and the sales organization. After the April 1 executive transition, the company planned to eliminate nine more positions and close offices in San Jose and Taipei, with approximately $100,000 of additional Q2 restructuring charges expected. The CEO and CFO resigned effective April 1; a new CEO took office in April and a new CFO in July.
- Customer concentration: Three customers represented approximately 22%, 10% and 30% of Q1 sales. U.S. Navy-related products accounted for approximately 32% of sales. Customer order timing, government funding and commercial project cycles may cause volatility.
- Other liquidity exposures: Inventory purchase commitments were approximately $2.5 million, of which $1.9 million was expected to ship in Q2 2019. The company’s plans depend on obtaining additional funding; equity financing could dilute shareholders, while debt could impose unacceptable terms or restrictions.
- Listing and controls: Nasdaq notified the company on May 15, 2019 that its share price had been below the $1.00 minimum for 30 consecutive trading days, creating a potential delisting risk if compliance was not regained within the applicable period. Management also reported ineffective disclosure controls due to a material weakness in financial-reporting controls, principally inadequate segregation of duties and supervision in a small finance function; remediation was underway.
- Guidance: The filing provides no specific revenue or earnings guidance. Management described plans to develop products, expand customers, improve sales execution and supply-chain operations, and pursue external financing.
Key facts for investors to verify
- Whether the company secured sufficient additional financing and maintained adequate liquidity beyond 2019.
- Whether the convertible notes converted, and the resulting preferred-stock and potential common-stock dilution, following required shareholder approvals.
- Whether sales and gross margin improved, particularly given customer concentration and the timing of military awards and commercial projects.
- Whether the planned cost reductions and office closures were completed and produced sustainable expense savings.
- Whether Energy Focus regained Nasdaq’s minimum bid-price compliance and remediated the material weakness in internal controls.