Business context and reporting period
Energy Focus, Inc. filed this Form 10-K for the fiscal year ended December 31, 2018. The company designs, manufactures, markets, and sells LED lighting for commercial, industrial, and military maritime markets. It operates as one segment.
Financial performance and liquidity
Amounts below are in U.S. dollars; annual comparisons are 2018 versus 2017 unless stated otherwise.
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $18.1 million | $19.8 million |
| Gross profit / margin | $3.4 million / 18.8% | $4.8 million / 24.3% |
| Operating loss | $9.1 million | $11.3 million |
| Net loss | $9.1 million | $11.3 million |
| Net loss per share | $0.76 | $0.95 |
| Cash used in operating activities | $6.8 million | $5.9 million |
| Cash and cash equivalents at year-end | $6.3 million | $10.8 million |
| Credit-line borrowings at year-end | $2.2 million | None |
At year-end, current assets were $17.7 million and current liabilities were $7.2 million. Cash included $0.3 million of restricted cash. Inventory was $8.1 million, up from $5.7 million. The company had $11.1 million of stockholders’ equity and an accumulated deficit of $117.3 million. The $5.0 million asset-secured revolving facility was limited by eligible receivables and inventory; the company reported that it had borrowed the maximum then available.
Fourth-quarter 2018 sales were $3.1 million, gross profit was $19,000, and net loss was $3.0 million, compared with fourth-quarter 2017 sales of $4.7 million, gross profit of $1.6 million, and net loss of $1.9 million.
Material changes versus the prior comparable period
- Annual sales declined 8.8%. Commercial sales fell 43.1% to $8.7 million, while military maritime sales rose 104.0% to $9.4 million.
- Gross margin fell to 18.8% from 24.3%, reflecting lower sales volume, unfavorable manufacturing variances and absorption, and low-margin military tube sales early in the year. The 2017 margin had also benefited from a $1.4 million reduction in excess-inventory reserves.
- The net loss narrowed by $2.2 million, mainly due to a further $3.6 million reduction in operating expenses, partly offset by lower gross profit.
- Operating cash use increased to $6.8 million from $5.9 million. Cash declined by $4.4 million during 2018.
- Military maritime sales became a larger share of revenue; one U.S. Navy distributor represented 41.9% of sales, and sales to Navy distributors totaled 46.2%.
Outlook, risks, contingencies and unusual items
- Going concern and financing: The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern, arising from recurring losses and negative operating cash flows. Management said it expected its plans, if adequately executed, to fund operations through 2019, but anticipated needing additional financing during 2019. There is no assurance financing will be available on acceptable terms or at all.
- Subsequent financing: On March 29, 2019, the company raised approximately $1.7 million through subordinated convertible notes. The notes bear interest at 5% through June 30, 2019 and 10% thereafter, mature in 2021, and are subject to conversion and Nasdaq/share-authorization conditions. Conversion could dilute existing shareholders. Management estimated March 31, 2019 cash of $3.9 million and credit-line borrowings of $1.9 million.
- Business plan and market conditions: Management is pursuing cost controls, product development, broader sales coverage, supply-chain improvements, and strategic options. It cited long and unpredictable sales cycles, delayed retrofit budgets and project starts, aggressive price competition, and commoditization. In 2018, it introduced six product families; products launched in the prior two years accounted for 17% of fourth-quarter revenue.
- Customer, supplier and execution risks: The company generally lacks long-term customer purchase commitments, depends heavily on a small number of customers, and uses a limited number of suppliers, including sole-source suppliers for some components. It also cited risks from government funding, product reliability and warranties, competition, and its ability to scale sales and execute product launches.
- Commitments and other items: Year-end purchase commitments for inventory were approximately $2.8 million. Net operating lease commitments were $3.3 million before sublease payments; the company expected to recognize approximately $2.2 million of additional lease liabilities upon adopting the new lease standard in 2019. It recorded $0.1 million of restructuring charges in 2018. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-controls attestation.
Important facts for investors to verify
- Whether the company secured additional financing after the filing, and whether available cash and borrowing capacity can fund operations and obligations.
- Whether the convertible notes converted, the applicable conversion price and share issuance, and the effects on dilution, voting power, and control.
- Whether new products gain meaningful sales and margins, and whether commercial revenue and gross margin recover.
- Whether the company reduces its dependence on the leading Navy distributor and retains key customers and suppliers.
- Whether inventory commitments, lease obligations, and other working-capital needs remain manageable given continued operating cash use.