Energy Focus, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Energy Focus designs, manufactures, markets and installs energy-efficient lighting. Its continuing businesses are Products (including commercial, industrial, government and military offerings) and Solutions (turnkey lighting projects). The pool-products business was sold in November 2013 and is reported as discontinued operations.
Financial performance and liquidity
Amounts below are in millions of dollars unless otherwise stated.
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $4.919 | $4.458; up 10.3% |
| Gross profit / margin | $1.422 / 28.9% | $0.883 / 19.8% |
| Operating expenses | $2.495 | $2.119 |
| Operating loss | $(1.073) | $(1.236) |
| Interest expense | $2.618 | $0.126 |
| Net loss | $(4.070), or $(0.08) per share | $(1.428), or $(0.03) per share |
| Cash used in operating activities | $(2.090) | $(1.958) |
| Cash and cash equivalents at period end | $1.960 | $0.452 at March 31, 2013 |
At March 31, 2014, current assets were $8.714 million and current liabilities were $5.049 million. Reported cash included $63,000 of restricted cash and $400,000 held in escrow; the cash-flow note separately identifies $1.497 million as cash and cash equivalents. The escrow balance was scheduled for monthly $100,000 releases through July 2014, subject to claims. Operating cash use was attributed primarily to paying operational liabilities. Investing activities provided $93,000, including proceeds from assets held for sale; financing activities provided $1.096 million, primarily from credit-line borrowings.
Credit-line borrowings totaled $1.109 million at quarter-end: $1.0 million under the domestic facility and $85,000 under the UK arrangement. The domestic facility had approximately $611,000 available, was secured by domestic assets, and was scheduled to expire December 31, 2014; the company reported compliance with its financial covenants. Remaining long-term debt, including current maturities, was $279,000, excluding credit-line borrowings.
Material changes and unusual items
- Solutions sales rose 21.1% to $2.188 million; Products sales rose 3.0% to $2.731 million. Within Products, commercial sales fell 28.9% to $1.166 million, while government products and R&D-services sales increased 55.0% to $1.565 million, primarily reflecting higher U.S. Navy sales. Solutions backlog was $1.0 million, versus $0.7 million a year earlier.
- Gross margin improved in both segments. Management cited better Solutions execution, improved commercial-product margins from supply-chain work, and a more favorable government-products sales mix.
- Convertible-note holders converted $6.145 million of principal into 26,717,393 common shares effective March 31, 2014. The conversion reduced reported long-term debt but triggered a one-time charge of approximately $2.7 million, including a $2.3 million noncash write-off of unamortized debt discount, $154,000 of additional interest through September 30, 2014, and $293,000 of loan-origination-cost write-offs. Management said that excluding the debt-discount write-off, Q1 net loss would have decreased by $92,000 year over year.
- Shares outstanding were 78,154,330 at May 9, 2014, compared with 51,421,937 at December 31, 2013. The conversion materially increased the share count.
- Net R&D expense reported in the income statement was $191,000 versus $37,000. Management reported gross R&D expense of $320,000 versus $1.107 million, with lower government-contract cost recovery and credits contributing to the higher net expense.
Outlook, risks and contingencies
The filing provides no specific numerical earnings or revenue guidance. Management said future performance depends on growing sales in military, maritime, commercial and industrial markets; improving Solutions execution, margins and supply-chain performance; developing technologies into sustainable products; and controlling costs. The company stated it may need additional financing for operations, working capital and growth, and that financing was not assured. If funding is unavailable, it may need to delay or scale back its plan, reduce costs or headcount. Potential funding sources include equity or debt issuance, other financing, or a sale or divestiture of an operating unit, with risks including dilution and restrictive or unavailable financing.
The filing notes that the auditor’s opinion accompanying the 2013 annual report raised substantial doubt about the company’s ability to continue as a going concern. At March 31, 2014, accumulated deficit was $87.1 million. The company also disclosed customer concentration and other operating and market risks by reference to its 2013 Form 10-K; it reported no significant changes to those risk factors. Foreign-exchange exposure included £-denominated UK cash valued at $61,000. The pool-business sale included customary indemnification obligations secured by escrow; the transition-services agreement continued through April 30, 2014.
Investor verification points
- Assess cash availability and cash burn, including restricted and escrowed amounts, escrow release timing, and the company’s need and ability to secure further financing.
- Verify the effect of the convertible-note conversion on debt service, future interest expense and dilution; review the reconciliation of the reported one-time charge.
- Monitor credit-facility availability, covenant compliance and the December 2014 expiration, as well as borrowing-base limits.
- Track whether revenue growth and gross-margin gains persist, particularly given the decline in commercial-product sales and the reliance on government/Navy demand.
- Review the going-concern disclosure, backlog conversion, customer concentration, and any developments in the pool-sale escrow or indemnification obligations.