ENERGY FOCUS, INC annual report, FY2013

Energy Focus, Inc. — 2013 Form 10-K

Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Energy Focus designs, develops, manufactures and sells energy-efficient LED lighting products and turnkey retrofit solutions. In November 2013, it sold its pool products business and refocused on LED lighting.

Financial performance and liquidity

Metric	2013	2012
Continuing-operations revenue	$21.533 million	$23.375 million
Gross profit / margin	$4.579 million / 21.3%	$3.972 million / 17.0%
Operating loss	$6.757 million	$5.910 million
Continuing-operations net loss	$6.947 million	$6.576 million
Net loss, including discontinued operations	$2.361 million	$5.709 million
Operating cash used	$7.215 million	$6.966 million
Cash and cash equivalents at year-end	$2.860 million	$1.181 million
Net carrying value of debt	$4.070 million	$4.139 million, including credit-line borrowings

Revenue from continuing operations fell 8%, mainly because commercial sales declined $2.5 million. A large customer’s 2012 purchases were approximately $2 million lower in 2013; solutions revenue also declined 7%.
Gross margin improved through supply-chain improvements, product mix and better execution in solutions, despite lower sales. Products gross margin rose to 26.5% from 19.9%; solutions margin rose to 15.1% from 13.4%.
The reported 2013 net loss includes $4.586 million of income from discontinued operations, including a $3.915 million gain on the pool-business sale. The continuing business remained materially loss-making.
Cash from investing activities was $4.603 million, including $4.816 million net sale proceeds. Financing activities provided $4.278 million, including $6.124 million of borrowing proceeds and repayment of the credit line.
Year-end current assets were $10.777 million and current liabilities $5.819 million. Cash included $94,000 of restricted funds and $500,000 held in escrow; the company also reports $1.0 million of cash collateral for surety bonding. Thus, reported cash is not wholly freely available.

Material changes and unusual items

The pool products business was sold for a stated $5.2 million cash purchase price; $500,000 was placed in escrow. The sale generated $4.816 million in net cash proceeds and a $3.915 million gain. Pool-business revenue was reclassified to discontinued operations.
Management relocated manufacturing from Mexico and consolidated production in Solon, Ohio following the sale and facility closures. Restructuring expense was $80,000; the company also recorded a $608,000 impairment on assets held for sale and a $325,000 tradename write-off.
A settlement of EFLS acquisition obligations produced an $892,000 gain after a $200,000 payment and cancellation of specified fees and debt, including accrued interest.
The company issued unsecured convertible notes bearing 5% interest, generally convertible at $0.23 per share, with maturities principally in 2016. Notes totaling $1.5 million were converted into common shares during 2013. The reported debt balance is reduced by substantial unamortized discounts.
Management reported significant executive turnover during 2013 and recorded $448,000 of separation costs.

Outlook, risks and contingencies

The auditor stated that substantial doubt exists about the company’s ability to continue as a going concern, citing recurring losses and insufficient internally generated cash. Management said additional financing may be needed and discussed debt or equity financing and possible asset or business sales; success is not assured.
Management’s stated priorities are growing military, maritime, commercial and industrial LED sales; improving solutions-business efficiency and gross margins; developing sustainable products; reducing costs; and improving supply-chain performance. No quantified revenue or earnings guidance is provided. Expected 2014 capital expenditures were approximately at the 2013 level.
Customer concentration is significant: the ten largest continuing-operations customers represented about 60% of 2013 sales. Johnson Controls accounted for approximately 14%, the U.S. Navy 13%, and Seiberlich Trane 12%.
Solutions backlog was $1.9 million at year-end and may be canceled, delayed or reduced. Fixed-price projects and percentage-of-completion estimates expose results to cost overruns and revisions.
Risks include continuing cash burn and financing availability, potential dilution, strong competition, LED adoption and technology changes, dependence on major customers, suppliers and government funding, and access to surety bonds. The credit facility expires December 31, 2014; the company reported covenant compliance at year-end.
Both reportable segments posted operating losses in 2013: solutions $875,000 and products $837,000. The company had an accumulated deficit of $83.0 million and reported $72.1 million of tax-loss carryforwards, of which approximately $14.5 million remained available after Section 382 limitations.

Fourth-quarter snapshot

Fourth-quarter continuing-operations revenue was $6.595 million, versus $7.111 million in fourth-quarter 2012; gross profit was $1.528 million versus $1.008 million. The company recorded a $2.459 million continuing-operations loss and $3.856 million of discontinued-operations income, resulting in $1.397 million of net income for the quarter, largely reflecting the business sale.

Important facts for investors to verify

Near-term cash needs, unrestricted liquidity, financing availability and the company’s ability to continue as a going concern.
Convertible-note terms, conversion status, debt discounts, warrants and potential dilution from outstanding securities.
Whether gross-margin gains and cost reductions can persist while continuing-operations revenue and cash flow remain weak.
Customer concentration, solutions backlog conversion, project economics and exposure to government funding.
Availability of cash collateral and escrow funds, surety-bond capacity, and renewal or replacement of the credit facility expiring in 2014.