Energy Focus, Inc. — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; unaudited fourth-quarter results are also disclosed. The company designs and sells LED lighting and controls, ultraviolet-C disinfection products, and related solutions for commercial, military maritime, and, beginning in late 2021, consumer markets.
Financial performance
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Net sales | $9.9 million | $16.8 million |
| Gross profit / margin | $1.7 million / 17.2% | $5.2 million / 30.8% |
| Operating loss | $8.7 million | $4.1 million |
| Net loss | $7.9 million | $6.0 million |
| Net loss per share, basic and diluted | $1.73 | $1.83 |
| Cash used in operating activities | $9.8 million | $2.5 million |
| Cash at year-end | $2.7 million | $1.8 million |
| Total liabilities | $8.2 million | $8.1 million |
| Stockholders’ equity | $6.2 million | $4.3 million |
FY 2021 net sales fell 41.4%. Military maritime sales declined 54.6% to $5.2 million, while commercial sales declined 13.4% to $4.7 million. Lower volume drove roughly $1.0 million of fixed-cost under-absorption; unfavorable inventory and warranty reserve adjustments were about $0.3 million. Product development expense rose to $1.9 million from $1.4 million, and SG&A increased to $8.5 million from $7.9 million.
Cash from financing activities was $10.7 million, largely reflecting approximately $4.0 million net proceeds from a December private placement, $4.5 million from a June equity offering, and $1.5 million net proceeds from the Streeterville note. At December 31, credit-facility borrowings were $2.2 million and the Streeterville note was $1.7 million, net of discounts and fees. Credit facilities were scheduled to mature August 11, 2022; reported additional availability at year-end was $1.7 million. The inventory facility’s annualized rate, including fees, was 22.4% at year-end.
Fourth-quarter results
Q4 2021 net sales were $2.4 million, gross profit was $0.2 million, and net loss was $2.6 million. In Q4 2020, sales were $3.7 million, gross profit was $1.4 million, and net income was $65,000.
Material changes and significant items
- Revenue and gross margin weakened substantially year over year. Management attributed the decline to delayed commercial retrofit projects, limited and delayed government funding and Navy orders, COVID-19 impacts, and supply-chain disruption. MMM sales in 2020 had benefited from deferred government purchasing and a contract worth approximately $3.5 million.
- Operating cash use increased to $9.8 million, including a $2.4 million net increase in inventory. Net inventory was $7.9 million at year-end, after a $3.1 million reserve for excess, obsolete, and slow-moving inventory.
- FY 2021 results included $801,000 of PPP-loan forgiveness income and $876,000 of Employee Retention Tax Credit income. The PPP loan and interest were forgiven in February 2021; $431,000 of ERTC refunds had been received by year-end, with approximately $445,000 recorded as receivable.
- The company launched its nUVo Tower and Traveler UV-C air-disinfection products in Q4 2021. It planned additional UVCD products and a second-generation EnFocus lighting-control system for 2022.
- Two customers represented 43% of 2021 sales; sales of products for the U.S. Navy represented about 38%. One offshore supplier represented 29% of annual expenditures and 60% of trade accounts payable at year-end.
- Net proceeds from 2021 equity offerings and note financing provided liquidity but increased debt and potential dilution. At year-end, warrants to purchase approximately 1.36 million shares remained outstanding; the pre-funded warrants were exercised in January 2022.
Outlook, risks, and contingencies
The filing provides no quantitative revenue, earnings, or margin guidance. Management’s stated priorities are to grow sales through new products and expanded channels, reduce product costs, manage expenses and inventory, and pursue additional financing. Management said its plans, if executed, were expected to support operations through 2022; this depended in part on obtaining external financing and achieving sales and product-development objectives.
The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern, citing recurring operating losses and negative operating cash flows. The financial statements contain no adjustments for the outcome of that uncertainty. The company said it would likely need additional external financing in 2022 and could not assure funding would be available on acceptable terms or at all. Cash was approximately $0.3 million and net borrowings under the credit facilities approximately $1.6 million as of February 28, 2022.
Key risks include continuing COVID-19 and customer-project delays, supply and freight constraints, inventory valuation, intense price competition, customer and supplier concentration, dependence on government and Navy funding, and the need for financing. The Streeterville note permits monthly redemptions of up to $205,000 beginning November 2021; the company deferred two redemptions in Q4, each increasing the balance by 1.5%. Delisting from Nasdaq would increase the note balance by 15%. The company also disclosed an interim CEO and a search for a permanent CEO; its former CEO resigned from the board in February 2022. The Solon facility lease was due to expire June 30, 2022, and the company expected to enter a new lease.
Management reported effective disclosure controls and internal control over financial reporting at December 31, 2021. The independent auditor did not attest to management’s internal-control assessment. The filing reports no material legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the company secured sufficient financing after year-end, and its cash, borrowing availability, debt maturities, covenants, and redemption obligations.
- Whether sales and gross margin stabilized after the steep FY 2021 decline, including quarterly commercial and Navy-related order trends.
- Whether inventory can be converted to sales without further reserve increases or cash strain, and whether supply costs and lead times improved.
- Actual market acceptance, sales, margins, and funding needs for nUVo and EnFocus products versus management’s plans.
- The status of the permanent CEO search, facility lease renewal, and any subsequent share or warrant issuance and dilution.