Energy Focus, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Energy Focus designs and sells LED lighting and controls for commercial, military maritime (MMM), and consumer markets. It said it had refocused its marketing on MMM and commercial and industrial lighting and controls after reassessing ultraviolet-C disinfection products.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1.764 million | $2.749 million | $5.305 million | $7.460 million |
| Gross profit (loss) | $(0.163) million | $0.563 million | $(0.080) million | $1.509 million |
| Gross margin | (9.2)% | 20.5% | (1.5)% | 20.2% |
| Operating loss | $(2.407) million | $(1.810) million | $(7.271) million | $(6.351) million |
| Net loss | $(2.662) million | $(1.140) million | $(7.969) million | $(5.255) million |
| Loss per share, basic and diluted | $(0.29) | $(0.22) | $(1.05) | $(1.22) |
- Revenue and mix: Sales fell 36% in Q3 and 29% over nine months. Q3 commercial sales declined 15% and MMM sales 61%; nine-month commercial sales declined 3% and MMM sales 52%.
- Margins and expenses: Lower sales volume, unfavorable product mix, inventory-reduction effects, and higher inbound freight contributed to the gross-margin deterioration. Operating expenses fell 5% in Q3 and 9% over nine months, but remained high relative to revenue.
- Cash flow: Nine-month operating cash use was $6.241 million, versus $8.420 million a year earlier. Investing cash use was $0.041 million; financing provided $3.641 million. Cash fell to $41,000 from $2.682 million at year-end 2021.
- Liquidity and debt: Current assets were $8.602 million and current liabilities $6.860 million. Management reported $4.8 million of debt, net of discounts and financing costs, and only $0.2 million of remaining Receivables Facility availability; the Inventory Facility had no availability. Inventory made up $6.156 million of current assets.
- Balance sheet: Total liabilities were $8.757 million and stockholders’ equity was $1.526 million, down from $6.209 million at December 31, 2021. Accumulated deficit was $146.710 million.
Material changes and unusual items
- Revenue declines were driven principally by lower and delayed Navy/government orders and timing of commercial projects. The company cited long sales cycles, customer budget delays, and supply-chain and logistics constraints.
- Q3 included a $76,000 write-off of ultraviolet-C disinfection robots deemed no longer useful. Inventory-reduction activity also affected gross profit; the company reported disposing of approximately $563,000 gross value of highly reserved excess and obsolete finished goods through September 30.
- Prior-year comparisons included $801,000 of PPP loan-forgiveness income in the first nine months of 2021 and ERTC-related income recognized in 2021. These items contributed to the larger year-over-year increase in nine-month net loss.
- The June 2022 private placement generated approximately $3.2 million net proceeds and included common shares and warrants. Common shares outstanding were 9,191,108 at September 30; the filing reports 9,577,026 outstanding as of November 7.
Outlook, liquidity risks, and contingencies
- Going concern: The company stated that substantial doubt about its ability to continue as a going concern remained. Management said its funding, cost-reduction, inventory, product-development, and sales-channel plans, if successfully executed, could finance operations for the next 12 months; it cautioned that this outcome was not assured.
- Funding and debt service: Energy Focus said it would continue seeking external financing, with no assurance of obtaining funds on acceptable terms or at all. Streeterville debt carries 8% interest compounded daily and redemption provisions; the 2022 note permitted monthly redemptions of up to $225,000 beginning December 1, 2022. Credit facilities are asset-backed and the Inventory Facility’s reported annualized borrowing cost, including fees, was 23.4%.
- Nasdaq: The company received notice that its share price did not meet the $1.00 minimum bid requirement. It had until February 20, 2023 to regain compliance; failure could lead to delisting. The Streeterville notes provide for a 15% increase in amounts outstanding upon delisting.
- Other risks: Customer and supplier concentration, government funding and award timing, aggressive price competition, supply-chain and freight costs, COVID-19-related project delays, and access to financing could materially affect results. Three customers accounted for approximately 38% of nine-month sales; one offshore supplier represented 45% of accounts payable at quarter-end.
- Subsequent events: In October, the company exchanged $205,000 of Streeterville debt for 385,918 common shares instead of making a cash redemption. After quarter-end it also disclosed additional short-term notes and bridge financing from board member Mei-Yun (Gina) Huang and Jay Huang. No quantified sales or earnings guidance was provided.
- The company reported no material legal proceedings and said disclosure controls were effective as of September 30, 2022.
Important facts for investors to verify
- Cash runway and near-term cash requirements, including Streeterville redemptions, related-party notes, facility terms, and any financing obtained after the filing.
- Whether Energy Focus regained Nasdaq’s minimum bid-price compliance by the stated deadline and whether any delisting-related debt provisions were triggered.
- Actual conversion of commercial project specifications and delayed MMM orders into revenue, and progress in restoring positive gross margins.
- Inventory quality, realization of planned inventory reductions, and whether supply-chain, freight, and customer-concentration risks are changing.
- Potential dilution from outstanding warrants, equity issuances, and debt-for-equity exchanges.