Energy Focus, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Energy Focus designs and sells LED lighting and controls, and is developing UV-C disinfection products, for commercial, military maritime, and planned consumer markets. Financial figures below are in U.S. dollars; amounts are in millions except per-share data.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $2.07 | $3.34 | $4.71 | $7.12 |
| Gross profit / margin | $0.39 / 18.9% | $1.34 / 40.3% | $0.95 / 20.1% | $2.38 / 33.4% |
| Operating expenses | $2.64 | $2.27 | $5.49 | $4.57 |
| Operating loss | $(2.24) | $(0.93) | $(4.54) | $(2.19) |
| Net loss | $(2.47) | $(4.34) | $(4.12) | $(4.88) |
| Loss per share, basic and diluted | $(0.59) | $(1.36) | $(1.05) | $(1.55) |
| Operating cash flow | $(3.32) | $(1.21) | $(6.11) | $(0.70) |
Q2 revenue fell 38%; first-half revenue fell 34%. First-half commercial sales declined to $1.99 million from $2.79 million, while military maritime sales declined to $2.72 million from $4.32 million. Q2 commercial sales were $1.08 million versus $1.06 million, but military maritime sales were $1.00 million versus $2.28 million. The six-month net loss was smaller than the prior year despite a substantially larger operating loss, partly because 2021 included $0.80 million of PPP loan forgiveness and 2020 included a $2.43 million warrant revaluation loss; the 2020 quarter also included a $3.30 million warrant loss.
Gross margin contracted materially year over year. Management attributed the first-half decline mainly to lower-margin product mix and noted favorable material and labor variances of $0.6 million, partly offset by $0.1 million of unfavorable inventory and warranty reserves. Operating expenses increased, including product development spending for UV-C products and higher payroll and stock-based compensation.
Liquidity, debt, and capital
- At June 30, cash was $1.33 million, plus $0.34 million of restricted cash unavailable until September 2021. Current assets were $12.32 million and current liabilities $7.75 million; inventory was $8.13 million.
- Management reported total debt of approximately $3.1 million: $1.2 million under the inventory facility, $0.4 million under the receivables facility, and $1.5 million under the Streeterville note. The company reported $2.8 million of additional borrowing availability under its facilities.
- The inventory facility’s annualized borrowing rate, including fees, was 21.62% at June 30. The Streeterville note carries 8% interest compounded daily, matures April 2023, and may require monthly redemptions of up to $205,000 beginning November 2021. Delisting from Nasdaq would increase its outstanding amount by 15%.
- First-half financing cash flow was $5.81 million, including approximately $4.5 million net proceeds from a June equity offering and $1.5 million from the Streeterville note; it was partly offset by $0.8 million of net credit-facility repayments. The offering issued 990,100 shares at $5.05 per share. Common shares outstanding were 5,085,274 at June 30, versus 3,525,374 at December 31, 2020.
- Stockholders’ equity was $5.60 million, accumulated deficit was $134.97 million, and the PPP loan was forgiven in February 2021, generating $0.80 million of first-half income.
Management outlook, risks, and unusual items
The filing gives no quantified revenue or earnings guidance. Management planned to launch two UV-C products in Q3 2021 and two in Q4 2021, and targeted a late-2021-to-early-2022 launch for its Suncycle circadian lighting system. Management expects growth to depend on new products, channel expansion, and sales to government, healthcare, education, commercial, industrial, and consumer markets.
Management stated that substantial doubt about the company’s ability to continue as a going concern remained at June 30. It believes its funding plans, cost actions, and operating initiatives, if adequately executed, could finance operations through the next 12 months and mitigate that doubt, but additional financing may not be available on acceptable terms or at all. Failure to secure funding could require further cost reductions, curtailment of growth plans, or reduced operations.
- COVID-19-related customer budget and occupancy uncertainty delayed commercial retrofit projects; government funding and timing of U.S. Navy awards affected military sales. Sales cycles are long and unpredictable, and competition is intense.
- Customer concentration is significant: two customers represented approximately 52% of first-half sales; U.S. Navy products accounted for approximately 47%. The primary Navy distributor represented 43% of receivables at quarter-end.
- One offshore supplier represented 32% of first-half expenditures and 68% of accounts payable at June 30. Supply-chain shortages and longer lead times contributed to inventory buildup; first-half operating cash use included $2.55 million invested in inventory.
- Outstanding inventory purchase commitments were approximately $3.3 million, with $2.6 million expected to ship in Q3 2021. The former New York lease obligation was settled June 30.
- Nasdaq had conditionally confirmed the company regained compliance with its minimum stockholders’ equity rule in January 2021. The filing reported no material legal proceedings and effective disclosure controls at June 30.
Key facts for investors to verify
- Whether cash burn and financing needs remain consistent with management’s stated ability to fund operations for 12 months, and whether further financing is obtained.
- Progress and commercial acceptance of the planned UV-C and Suncycle launches, including delivery timing and margins.
- Recovery in commercial retrofit demand and timing of U.S. Navy and other government orders, given customer concentration and sales volatility.
- Inventory quality and sell-through, supplier continuity, and the company’s ability to meet purchase commitments without further weakening liquidity.
- Potential dilution and repayment pressure from equity issuance, preferred shares, warrants, credit facilities, and Streeterville’s redemption and delisting provisions.