Energy Focus, Inc. — Q1 2021 Form 10-Q
Business and period. This unaudited quarterly report covers the three months ended March 31, 2021. Energy Focus designs and sells energy-efficient LED lighting and controls to commercial and military maritime markets, and is developing ultraviolet-C disinfection products.
Financial performance and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $2.64 | $3.78 |
| Gross profit / gross margin | $0.55 / 21.0% | $1.03 / 27.3% |
| Operating expenses | $2.85 | $2.30 |
| Operating loss | $(2.30) | $(1.26) |
| Net loss | $(1.64) | $(0.54) |
| Basic and diluted loss per share | $(0.45) | $(0.18) |
| Cash used in operating activities | $(2.78) | Cash provided: $0.50 |
| Cash, March 31 | $0.55 | — |
| Current liabilities, March 31 | $8.88 | — |
| Credit-line borrowings, March 31 | $3.42 | — |
Cash and restricted cash totaled $0.89 million at quarter-end, including $0.34 million of restricted cash. Total liabilities were $9.05 million and stockholders’ equity was $3.28 million. The company reported $0.3 million of additional borrowing availability under its credit facilities at March 31. The inventory facility’s disclosed annualized rate, including its service fee, was 22.4%.
Changes versus prior year
- Sales declined 30%. Commercial sales fell 47% to $0.91 million; military maritime products fell to $1.72 million, down approximately 16%.
- Gross margin contracted 6.3 percentage points. Product development expense increased by $0.37 million, primarily for UVCD development and testing; selling, general and administrative expense rose by $0.19 million.
- Operating loss widened 82%. Net loss increased despite an $0.80 million gain from forgiveness of the PPP loan. The prior-year quarter included an $0.87 million warrant revaluation gain, while no warrant liability or related remeasurement gain existed in Q1 2021.
- Operating cash flow shifted from $0.50 million provided to $2.78 million used, including $1.96 million used for inventory. Financing provided $1.60 million, including $1.08 million of net credit-facility proceeds and $0.53 million from warrant exercises.
Outlook, risks and unusual items
- Going concern and funding: Management reported substantial doubt about the company’s ability to continue as a going concern. It believes funding plans, cost actions, inventory reduction and business initiatives, if executed, can support operations for the next 12 months and mitigate that doubt. Additional financing is not assured; failure to obtain it could require further cuts, asset sales or curtailment of operations.
- Subsequent financing: On April 27, 2021, the company issued a Streeterville note with approximately $1.7 million principal and received approximately $1.5 million after original issue discount and transaction expenses. It bears 8% interest compounded daily, matures April 27, 2023, and may require monthly redemptions of up to $205,000 beginning after six months. On April 20, the inventory facility’s maximum commitment was increased from $3.0 million to $3.5 million, subject to its borrowing base.
- Demand and execution: Management cited COVID-19-related delays in commercial retrofit projects, long and unpredictable sales cycles, customer budget and occupancy uncertainty, supply-chain issues, aggressive price competition, and dependence on the timing of U.S. Navy orders and government funding. Two customers represented approximately 61% of Q1 sales; U.S. Navy-related products accounted for approximately 57%.
- Products: EnFocus lighting controls had launched in 2020. The company expected its announced UVCD products to become available in 2021; timing and market acceptance remain uncertain. No quantified financial guidance was provided.
- Commitments and listing: Inventory purchase commitments were approximately $4.2 million, with about $1.4 million expected to ship in Q2 2021. Nasdaq had conditionally determined the company regained compliance with its minimum stockholders’ equity requirement; equity was $3.28 million at quarter-end.
- The PPP loan principal and interest were forgiven on February 11, 2021. On April 1, 2021, 1,721,023 Series A preferred shares converted into 344,205 common shares. Management concluded disclosure controls were effective; no material legal proceedings were reported.
Important facts for investors to verify
- Whether cash burn, inventory levels and customer collections improve, and whether the company can secure sufficient funding to address the stated going-concern doubt.
- The Streeterville note’s redemption requirements and effective financing cost, along with actual borrowing availability under the asset-based facilities.
- Whether commercial demand recovers and the company reduces customer and supplier concentration while managing U.S. Navy order volatility.
- Whether UVCD product launches occur on schedule and achieve customer acceptance, and whether gross margins recover despite pricing and supply-chain pressures.
- Whether the company maintains Nasdaq listing compliance as losses continue and stockholders’ equity declines.