Energy Focus, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Energy Focus sells energy-efficient LED lighting and controls, primarily to commercial and military maritime markets, and is developing ultraviolet light disinfection (UVCD) products. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $5.964 | $2.915 | $13.082 | $9.174 |
| Gross profit / margin | $1.376 / 23.1% | $1.028 / 35.3% | $3.751 / 28.7% | $1.017 / 11.1% |
| Operating loss | $(1.012) | $(0.833) | $(3.204) | $(5.785) |
| Net loss | $(1.165) | $(0.946) | $(6.046) | $(6.065) |
| Basic and diluted loss per share | $(0.35) | $(0.38) | $(1.89) | $(2.47) |
- Q3 sales grew 104.6% year over year; nine-month sales grew 42.6%. Military maritime (MMM) sales drove growth, while commercial sales declined.
- At September 30, cash was $2.574 million, plus $0.342 million restricted cash. Current assets were $12.560 million and current liabilities $11.022 million. Stockholders’ equity was $2.139 million; accumulated deficit was $130.920 million.
- Management reported approximately $3.0 million of debt: $1.1 million under the inventory facility, $0.9 million under the receivables facility, $0.2 million under the Iliad Note, and $0.8 million under the PPP loan. Additional borrowing availability was $1.1 million and $1.2 million, respectively, under the inventory and receivables facilities. Warrant liabilities were $2.928 million.
- Nine-month operating cash use was $1.583 million, investing cash use $0.171 million, and financing cash provided $3.978 million. Cash increased by $2.224 million from year-end 2019.
Changes and notable items
- MMM sales rose to $4.508 million in Q3 from $1.182 million; commercial sales fell to $1.456 million from $1.733 million. For the first nine months, MMM sales were $8.832 million versus $3.327 million, while commercial sales were $4.250 million versus $5.847 million.
- Q3 gross margin fell to 23.1% from 35.3%, with supply-chain-related additional manufacturing costs adversely affecting the quarter by about 4.1% of sales. Nine-month margin improved from 11.1%, reflecting product mix and favorable manufacturing variances, among other factors.
- Q3 net loss increased despite higher sales, mainly due to higher cost of sales, product development and SG&A expenses, and increased interest and debt-extinguishment costs. Nine-month net loss was broadly unchanged; it included a $2.274 million noncash loss from warrant fair-value remeasurement. Q3 included a $0.153 million warrant remeasurement gain.
- Operating cash use improved from $6.329 million in the first nine months of 2019 to $1.583 million in 2020. Financing included a January equity-and-warrant offering that generated approximately $2.3 million net, warrant exercises, new credit facilities, and the PPP loan.
- The company completed a 1-for-5 reverse stock split on June 11, 2020; comparative per-share data and share counts were retroactively adjusted.
Outlook, risks and contingencies
- Management gave no quantified revenue or earnings guidance. It aims to reach profitability through new products, expanded sales channels, targeted verticals, and cost and sourcing discipline, while continuing to seek external financing.
- Management stated that substantial doubt about the company’s ability to continue as a going concern remained at September 30. It believes its plans and resources, if successfully executed, can fund operations for the next 12 months, but cautions that financing may not be available on acceptable terms or at all.
- COVID-19 delayed commercial orders and projects and disrupted supply chains; the ultimate business impact was uncertain. Long sales cycles, aggressive price competition, customer concentration, dependence on suppliers, and military funding and order timing are additional risks.
- Two customers represented approximately 66% of nine-month sales; U.S. Navy-related products were 58% of nine-month sales. The primary Navy distributor represented 73% of trade receivables at quarter-end. Two offshore suppliers represented 59% of accounts payable.
- Nasdaq notified the company of noncompliance with its $2.5 million stockholders’ equity requirement. After quarter-end, Nasdaq granted an extension through February 15, 2021 to regain compliance, subject to conditions; the notice did not immediately affect listing.
- The company had $9.8 million of inventory purchase commitments, including about $3.8 million expected to ship in Q4 2020. The PPP forgiveness application was submitted after quarter-end and forwarded to the SBA; forgiveness was not assured.
- After quarter-end, the company announced three UVCD products, with deliveries expected to begin in Q1 2021. Product performance, market acceptance, affordability and delivery timing remain uncertain.
Investor facts to verify
- Whether the company can secure additional funding and meet obligations while reducing its operating cash use.
- Progress toward Nasdaq equity-listing compliance by the February 15, 2021 deadline.
- Whether the PPP loan is forgiven, and the resulting repayment obligations if it is not.
- Whether Navy-driven sales and customer collections continue, and whether customer and supplier concentration changes.
- UVCD product launch timing, customer uptake, costs and margins, alongside recovery in commercial lighting demand.
- The effect of warrant revaluation and potential dilution from outstanding warrants and convertible preferred stock.