Energy Focus, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Unaudited consolidated results. Energy Focus designs, manufactures, markets, and installs energy-efficient lighting through product-based and turnkey solutions-based businesses.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $7.904 million | $6.046 million | $20.878 million | $19.699 million |
| Gross profit / margin | $1.959 million / 24.8% | $1.215 million / 20.1% | $4.448 million / 21.3% | $3.922 million / 19.9% |
| Operating loss | $0.777 million | $1.243 million | $3.202 million | $4.919 million |
| Net loss | $0.928 million | $1.459 million | $3.695 million | $5.445 million |
| Basic and diluted loss per share | $0.02 | $0.06 | $0.09 | $0.22 |
Q3 sales rose 31%, principally from Products. Nine-month Products sales increased 28% to $15.067 million, while Solutions sales declined 27% to $5.811 million. Q3 gross-margin improvement reflected higher Products and Solutions margins. For nine months, Products gross margin improved to 23.6%; Solutions margin slipped to 15.5% from 16.0%.
Operating expenses for the first nine months were $7.650 million, down from $8.841 million. Interest expense was $0.388 million, versus $0.581 million. The company remained loss-making despite improved sales and reduced losses.
Cash, liquidity, and debt
- Cash and cash equivalents were $0.380 million at September 30, 2012, down from $2.136 million at year-end 2011; the balance included $27,000 restricted cash. Separately, $1.0 million of collateralized assets was pledged to a surety carrier.
- Nine-month operating cash use was $6.168 million, compared with $2.688 million a year earlier. Investing cash use was $0.159 million; financing provided $4.561 million.
- Current assets of $8.299 million were below current liabilities of $9.457 million. The company reported $1.330 million outstanding on its revolving line and $1.038 million of long-term borrowings, including current maturities. Management described total debt as $2.4 million; the filing’s debt figures should be checked for scope and classification.
- The $4.5 million asset-based revolving facility expires December 31, 2014, carries rates of 8.5%–13.0% plus a 1% annual facility fee, and is secured by domestic assets. The company reported covenant compliance at quarter-end.
- A February–March stock-and-warrant offering raised approximately $4.9 million. Proceeds were used for debt repayment and working capital. The offering included 19.6 million common shares and warrants exercisable at $0.54; common shares outstanding were approximately 44.542 million at September 30.
Outlook, risks, and unusual items
Management identified cost reduction, margin improvement, sales execution for turnkey solutions, execution of a $23.1 million U.S. Navy supply contract, development of new products, and supply-chain improvements as important to reaching profitability. Solutions backlog was $2.6 million at September 30, up from $854,000 a year earlier. The filing provides no quantified revenue or earnings guidance.
The company stated it remained optimistic about obtaining funding but gave no assurance it would succeed; it was pursuing potential financing, asset sales, or further equity or debt issuance. Its 2011 auditor had raised substantial doubt about the company’s ability to continue as a going concern. The filing reports a $78.6 million accumulated deficit and warns that continued losses and operating cash use may require additional capital, which could dilute shareholders.
Other risks include collecting receivables, executing the Navy contract, competition and other adverse market factors, and litigation and intellectual-property costs. The credit facility has early-termination damages. Acquisition-related contingent liabilities included $842,000 recorded in accrued liabilities. The company also had a $500,000 related-party convertible note due June 30, 2013, with a possible additional $500,000 fee if the specified stock-price condition is not met. Management reported disclosure controls were effective and no significant changes in risk factors from its 2011 annual report.
Most important facts for investors to verify
- Cash runway, near-term funding needs, and whether additional financing or asset sales are required.
- Cash conversion and collection of receivables, given increased operating cash use and low cash on hand.
- Progress, timing, profitability, and cash requirements for the Navy contract and Solutions backlog.
- Debt and liquidity figures, including the reported $2.4 million total debt, facility availability, covenant compliance, and upcoming maturities.
- Potential dilution from the 2012 offering warrants and other outstanding options and warrants, and the terms of contingent and related-party obligations.