Energy Focus, Inc. — Q3 2018 Form 10-Q
Business and period: Energy Focus designs and sells energy-efficient LED lighting for commercial, industrial, and military maritime markets. This unaudited report covers the quarter and nine months ended September 30, 2018; comparisons are to the corresponding 2017 periods.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $5.16M | $5.00M | $14.99M | $15.12M |
| Gross profit / margin | $1.28M / 24.8% | $1.14M / 22.7% | $3.39M / 22.6% | $3.20M / 21.2% |
| Operating loss | $1.90M | $1.79M | $6.11M | $9.40M |
| Net loss | $1.92M | $1.77M | $6.11M | $9.41M |
| Basic and diluted loss per share | $0.16 | $0.15 | $0.51 | $0.80 |
- Q3 sales rose 3.1% as military maritime sales increased 171.7%; commercial sales fell 41.9%. For the first nine months, sales declined 0.9%, with commercial sales down 38.8% and military maritime sales up 158.0%.
- Q3 gross margin improved to 24.8%, primarily reflecting product cost-reduction initiatives. Nine-month margin improvement also reflected a more favorable military sales mix and inventory reserve adjustments.
- Q3 net loss increased year over year, principally because of severance and benefits costs, partly offset by lower product development expenses. Nine-month net loss improved by $3.3M, reflecting lower operating expenses, including $1.6M less restructuring expense.
Cash, liquidity, and balance sheet
- At September 30, 2018, cash and cash equivalents were $7.05M, including $0.34M of restricted cash; cash was $10.76M at December 31, 2017. The company reported no debt.
- Cash used in operating activities was $3.85M for the first nine months, compared with $4.68M in 2017. Investing activities provided $0.18M, mainly from equipment-sale proceeds; financing activities used $0.04M. Cash decreased $3.71M during the period.
- Total current assets were $17.71M and current liabilities $4.57M. Inventory was $6.43M; accounts payable increased to $3.00M from $1.63M at year-end.
- Accumulated deficit was $114.32M. Stockholders’ equity was $13.84M, down from $19.29M at December 31, 2017.
Outlook, risks, and notable items
- Going concern: Management stated that substantial doubt about the company’s ability to continue as a going concern remained at September 30, 2018, despite $7.1M of cash and no debt. Management believed its liquidity, cost reductions, business plans, and plans to seek external financing could fund operations through 2019 and mitigate the doubt if executed successfully.
- The company expects to pursue possible asset-based debt, traditional or nontraditional investment, and equity or debt offerings. Financing may not be available on acceptable terms or in time; equity financing could dilute shareholders, while debt could impose restrictive terms. Failure to obtain funding or generate cash could require further cost or headcount reductions.
- Customer concentration is significant: U.S. Navy-related sales were approximately 53% of Q3 revenue and 45% of nine-month revenue. The primary Navy distributor alone represented 48% and 41%, respectively. Two customers represented approximately 41% and 10% of nine-month sales; the primary Navy distributor and a Texas retrofit company were 42% and 14% of receivables at quarter-end.
- Commercial sales remain subject to long, variable project cycles; military sales depend on government funding, Navy awards, ship construction, and maintenance schedules. Management cited competition, customer concentration, and execution risks to its sales and profitability plans.
- Inventory purchase commitments totaled approximately $3.7M, with $2.5M expected to ship in Q4 2018 and the balance in Q1 2019. Restructuring liabilities were $0.24M; management anticipated insignificant additional restructuring costs and no major restructuring in the near term.
- The filing reports legal matters arising in the ordinary course but gives no clear quantified exposure. The CFO’s resignation resulted in severance and benefits costs. Disclosure controls were deemed effective, and the filing reported no material change in internal controls or risk factors from the 2017 Form 10-K.
Key facts for investors to verify
- Whether cash burn, sales performance, and available financing support management’s stated ability to fund operations through 2019.
- Whether military maritime growth can continue and commercial revenue can recover, given the high Navy and individual-customer concentration.
- The sustainability of gross-margin gains, including the effect of inventory reserve adjustments and low production volumes.
- Cash conversion and working-capital needs, including inventory commitments and the increased accounts payable balance.
- Any subsequent developments in financing, going-concern conditions, customer orders, or legal contingencies.