Energy Focus, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. Amounts are in U.S. dollars unless noted.
Business context
Energy Focus designs, manufactures, markets and installs energy-efficient lighting. Its two segments are turnkey lighting solutions, primarily for public-sector buildings, and lighting products for pool, commercial, industrial and government customers. The company describes typical electricity-cost savings from its technology as approximately 80%.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net sales | $5.333 million | $5.302 million; up less than 1% |
| Gross profit and margin | $1.201 million; 22.5% | $0.785 million; 14.8% |
| Operating loss | $1.205 million | $1.686 million |
| Net loss | $1.428 million; $0.03 per share | $1.867 million; $0.06 per share |
| Cash used in operations | $1.958 million | $4.980 million |
| Cash and cash equivalents, including restricted cash | $452,000 | $1.181 million at Dec. 31, 2012 |
| Total debt, including credit-line borrowings | $5.5 million | $4.1 million at Dec. 31, 2012 |
Gross margin improvement reflected stronger results in both segments, including better solutions-project installation progress and improved pool and commercial product margins. Solutions revenue rose 10% to $1.807 million; products revenue fell 4% to $3.526 million, mainly due to lower government-product sales. Solutions backlog was $0.7 million, versus $1.7 million a year earlier.
At March 31, current assets were $9.268 million and current liabilities $9.744 million, implying negative working capital of approximately $476,000. Total liabilities of $13.290 million exceeded assets of $12.695 million, leaving shareholders’ equity of negative $595,000. The company used $125,000 in investing activities and received $1.360 million net from financing activities during the quarter.
Material changes, outlook and risks
- The company raised $1.75 million of unsecured convertible debt in Q1 as part of a program to raise up to an additional $3.8 million. The notes bear 5% annual interest, mature December 31, 2016, and are convertible at $0.23 per share beginning July 31, 2013. Management expected a further $2 million in Q2; receipt was not assured.
- The independent auditor’s 2012 report raised substantial doubt about the company’s ability to continue as a going concern. Management said it needed to improve margins, execute its solutions sales plans, obtain and fulfill additional orders under a $23.1 million U.S. Navy supply contract, develop new products, reduce costs and improve supply-chain performance.
- Management identified potential additional funding sources including debt, equity or sale of operating units, and warned that financing may not be available or may impose unacceptable terms or dilute shareholders. The company had an accumulated deficit of $82.1 million and low cash reserves.
- A $4.5 million asset-based revolving credit facility expires December 31, 2014; borrowings were $1.2 million at quarter-end. The company reported compliance with its financial covenants. The facility is secured by domestic assets and carries rates of 8.5% on receivables, 10% on inventory and 13% on overdrafts.
- Accrued liabilities include $626,000 related to contingent obligations from the SRC acquisition. These include a $500,000 fee if the stock-price condition is not met by June 30, 2013. The company also amended a business-development agreement with a company associated with its non-executive chairman, committing to an additional $425,000 through December 2013 and a 5% commission on qualifying territory sales.
- Deferred tax assets in the U.S. are fully reserved. Management noted that approximately $70.7 million of tax-loss carryforwards may be significantly limited under Section 382.
Important facts for investors to verify
- Whether the anticipated Q2 convertible-debt proceeds were received and whether further financing was secured.
- Current cash availability, restricted-cash conditions, credit-facility borrowing capacity and covenant compliance.
- Progress on the Navy contract, solutions backlog and execution of management’s margin and cost-improvement plans.
- The status and final amount of the SRC contingent obligations, including the June 2013 stock-price condition.
- Potential dilution from convertible notes and outstanding options and warrants; the filing reported 44,698,650 common shares outstanding as of May 10, 2013.