Energy Focus, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Energy Focus designs, manufactures, markets and installs energy-efficient lighting, through solutions and products segments. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Financial performance
- Q3 revenue: $5.99 million, down 24% year over year. Gross profit was $1.41 million (23.6% margin), versus $1.96 million (24.8%) a year earlier. Operating loss was $1.46 million and net loss was $1.65 million, or $0.03 per share, compared with a $0.93 million net loss, or $0.02 per share.
- Nine-month revenue: $18.70 million, down 10%. Gross profit rose to $4.64 million (24.8% margin) from $4.45 million (21.3%). Operating loss widened to $3.92 million from $3.20 million; net loss was $3.76 million, compared with $3.70 million.
- Segments: Q3 solutions revenue increased 2% to $2.10 million, while products revenue fell 33% to $3.88 million. Nine-month solutions revenue increased 1% to $5.89 million; products revenue declined 15% to $12.81 million. Solutions backlog was $4.0 million, versus $2.6 million one year earlier.
- Cash flow: Nine-month operating cash use was $4.26 million, improved from $6.17 million. Investing cash use was $0.17 million; financing provided $4.20 million. Cash declined $0.23 million to $0.95 million from year-end 2012.
- Liquidity and debt: Current assets were $9.97 million and current liabilities $8.53 million. Total debt, including the credit line, was approximately $5.1 million; the credit line balance was $0.84 million. Long-term debt, net of discounts and current maturities, was $4.25 million. Shareholders’ equity was only $21,000.
Material changes and unusual items
- Q3 sales weakness primarily reflected lower pool, commercial and government products sales. Products gross margin improved, which management attributed mainly to supply-chain improvements; solutions margins weakened amid lower-margin projects and installation timing.
- During the first nine months, the company raised $5.2 million through unsecured convertible notes bearing 5% interest and convertible at $0.23 per share. Notes outstanding totaled $5.745 million before discounts. $1.0 million was converted into shares during Q2; a further $0.5 million was converted into 2.2 million shares on October 16. The company reported 51.35 million common shares outstanding on November 8, versus 49.16 million at September 30.
- A June settlement of acquisition-related obligations generated a reported $0.892 million gain, including cancellation of a $0.5 million fee and a $0.5 million note plus interest, in exchange for a $0.2 million payment. The company also wrote off $0.325 million of tradename assets and recorded $79,000 of restructuring costs after moving manufacturing from Mexico to facilities in California and Ohio.
Outlook, risks and contingencies
- The filing provides no specific revenue or earnings guidance. Management said profitability depends on improving margins, executing sales plans for turnkey solutions, securing and fulfilling further orders under a $23.1 million U.S. Navy contract, developing products, reducing costs and improving supply-chain performance.
- The company has a history of losses, an accumulated deficit of $84.4 million and limited cash. Its auditor’s 2012 opinion raised substantial doubt about its ability to continue as a going concern. Management was pursuing additional financing and reported raising a further $0.9 million in convertible debt through November 13, but said funding was not assured. Additional debt or equity could carry restrictive terms or dilute shareholders.
- On November 13, the company disclosed negotiations to sell its Fiberstars-brand pool product lines. There was no binding agreement; completion would require satisfactory terms, buyer due diligence, lender consent and other conditions.
- The $4.5 million asset-based credit facility expires December 31, 2014; the company was in compliance with its financial covenants at September 30. The facility is secured by domestic assets and includes early-termination charges.
- Other risks include collection of receivables, execution of cost reductions and sales plans, and possible restrictions on using approximately $70.7 million of tax-loss carryforwards under Section 382. The company recorded a full U.S. valuation allowance against deferred tax assets.
Key facts for investors to verify
- Whether the company can secure enough financing to fund operations, and the resulting debt terms and share dilution.
- Whether products sales stabilize and solutions projects convert from backlog to revenue and completed installation, supporting improved margins and cash generation.
- Whether the Fiberstars sale negotiations result in a definitive transaction and receive lender consent.
- The remaining convertible-note maturities, discounts, conversion activity and potential impact on shares outstanding.
- Whether the going-concern uncertainty, low equity balance and operating cash burn improve in subsequent filings.