Energy Focus, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; financial statements are unaudited. Energy Focus designs, manufactures, markets, and installs energy-efficient lighting. Its reportable segments are turnkey lighting solutions and lighting products, including military, commercial, industrial, and pool products.
Financial performance
Amounts below are in millions of dollars except per-share data and margins.
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $5.302 | $5.460 |
| Gross profit / gross margin | $0.785 / 14.8% | $1.159 / 21.2% |
| Operating loss | $(1.686) | $(2.675) |
| Net loss | $(1.867) | $(2.813) |
| Net loss per share, basic and diluted | $(0.06) | $(0.12) |
| Cash used in operating activities | $(4.980) | $(2.849) |
| Cash used in investing activities | $(0.012) | $(0.117) |
| Cash provided by financing activities | $4.581 | $0.413 |
- At March 31, cash and cash equivalents were $1.733 million, including $72,000 restricted cash; total current assets were $9.997 million and current liabilities were $8.628 million, implying working capital of $1.369 million.
- Total borrowings were approximately $2.3 million: $1.304 million drawn on the revolving credit line and approximately $1.016 million of net long-term borrowings, including current maturities. The company reported $1.0 million of cash collateral pledged to its surety carrier.
- Gross research and development costs were $1.179 million, substantially offset by contract cost recovery and other credits; reported R&D expense was $46,000.
Changes versus Q1 2011
- Revenue declined about 3%. Solutions sales fell to $1.640 million from $2.602 million, while product sales rose to $3.662 million from $2.858 million, primarily attributed to U.S. Navy contract shipments. International sales declined to $515,000 from $907,000.
- Gross profit fell $374,000 and consolidated gross margin contracted 6.4 percentage points. Management attributed the decline mainly to lower solutions sales and margins, including projects with materials shipped but installation not yet completed and unfavorable cost adjustments.
- Net loss improved by $946,000, supported by lower sales and marketing and general and administrative expenses. However, operating cash outflow increased by $2.131 million, reflecting a $1.584 million cash use from receivables, inventories, and other assets and a $2.158 million decrease in accounts payable and accrued liabilities.
- Cash declined $403,000 during the quarter. Financing included $4.827 million net proceeds from stock issuance and $603,000 of net credit-line borrowings; the company also paid $849,000 on other borrowings.
Outlook, risks, and unusual items
- No specific quarterly or annual financial guidance was provided. Management said profitability depends on continued cost reductions, improved gross margins, execution of sales plans and the $23.1 million U.S. Navy supply contract, development of new products, and supply-chain improvements.
- The 2011 auditor’s report raised substantial doubt about the company’s ability to continue as a going concern. Management said it remained optimistic about obtaining capital but could not assure success and was considering external financing, a possible operating-unit sale or divestiture, and equity or debt issuance.
- The February–March 2012 offering raised $4.9 million by selling 19.6 million common-stock units at $0.25 each. Each unit included one share and one-half warrant; the warrants cover up to 9.8 million additional shares at $0.54 and expire after three years. The offering materially increased shares outstanding, from 24.913 million at year-end to 44.513 million at March 31.
- The $4.5 million asset-based revolving facility is secured by domestic assets, carries variable rates of 8.5%–13.0% depending on collateral/borrowing type, and includes financial covenants. The company reported covenant compliance at quarter-end. The filing lists $804,000 of long-term borrowing maturities in 2013.
- Related-party activity included $500,000 of revenue and $800,000 of subcontractor services in Q1 2012; related-party receivables, including retainage, were $700,000 and payables were $1.1 million at quarter-end. The company also disclosed a $500,000 convertible note due June 2013 and a possible additional $500,000 fee if the share-price condition is not met.
- Management reported disclosure controls were effective and no significant changes in internal control during the quarter. The filing reported no significant changes to the risk factors in the 2011 Form 10-K.
Important facts for investors to verify
- Whether operating cash burn can be reduced and additional funding obtained before liquidity becomes insufficient; the going-concern uncertainty remains material.
- Progress, timing, margins, and cash collection for the U.S. Navy contract and the solutions backlog, which was $1.7 million versus $3.5 million a year earlier.
- Terms, availability, and covenant headroom under the revolving credit facility, as well as debt maturities and the collateral pledged to lenders and surety providers.
- Potential dilution from the offering warrants and other outstanding options and warrants; approximately 15.304 million options and warrants were excluded from diluted loss per share as anti-dilutive.
- The filing’s segment margin disclosures should be reconciled: narrative margins do not appear to match gross profit and sales amounts in the segment tables.