Energy Focus, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022. Energy Focus designs, manufactures, markets, and sells energy-efficient LED lighting and controls for commercial, military maritime (MMM), and consumer markets.
Key financial results
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $930,000 | $2.061 million |
| Gross profit (loss) | $17,000; 1.8% margin | $(26,000); (1.3%) margin |
| Operating expenses | $1.220 million | $2.630 million |
| Loss from operations | $(1.203) million | $(2.656) million |
| Net loss | $(1.333) million | $(2.821) million |
| Net loss per share, basic and diluted | $(0.08) | $(0.44) |
| Net cash used in operating activities | $(1.183) million | $(2.703) million |
Commercial sales fell to $321,000 from $1.134 million; MMM sales declined to $609,000 from $927,000. Three customers represented approximately 60% of Q1 2023 revenue, and military products accounted for about 49%.
At March 31, 2023, cash was $301,000, total assets were $8.613 million, total liabilities were $5.658 million, and stockholders’ equity was $2.955 million. Cash increased from $52,000 at year-end, supported by financing proceeds. Debt was approximately $1.7 million, including about $400,000 under the inventory facility and $1.3 million on the 2022 Streeterville note. Current liabilities were $4.683 million. The company reported an accumulated deficit of $150.4 million.
Changes and financing
- Revenue decreased 55% year over year. Management attributed lower MMM sales partly to an interrupted sales pipeline following a change in MMM sales leadership; commercial sales weakness reflected delayed or paused retrofit projects.
- Gross profit improved from a loss, but remained near break-even. Management cited lower fixed production costs and favorable freight, material and labor, and inventory-reserve variances; these favorable items contributed materially to the quarter’s margin.
- Operating expenses declined 54%, primarily due to lower payroll and payroll-related costs and reduced severance. Net loss narrowed 53%.
- Operating cash use improved year over year but remained substantial. Financing activities provided $1.432 million, including $3.025 million from common-stock issuance, offset in part by credit-facility and note repayments.
- Common shares outstanding increased from 9.85 million at December 31, 2022 to 19.24 million at March 31, 2023, reflecting private placements and debt-for-equity exchanges. These transactions improved reported equity and reduced debt, but substantially diluted existing holders.
Outlook, liquidity, and risks
Management stated that substantial doubt about the company’s ability to continue as a going concern remains, citing continuing losses, operating cash use, limited cash, and the need for additional financing. Management believes its funding plans, cost reductions, inventory actions, and sales and product initiatives could support operations for the next 12 months if successfully executed; however, funding may not be available on acceptable terms or at all.
No numerical revenue or earnings guidance was provided. Management planned to launch the second-generation EnFocus powerline-control switches and circadian lighting system in 2023 and continue developing RedCap products and sales channels. Execution is exposed to long and unpredictable sales cycles, delayed commercial and government projects, intense price competition, supply-chain and logistics constraints, and customer concentration.
- Nasdaq listing: The company had failed the $1.00 minimum bid-price requirement and faced a delisting determination. On May 1, 2023, after the reporting date, the Nasdaq Hearings Panel allowed continued listing subject to filing this report demonstrating compliance with the stockholders’ equity requirement by May 15 and regaining bid-price compliance by July 7, 2023. The company said it believed it had regained the equity requirement; continued listing was not assured.
- Debt and liquidity: The inventory facility was amended, its maximum availability reduced to $500,000, and the receivables facility was terminated. The Streeterville note requires scheduled payments, including 2023 payments; the note provides for a 15% increase in the outstanding amount if the common stock is delisted from Nasdaq.
- Commitments and concentrations: Inventory purchase commitments totaled approximately $1.391 million, including $733,000 to a related party; nearly all were expected to ship in Q2 2023. Major customers also represented substantial portions of receivables. One offshore supplier accounted for about 36% of accounts payable.
- Other items: A $445,000 Employee Retention Tax Credit receivable remained outstanding. Management reported no material legal proceedings and concluded disclosure controls were effective as of March 31, 2023.
Important facts for investors to verify
- Whether the company obtained sufficient additional financing to fund operations and whether cash burn and sales trends improved after Q1.
- Whether Nasdaq bid-price and stockholders’ equity requirements were met by the Panel’s deadlines and listing was maintained.
- Whether the Streeterville note and inventory-facility obligations were paid, refinanced, or otherwise amended as scheduled.
- Whether planned EnFocus and RedCap product launches and expected sales-channel improvements translated into revenue and sustainable gross margins.
- Whether the $445,000 ERTC receivable was collected, and how related-party inventory commitments and customer concentration affected liquidity and results.