Energy Focus, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Energy Focus designs, develops, manufactures, and sells LED lighting products for commercial, industrial, and military maritime markets.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $5.172 million | $6.011 million | $9.831 million | $10.117 million |
| Gross profit / margin | $1.296 million / 25.1% | $1.501 million / 25.0% | $2.112 million / 21.5% | $2.062 million / 20.4% |
| Operating expenses | $3.097 million | $4.601 million | $6.323 million | $9.677 million |
| Net loss | $1.804 million | $3.114 million | $4.194 million | $7.636 million |
| Loss per share, basic and diluted | $0.15 | $0.26 | $0.35 | $0.65 |
For the first half, operating cash outflow was $2.300 million, versus $3.148 million in the prior-year period. Investing activities provided $183,000, mainly from equipment-sale proceeds; financing activities used $18,000. Cash and cash equivalents were $8.619 million at June 30, including $342,000 of restricted cash, compared with $10.761 million at year-end 2017. The company reported no debt obligations. Total liabilities were $4.255 million and stockholders’ equity was $15.508 million at June 30.
Changes and operating trends
- Q2 sales declined 14.0%; first-half sales declined 2.8% year over year. Commercial sales fell 42.6% in Q2 and 37.3% for the half, while military maritime sales rose 164.1% and 150.2%, respectively.
- Q2 gross margin was nearly unchanged year over year; first-half gross margin improved to 21.5% from 20.4%. First-half margin included $0.6 million of unfavorable manufacturing variances and absorption, partly offset by $0.4 million of favorable excess-inventory reserve adjustments.
- First-half operating expenses declined $3.4 million, principally following the 2017 restructuring. First-half net loss narrowed by $3.442 million.
- Management reported agency-channel sales increased 5.9% in Q2 versus Q1. Southeast and Western regional sales increased 90.7% in the first half versus the prior-year period.
Outlook, risks, and notable items
Management said it expects the combination of restructuring, available liquidity, executive reorganization, and sales-channel strategy to return the company to break-even levels in 2019. This is management’s expectation, not quantified earnings guidance. The filing states that substantial doubt about the company’s ability to continue as a going concern remained at June 30, 2018, notwithstanding management’s belief that its plans mitigate that doubt.
Key risks include continued operating losses and cash use, possible need for additional financing, unpredictable commercial project timing, reliance on a limited customer base, and dependence on Navy-related orders and government funding. Navy-related product sales represented approximately 33% of Q2 sales and 41% of first-half sales, according to the note’s combined distributor-and-shipbuilder figures. The filing also reports that three customers represented 30%, 17%, and 12% of net receivables at June 30. Management said no material changes had occurred to the risk factors from the 2017 annual report.
Restructuring liabilities were $262,000 at June 30, primarily remaining facility lease obligations; management expected insignificant additional costs and no further major restructuring in the near future. Adoption of ASC 606 on January 1, 2018 had no material effect. No income tax provision was recorded, and deferred tax assets remained fully valuation-allowed.
Important facts for investors to verify
- The customer-concentration disclosures conflict: the Note reports first-half sales of approximately 37% to the primary Navy distributor and 12% to the healthcare system, while MD&A reverses those percentages. Confirm the correct customer-level figures.
- Whether commercial demand and agency-channel expansion improve sufficiently to offset lower commercial sales and support the stated 2019 break-even objective.
- Whether operating cash use and available cash are consistent with management’s liquidity and going-concern assumptions, and whether external financing will be needed.
- How manufacturing under-absorption, inventory reserve adjustments, warranty estimates, and concentrated receivables may affect future margins and cash flow.