ENERGY FOCUS, INC. The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the financial statements and
related notes thereto included in Part I, Item 1, "Financial Statements" of this
Quarterly Report, as well as Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," of our Annual Report on Form
10-K for the year ended
Overview
Net sales decreased 30% for the three months ended
Despite continuing progress throughout 2020, operating losses increased by 82.0%
in the first three months of 2021 over the first quarter of 2020. The Company's
results reflect the challenges due to long and unpredictable sales cycles,
unexpected delays in customer retrofit budgets and project starts, and
unexpected supply chain issues exacerbated by the COVID-19 pandemic. There has
also been continuing aggressive price competition in the lighting industry. We
continued to incur losses and we have a substantial accumulated deficit, which
continues to raise substantial doubt about our ability to continue as a going
concern at
The novel coronavirus ("COVID-19") pandemic in particular has, and may continue to have, a significant economic and business impact on our company. In the first quarter of 2021, following a slowdown throughout 2020, we have seen a continuing weakness in commercial sales as customers in the healthcare, education, and commercial and industrial sectors delayed order placements in reaction to the ongoing impacts of the COVID-19 pandemic that caused organizations to suspend or postpone lighting retrofit projects due to budget and occupancy uncertainties.
We continue to monitor the impact of the COVID-19 pandemic on our customers, suppliers and logistics providers, and to evaluate governmental actions being taken to curtail and respond to the spread of the virus. The significance and duration of the ongoing impact on us is still uncertain. Material adverse effects of the COVID-19 pandemic on market drivers, our customers, suppliers or logistics providers could significantly impact our operating results. We also plan to continue to actively follow, assess and analyze the ongoing impact of the COVID-19 pandemic and continue to adjust our organizational structure, strategies, plans and processes to respond.
Because the situation continues to evolve, we cannot reasonably estimate the ultimate impact to our business, results of operations, cash flows and financial position that the COVID-19 pandemic may have. Continuation of the COVID-19 pandemic and government actions in response thereto could cause further disruptions to our operations and the operations of our customers, suppliers and logistics partners and could significantly adversely affect our near-term and long-term revenues, earnings, liquidity and cash flows. We aim to stay agile as an organization to respond to potential or continuing weakness in the macro environment and in the meantime expand sales channels and enter new markets, such as UVCD, that might be able to provide additional growth opportunities.
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It is our belief that the momentum of the efforts undertaken in 2020, as described in our 2020 Annual Report, along with the development and launch of new and innovative products, will over time result in improved sales and bottom-line performance for the Company.
We launched our EnFocus™ platform during the second quarter of 2020 and continued to receive positive feedback from existing, new, and potential new customers. The EnFocus™ platform offers two immediately available product lines: EnFocus™ DM, which provides a dimmable lighting solution, and EnFocus™ DCT, which provides both a dimmable and color tunable lighting solution. EnFocus™ enables buildings to have dimmable, color tunable and circadian-ready lighting using existing wiring, without requiring laying additional data cables or any wireless communication systems, through a relatively simple upgrade with EnFocus™ switches and tubular LEDs, a far more affordable and environmentally sustainable solution compared with replacing entire lighting fixtures and incorporating additional wired or wireless communication.
In addition, in response to the COVID-19 pandemic and an anticipated increase in sanitation and hygiene demand for buildings, facilities and homes, we are developing advanced UVCD products for both consumer as well as the commercial and industrial markets. We announced the following three UVCD products in the fourth quarter of 2020: abUV™ circadian lighting and UVCD air disinfection integrated troffers controlled by the EnFocus™ platform technology; nUVo™ portable disinfection device for offices and homes; and mUVe™ autonomous robot designed for surface disinfection. These UVCD products are expected to be available in the third quarter of 2021. In the first quarter of 2021, we further announced plans for the nUVo™ Traveler personal air disinfection device and the mUVeCrewTM robotic surface disinfection service program, both expected also to be available in the second quarter of 2021.
In our MMM business, significant efforts undertaken to reduce costs in our
product offerings have positioned us to be more competitive in this segment,
along with improved production efficiencies. Such efforts allowed us to continue
to win bids and proposals that helped grow our MMM sales throughout 2020,
offsetting some of the weakness being experienced in our commercial business. In
addition, during the fourth quarter of 2020, we became an approved supplier for
the
Meanwhile, we continue to seek additional external funding alternatives and sources to support our growth strategies, plans and initiatives. We plan to achieve profitability through developing and launching new, innovative products, such as EnFocusTM and our UVCD products, as well as executing on our multi-channel sales strategy that targets key verticals, such as government, healthcare, education and commercial and industrial, complemented by our marketing outreach campaigns and expanding channel partnerships. We also plan to continue to develop advanced lighting and lighting control applications built upon the EnFocusTM platform. In addition, we intend to continue to apply rigorous financial discipline in our organizational structure, business processes and policies, strategic sourcing activities and supply chain practices to help accelerate our path towards profitability.
At
On
The Streeterville Note has a maturity date of
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months are limited to 50% of the outstanding balance. Beginning on the first day
of the calendar month following the date that is six months after the date of
purchase, Streeterville may require the Company to redeem up to
Results of operations
The following table sets forth items in our Condensed Consolidated Statements of Operations as a percentage of net sales for the periods indicated:
Three months ended
March 31,
2021 2020
Net sales 100.0 % 100.0 %
Cost of sales 79.0 72.7
Gross profit 21.0 27.3
Operating expenses:
Product development 24.8 7.5
Selling, general, and administrative 84.1 53.6
Restructuring (0.7) (0.4)
Total operating expenses 108.2 60.7
Loss from operations (87.2) (33.4)
Other expenses (income):
Interest expense 4.8 3.5
Gain on forgiveness of PPP loan (30.4) -
Gain from change in fair value of warrants - (23.1)
Other expenses 0.6 0.5
Net loss (62.2) % (14.3) %
Net sales
A further breakdown of our net sales is presented in the following table (in
thousands):
Three months ended
March 31,
2021 2020
Commercial $ 913 $ 1,736
MMM products 1,724 2,047
Total net sales $ 2,637 $ 3,783 Net sales of
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Gross profit
Gross profit was
Operating expenses
Product development
Product development expenses include salaries and related expenses, contractor and consulting fees, legal fees, supplies and materials, as well as overhead, such as depreciation and facility costs. Product development costs are expensed as they are incurred.
Product development expenses were
Selling, general and administrative
Selling, general and administrative expenses were
Restructuring
For the three months ended
Interest expense
Interest expense was
Gain on forgiveness of PPP loan
Forgiveness income of
Income from change in fair value of warrants
A gain of
Other expenses
Other expenses were
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Provision for income taxes
Due to the operating losses incurred during the three months ended
Net loss
For the three months ended
Financial condition
At
As a result of the restructuring actions and initiatives described above, we
have reduced our operating expenses to be more commensurate with our expected
sales volumes. However, we continue to incur losses and have a substantial
accumulated deficit, and substantial doubt about our ability to continue as a
going concern continues to exist at
Throughout 2020, as well as the first quarter 2021, we have continued to evaluate and assess strategic options as we seek to achieve profitability. We plan to achieve profitability through growing our sales by continuing to execute on our multi-channel sales strategy that targets key verticals, such as government, healthcare, education, and commercial and industrial, complemented by our marketing outreach campaigns and expanding channel partnerships. We also plan to continue to develop and launch advanced lighting and lighting control technologies and introduce impactful new products such as EnFocus™, a breakthrough lighting control platform we officially launched during the second quarter of 2020. In addition, during the last quarter of 2020, we announced newly developed UVCD products for both consumer, as well as commercial and industrial markets, that are expected to be available in the third quarter of 2021.
As described in Note 9, "Stockholders' Equity," in
The restructuring and cost cutting initiatives implemented during 2020, as well
as the
•obtaining financing from traditional or non-traditional investment capital
organizations or individuals;
•obtaining funding from the sale of our common stock or other equity or debt
instruments; and
•obtaining debt financing with lending terms that more closely match our
business model and capital needs.
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There can be no assurance that we will obtain funding on acceptable terms, in a timely fashion, or at all. Obtaining additional funding contains risks, including:
•additional equity financing may not be available to us on satisfactory terms, and any equity we are able to issue could lead to dilution for current stockholders and have rights, preferences and privileges senior to our common stock; •loans or other debt instruments may have terms and/or conditions, such as interest rate, restrictive covenants, conversion features, refinancing demands, and control or revocation provisions, which are not acceptable to management or our board of directors; and •the current environment in the capital markets combined with our capital constraints may prevent us from being able to obtain adequate debt financing.
If we fail to obtain the required additional financing to sustain our business before we are able to produce levels of revenue to meet our financial needs, we will need to delay, scale back or eliminate our growth plans and further reduce our operating costs and headcount, each of which would have a material adverse effect on our business, future prospects, and financial condition. A lack of additional funding could also result in our inability to continue as a going concern and force us to sell certain assets or discontinue or curtail our operations and, as a result, investors in the Company could lose their entire investment.
Considering both quantitative and qualitative information, we continue to believe that the combination of our plans to obtain additional external funding, timely re-organizational actions, current financial position, liquid resources, obligations due or anticipated within the next year, development and implementation of an excess inventory reduction plan, plans and initiatives in our research and development, product development and sales and marketing, and development of potential channel partnerships, if adequately executed, will provide us with an ability to finance our operations through the next twelve months and will mitigate the substantial doubt about our ability to continue as a going concern.
On
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Liquidity and capital resources
Cash
At
The following summarizes cash flows from operating, investing, and financing activities, as reflected in the Condensed Consolidated Statements of Cash Flows included in Part I, Item 1, "Financial Statements," of this Quarterly Report (in thousands):
Three months ended
March 31,
2021 2020
Net cash (used in) provided by operating activities $ (2,783) $ 504
Net cash used in investing activities $ (109) $ (47)
Net cash provided by financing activities $ 1,604 $ 2,104 Net cash (used in) provided by operating activities
Net cash used in operating activities was
Net cash provided by operating activities was
Net cash used in investing activities
Net cash used in investing activities was
For the three months ended
Net cash provided by financing activities
Net cash provided by financing activities during the three months ended
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warrants to purchase an aggregate of 310,860 shares remain outstanding at
Net cash provided by financing activities during the three months ended
Contractual obligations
As of
There have been no other material changes to our contractual obligations as compared to those included in our 2020 Annual Report.
Critical accounting policies
Fair value of warrant liabilities
Due to a potential cash settlement upon occurrence of a fundamental transaction within the warrant agreement, the warrants were initially classified as liabilities, as opposed to equity, and were recorded at their fair values at each balance sheet date for the first three quarters of 2020. We used the Black-Scholes valuation model to value the warrant liabilities at fair value. The fair value is estimated using the expected volatility based on our historical volatility and is determined using probability weighted average assumptions, when appropriate.
During
There have been no other material changes to our critical accounting policies as compared to those included in our 2020 Annual Report.
Certain risks and concentrations
We have certain customers whose net sales individually represented 10% or more of our total net sales, or whose net trade accounts receivable balance individually represented 10% or more of our total net trade accounts receivable; we have certain suppliers, which individually represent 10% or more of our total purchases, or whose trade accounts payable balance individually represented 10% or more of our total trade accounts payable balance, as follows:
For the three months ended
Our primary distributor for the
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One offshore supplier accounted for approximately 26.1% and 21.6%, respectively,
of our total expenditures for the three months ended
Recent accounting pronouncements
For information on recent accounting pronouncements, please refer to Note 2, "Basis of Presentation and Summary of Significant Accounting Policies," included under Part I, Item 1, "Financial Statements," of this Quarterly Report.
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