November 13, 2024
Outlook for Energy Focus Dims as Losses Mount
Company cites “substantial doubt about our ability to continue as a going concern.”
Energy Focus Inc. (Nasdaq: EFOI), an Ohio-based maker of LED lighting products, has reported continuing financial struggles, as disclosed in its quarterly report filed on November 12, 2024, for the period ending September 30, 2024.
The company's report highlights significant concerns about its ability to continue operations, referencing “substantial doubt about our ability to continue as a going concern.” This disclosure follows years of declining sales and ongoing net losses, raising questions about the company's long-term viability in a competitive market.
Energy Focus, which generated $64 million in sales in 2015, has seen a steady decline in revenue over the years. For the first nine months of 2024, the company posted net sales of $3.6 million, a modest increase from $3.3 million in the same period last year, yet significantly below past sales figures. In a detailed article in Inside Lighting published in August 2024, titled "Financial Health of Energy Focus Remains Precarious" highlighted the ongoing challenges, including significant cash burn and sustained net losses.
The recent report recorded a $1.3 million net loss for the nine months ending in September 2024, adding to a $4.3 million loss for the previous fiscal year ending December 31, 2023.
The company's liquidity remains fragile, with operating activities using up $1 million in cash over the first nine months of 2024, following a $2.4 million depletion the previous year. Energy Focus is actively seeking external funding, acknowledging that without timely capital infusion, sustaining operations may become increasingly challenging.
Dependency on Funding and Military Sales
Energy Focus’s business model relies heavily on the U.S. military maritime sector, which accounts for a large portion of its sales. For the nine months ending September 30, 2024, military maritime products constituted $2.6 million of total net sales, compared to just $1 million from commercial markets. This 70/30 business split highlights the company’s reliance on defense contracts, which can be vulnerable to budgetary changes in government spending.
To mitigate cash flow concerns, the company has been exploring financing options, including loans, equity sales, and other financing mechanisms. However, it cautioned that “there can be no assurance that we will obtain funding on acceptable terms, in a timely fashion, or at all.” Additionally, the company has faced constraints in its inventory purchasing strategy due to global supply chain disruptions, affecting component availability and increasing lead times.
Two Nasdaq Listing Compliance Risks
The company's stock price has also encountered volatility, posing a risk to its Nasdaq listing status. In April 2023, Energy Focus executed a 1-for-7 reverse stock split in an effort to keep its stock price above the $1 minimum required for continued Nasdaq listing. However, recent performance suggests the stock price is once again approaching the $1 threshold, increasing the risk of non-compliance with Nasdaq’s Bid Price Rule.
Energy Focus also faces potential challenges in maintaining the required minimum stockholders’ equity of $2.5 million. As of September 30, 2024, stockholders' equity stood at $3.2 million, a narrow margin above Nasdaq’s requirements.
Despite restructuring efforts to align expenses with expected sales, Energy Focus has not yet returned to profitability. The company acknowledges a substantial accumulated deficit and ongoing losses, and while external funding remains an option, the company faces considerable risks in securing these resources amid a challenging financial landscape.
