Energy Focus, Inc. (EFOI) Q1 2022 Earnings Report, Transcript and Summary

Greetings, and welcome to the Energy Focus First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Brett Mass of Hayden IR. Thank you, Brett. You may begin.

Thank you, operator, and good morning, everyone. Joining me on the call today is Stephen Socolof, Chairman and Interim Chief Executive Officer; and Tod Nestor, Chief Operating Officer and Chief Financial Officer. Before we begin today's call, I'd like to remind everyone that, we'll be making certain forward-looking statements. Statements that are based upon information the company represent's, the company's current expectations or beliefs. These results realize – results realized may differ materially from those stated. For discussion of these risks that could affect our results please refer to the section under the headings Risk Factors as well as forward-looking statements in our most recent 10-Q filed with the SEC. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Also, please note that, during this call and in the accompanying press release, certain financial metrics are presented on both GAAP and non-GAAP adjusted basis. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at energyfocus.com in the Investor Relations section of the site. I'll now turn the call over to Steve. Steve, the floor is yours.

Thank you, Brett. Good morning, everyone. Just a few weeks ago I introduced myself and spoke to you about our initiatives to improve the energy-focused business through bringing more value-added differentiated products to the marketplace, aligning our team around near-term opportunities, with an emphasis on execution and streamlining our expenses to reduce our cash burn. We have made progress in each of these areas since we last spoke, positioning the company for improved financial results in the second half of this year. As discussed on the last call, we reorganized the company to drive focus and accountability on our lines of business, as well as on the engineering operations and sales functions. We are building on areas where Energy Focus has an established reputation in the market, such as with our RedCap products. We are on track with our plans for new product introductions of solutions that leverage our core expertise in innovative, military, industrial and commercial lighting and controls and where we believe we can see near-term results, without significant additional sales and marketing investments. I am encouraged with the effort and resolve our team has displayed and believe all our resources are fully aligned toward the same strategic goal. A key rationale for our reorganization was to focus on improved execution. We have put initiatives in place to improve engineering and supply chain management, with the goal of improving inventory management, reducing costs, and improving quality. We are simultaneously focused on improving sales execution in both our military and commercial markets. To this end, we are making a few strategic investments, including investing in our government direct sales, team to help us better target decision makers in the military market. We are also implementing, some upgrades to our approach in the commercial market, to drive improved sales execution. Please don't misunderstand we're not satisfied with the results, we're reporting today. Current revenue and gross profit levels are simply not acceptable. This is why the Board stepped in and made the changes we made. Current revenue levels represent a trough from which we believe we will recover. It is critical that Energy Focus improve its execution. We need to do a much better job of bringing new products to market successfully. We need our innovative products with great product quality and good supply chain support to drive higher margins. We also are building our sales and support teams, to better serve our customers. Extending our current differentiation, we are developing the next generation of our RedCap integrated battery backup emergency lighting products, leveraging our long-standing reputation with this innovative product line. The next generation, will include additional features that we expect will continue to differentiate it in the marketplace. This has traditionally been one of our highest demand products, where we also have intellectual property and competitive advantages and we expect this to enhance our position in the retrofit market. We are also refreshing our traditional line of two products, to simplify and reduce costs. We expect this refresh to improve customer satisfaction, enable better inventory management and availability, and improve margins. Our major area of innovation, involves our patented and focused power line control technology. This offering enables hardwired, digital dimming and color tuning control, to any lighting circuit without additional control wiring. We believe this is a disruptive solution for our market, bringing reliable network lighting control into commercial applications where concerns about security, reliability or cost preclude the use of wireless solutions. In addition, this product line offers cost-effective and user-friendly human wellness lighting to hospitality spaces and homes, especially new home construction. We expect to launch a broader portfolio of products built around this technology, late second quarter and early third quarter of this year. Our nUVo line of UVC disinfection solutions, for mobile residential and commercial use, were introduced at the end of fourth quarter last year. First quarter this year, we have seen initial sales traction and are building both a new brand and new category of UVC air disinfectors from the ground up. We have demonstrated the effectiveness of these products, neutralizing pathogens to help create healthier spaces for living and working. We've seen positive interest following our recent promotion on The Dr. Phil Show, with additional media opportunities in the works. We have focused our brand building efforts on nUVo Traveler, which offers the lowest entry cost and a lower overall cost of ownership compared to its air purifier competitors. With that, I will turn the call to Tod, to review our financial performance for the quarter. Tod?

Thank you, Steve. Net sales of $2.1 million for the first quarter of 2022, decreased 21.8% compared to sales of $2.6 million in the first quarter of 2021 mainly due to delayed funding related to projects, including our products. The sales cycle for the military maritime business unit, are dependent on many factors including government funding, US Navy award and new ship construction schedules and the timing of vessel maintenance schedules. When compared to $2.4 million in the fourth quarter of 2021, net sales were down sequentially due to a decrease in military product sales. Sales of our commercial products, were $1.1 million or 55% of total net sales for the first quarter of 2022, up $221,000 as compared to the first quarter of 2021. Commercial sales were slightly below the prior quarter on a sequential basis. As Steve mentioned, we are focused on sales execution including the expansion of agency relationships and introduction of new products, to improve our position in the commercial market. Sales of our military products decreased mainly due to the continued delays of government funding for certain projects and the continued delayed timing of orders. Gross profit for the first quarter of 2022 was a negative $26,000 compared with positive $600,000 in the first quarter of 2021. As a percentage of revenue, gross profit margin was negative 1.3% in the first quarter of 2022, compared to 21% in the first quarter of 2021. The year-over-year decline in gross margin was primarily driven by less leverage of our fixed costs due to lower sales levels, sales product mix, primarily the margin impact from decreased military and maritime market product sales, and the impact of higher freight costs. In the price-sensitive markets we compete, we are very limited in our ability to pass-through higher freight costs to customers. The focus on value engineering throughout our R&D manufacturing lines is expected to drive reductions in our variable costs. Additionally, we have begun initiatives designed to lower our freight costs on a per unit basis. We are seeing the initial benefits now and this will flow through our inventory, benefiting our consolidated results in the second half of the year. We also recently signed a new lease extension reducing our square footage on annual rent costs by approximately $415,000 to $425,000 annually beginning in July of this year. Leaving no stone unturned, we are hard at work on a number of cost reduction initiatives. Adjusting gross profit margins for excess and obsolete in-transit and net realizable value inventory reserve resulted in a non-GAAP adjusted gross margins of positive 5% for the first quarter of 2022, compared to 24.3% in the first quarter of 2021. Based on our levels of fixed costs if we can again obtain quarterly sales levels greater than $3.5 million to $4 million, we continue to expect our overall gross margins to be initially in the mid-20s. As we move forward on those run rates, we anticipate we will begin to approach the high 20s percentage range, as we introduce new products and implement more aggressive value engineering initiatives to accompany our increased sales volume as well as depending on our sales mix and inventory valuations. Operating expenses in the first quarter of 2022 were $2.6 million, compared to $2.9 million in the first quarter of 2021. The decrease is attributable to lower product development and SG&A expenses due to continued tight cost management efforts and the furloughing of some employees. Loss from operations for the first quarter of 2022 was $2.7 million, up compared to an operating loss of $2.3 million in the first quarter of 2021. Net loss was $2.8 million or a negative $0.44 per share of common stock for the first quarter of 2022, compared with a net loss of $1.6 million or negative $0.45 per share of common stock in the first quarter of 2021. Adjusted EBITDA, a non-GAAP measure, which excludes depreciation and amortization, interest expense, stock-based and other non-recurring charges and/or sources of income, such as incentive compensation and the gain on forgiveness of PPP loans in prior periods was a loss of $2.6 million for the first quarter of 2022, compared with a loss of $2 million in the first quarter of 2021. The increased adjusted EBITDA loss from first quarter of 2022 was primarily due to a combination of gross margin reductions and lower sales. Now I'd like to turn to the balance sheet. Cash was $200,000 as of March 31 2022, as compared to $2.7 million as of December 31 2021. As of March 31 2022, the company had total availability of $1.1 million which consisted of $200,000 of cash and $0.9 million of additional borrowing availability under its credit facilities. This compares to total availability of $4.4 million as of December 31 2021. As a reminder, total availability is a non-GAAP measurement of our access to cash at any given point in time and we believe is a much more relevant metric to simply looking at cash balance or even net debt on the balance sheet. Excess borrowing availability on our credit facilities represents the difference between the maximum borrowing capacity of the credit facilities and our actual borrowings under the credit facilities. During the first quarter of 2022, cash used in operations was $2.7 million. Our net inventory balance of $7.4 million as of March 31 2022, decreased slightly from $7.9 million balance at the end of December 31 2021. Subsequent to the end of the quarter, we completed a bridge financing raising $2 million in gross proceeds and approximately $1.8 million in net proceeds after original issue discounts and expenses. To further bolster liquidity we are working with several liquidators to sell obsolete and clearance inventory. Nearly all of this inventory has previously been reserved against. We believe this represents approximately $1 million in fully reserved obsolete inventory that we are working to monetize in addition to any other clearance item opportunities. Finally, as you may know, given the recent 8-K announcement, this will be my final earnings call while the COO and CFO at Energy Focus. First I would like to thank our employees for being so dedicated hard-working and committed during my tenure at Energy Focus, but in particular since the pandemic began to impact our business. The team showed up to work every day because we manufacture products and Energy Focus still needed to do so throughout the pandemic. Second, I would like to thank our customers, who stuck with us through the pandemic and supply chain challenges, continuing to be supporters of Energy Focus and committing to the same quality and attention that has defined our partnerships for a very long time. And finally, I would like to wish the Board of Directors, Steve, Greg, Jim, and the entire leadership team, tremendous success as they move forward continuing to drive the performance of Energy Focus. The continued opportunity for Energy Focus remains particularly strong given the unique technology the company has already created in the form of RedCap and EnFocus and nUVo, and new products I have no doubt are yet to come, as well as the extremely high quality and durable product the company sells to US military, while gaining larger portions of projects with high-quality, white light LEDs that are consistent with Energy Focus's very strong brand. As the company strengthen and enhances its selling and distribution capabilities, it is all the earmarks for driving improved performance as the innovative and proprietary technologies gain higher market penetration and usage. Thank you everyone for providing me the honor and privilege to be part of a special group of people, who have a lot of the ingredients necessary to achieve success. With that I will turn the call back to Steve for closing comments.

Thank you, Tod. We wish you the best of luck in your next endeavor. And we are grateful for the contributions you have made to Energy Focus. I want to also thank you for agreeing to facilitate a smooth transition process over the next few weeks. As I said we are not satisfied with the results we are reporting. The Board recognized that changes needed to be made and we've begun the process to address sales execution and reduce costs. We have a lot of work to do and this process is just beginning. As Tod mentioned, Energy Focus provides unique technology that addresses real-world needs. Our existing product line is well aligned with industry trends and our refresh of key product lines will further highlight our competitive advantages. We are squarely focused on execution within the sales, marketing and engineering functions and we expect improved results in the second half of this year. With that we'd like to open the call to questions. Operator?

[Operator Instructions] Thank you. Our first question is from Amit Dayal with H.C. Wainright. Please proceed with your question.

Thank you. Good morning, everyone. Thanks for taking my question. Just to begin with, how should we think about gross margin expectations down the line in next few quarters? I know Tod mentioned you are working on some cost-cutting efforts. And if revenues pick up you could be at the mid-20% levels. But what kind of visibility do you have right now to sort of hit those revenue levels?

Amit, this is Tod. I'll take that one. So right now we are -- the headwinds that we're battling and actually getting some nice solutions to the sales with the fixed costs. And as we noted starting July 1, we've significantly reduced that portion of the cost of goods sold, so that will help our margins. The improved sales levels that will -- that we're expecting will also assist. We're also working on freight cost per unit. Our supply chain folks have developed methodologies to get more units in each container which reduces our cost per unit. I don't know you probably heard from other companies you follow there have been literally 5x to 10x fold increases in freight costs, over the past year and we're working on creative solutions to get that down on a per unit basis. So -- and as we said, we expect those to return to the kind of levels we've seen as our sales return in the past.

Understood. So, these are mostly inflationary pressures you are seeing or I mean maybe it's a mix of revenue levels? And some supply chain/inflationary trends going on right now?

So we are working -- as we also noted we have value engineering efforts to address the cost per unit. It's not necessarily inflation. It's a -- we've seen that in some of our parts not across the entire portfolio as much as maybe other industries. But on the freight side and on the fixed cost side, we're definitely taking significant -- making significant efforts to reduce those.

Yes. I would just add that, we have a reasonable level of fixed cost. And so, the low sales level reporting doesn't absorb as much fixed cost as we'd like. So just improvements in revenue that we expect will help. And we've also done some things like, as Tod said, reducing our real estate footprint by about half, which takes significant fixed cost out of our P&L. On the -- in terms of value engineering I talked about simplification of our two product line, that's going to improve inventory management and reduce cost. And also, we tend to see a higher margin on our military sales than our commercial sales. So as you know, we've been waiting for a couple of large projects on the military side. So as those come to fruition, we should see improved margins from that side of the business. And as Todd reflected, probably the freight costs are the most inflationary component of what we saw in the first quarter. And we're working on some better inventory management, supply chain management to address those. So we have a lot going on to improve margins over time.

Understood. So should I assume operating costs to sort of stay where they are or maybe come down a little bit, but maybe you guys start seeing improvements on the cost of goods line, because of these initiatives?

Yes. We've taken a little bit out of operating cost to date, but we have some initiatives very focused on scrutinizing operating costs right now. So we do expect to take some more out of the operating cost below the margin line.

Understood. And then, just from a liquidity perspective, I know, Tod you're trying to reassure everyone about how the balance sheet is positioned. But is that sort of a little bit of an overhang in terms of your ability to win contracts, et cetera? Just wanted to understand how your balance sheet is positioning you from that perspective.

It's a good -- it's a fair question. We have not had any feedback and/or an indication back from our sales team or customer-facing folks that our balance sheet is impacting sales. So we've got a good set of agency and direct relationships. In fact we're expanding there. And I see -- I haven't had any feedback that balance sheet is holding anyone back on buying product.

Understood. And any -- last question, I guess, what is in the pipeline right now between sort of your -- the lighting products and the disinfectant offerings? What is in the pipeline or backlog, if you could give us any color on that?

You mean in terms of current pipeline and backlog, or are you talking about new product introduction?

Yes. No current pipeline and backlog from sort of your legacy offerings.

We tend to ship as we get orders. So we have a good pipeline. We don't carry a lot of backlog. We have a few projects that are timed out over a couple of quarters. So we do have some backlog, but I'd say not a significant amount of backlog as we do tend to ship as we receive orders.

Okay. Those are my questions for now. Thank you so much guys.

Thank you. [Operator Instructions] Thank you. There are no further questions at this time I'd like to turn the floor back over to management for any -- one moment, we have one question in the queue. Our next question is from Bill Hardy [ph], Private Investor. Please proceed with your question.

Yes. Good morning. I almost got locked out. I didn't hear the response on the phone. I thought my question was in. My questions are more focused on actual products that were more or less developed and committed to for the first quarter release, which didn't happen. And the one is the Suncycle product, which was intended for home/office use. Could you comment on its availability? Hello?

Hey, yeah. Hey, Bill sorry. It’s Tod.

No, no. That’s okay.

So we are -- as we said in the script the expectation is and I apologize I don't remember the specific commitments of the first quarter, but we did state in the script that that's expected to roll out late second quarter early third into the market. So the product testing that goes with lighting products and the development time it took that's the timing we're looking at right now and that's what we have in the script. So you should expect to see hit the market in that time frame.

So late second quarter, early third quarter then for that product?

Yeah. So we call it it's the EnFocus line. If you're sort of trying to match the two between what we said and where your expectations are and it's the power line control technology addressing the home market as well.

Right. Well, as I say it was called Suncycle last year. And you did get an award for it in July as to a significant product so -- the other question -- pardon?

No I'm sorry the trademark name changes. It's EnFocus. It's on the platform now.

All right. The other question is on the tower unit of your disinfected -- disinfection product line, which again was scheduled for release in first quarter. It appeared that it was and then it was taken out of availability late in the first quarter. What's the status on that now?

That product, it just came in with some quality issues that we didn't want to put it out in the field. And so those issues are with the electronic boards. And so, as you might know, the electronics has been a challenged supply chain for some time now. So we are working hard to get new boards in to bring those products up to where we are ready to sell them.

So it's actually -- in other words -- let me just ask this question has the problem been solved? And is the unit reliable now?

We're waiting for new boards to come in to test. So we haven't done that testing.

Okay. So you haven't verified the reliability of...

We had a supply problem with the initial set of boards that the units came in with. And so we've worked through some rework on those and we're waiting for a replacement set of boards to come in to test.

I will say just to build on what Steve said that we did ship a few of those and they were validated and tested prior to shipment. But the Traveler, as we mentioned in the call, the Traveler's launched and out there and available and we've had some success with The Dr. Phil Show and other approaches to marketing that product.

Yeah. I have read. I guess you have seven comments on its using and acceptability on your website. Okay. Thank you very much. Sure hope we get sales coming much stronger than they are now. Thank you.

Thank you.

Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

I'll just say thank you for all of your attention and support. As we said, we also as Bill suggested, certainly look forward to improving our business performance on both the top line and bottom line going forward. We've got a lot of work we've been doing and we'll continue to do. And we should see those results as we go forward. And in the meantime, I will again thank Tod for his support over the last couple of years. And seeing us through today's earnings call and transition over the next few weeks. Thank you.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.