Energy Focus, Inc. (EFOI) Q1 2023 Earnings Report, Transcript and Summary

Greetings, and welcome to Energy Focus First Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jim Warren, Senior Vice President and General Counsel. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Joining me on the call today is Lesley Matt, Chief Executive Officer. Before we begin today's call, I'd like to remind everyone that we will make certain forward-looking statements. These statements are based upon information that represents the company's current expectations or beliefs. The results realized may differ materially from those stated. For a 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 otherwise required by law. Please note that during this call and in the accompanying press releases, certain financial metrics are presented on both U.S. 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 will now turn the call over to Lesley.

Thank you, Jim. Good morning, everyone. This is my third earnings call since joining Energy Focus in September of 2022, and what a ride this has been thus far. My main objective since joining the company has been to bring it back to its core of -- markets of military maritime in commercial and industrial lighting and control products, secure necessary equity capital via a strategic investment, work through significant supply chain constraints in our legacy inventory position and massive cost-cutting and rightsizing to propel the company forward into the future. In my first call, I have stated that I was cautiously optimistic that I would be able to show progress in 6 months' time. I believe that the first quarter 2023 results that I'm sharing today are delivering on that promise to do more with less sales are beginning to rebound while operating costs have plummeted. Although I have my sight on the company's strategy aligned with much higher goals, today's results show the beginning signs of what I expect this progress towards a brighter future for EFOI. We started the year off with a critical win in January of 2023, where we were able to secure a strategic investment from Sander Electronics. In addition to funding provided by this investment, we welcomed our new Chairman of the Board, Jay Huang, who has brought with him expertise in manufacturing, electronics industry knowledge and excitement around product development back to the organization. We are also excited to have Mr. Wen-Jeng Chang join the Board this quarter and look forward to his contributions as an experienced financial and transactional adviser. The funding provided by the Sander investment has contributed to approximately $4.8 million in balance sheet improvements in Q1, including over $3 million in fresh capital, plus $1.7 million in debt to equity conversions. We utilized the funds to restructure our outstanding credit facilities and unsecured bridge debt to reduce borrowing costs and push out cash obligations so that our operational cash flow can be utilized for operating the business. To recap, these improvements include a paydown of $1 million in conjunction with a restructuring of our secured inventory line through Crossroads Financial that will reduce our overall cost of this facility in 2023, a paydown of $500,000, plus exchanging another $250,000 for common stock and restructuring our payment schedule out into 2024 with our outstanding bridge note held by Streeterville Financial, and agreed termination on our accounts receivable lending facility, a conversion of primarily related party promissory notes totaling $1.5 million to common stock reducing future cash burn and additional private placements to 2 of our directors totaling an additional $955,000 during the quarter. The improvements made early in the quarter allowed us to focus on the business and set a positive tone with employees and customers to kick off the year. Noncompliance with NASDAQ continued listing requirements, and the risk of delisting has been a looming dark cloud over EFOI for the last few quarters. Although there might not have been a direct question regarding this on the last call, I did want to speak to this today. As disclosed earlier in the month, after an appearance before a NASDAQ hearing panel in April, NASDAQ has conditionally granted our request for continued listing. The results we are sharing with you today and the balance sheet improvements I have just spoken about will satisfy the first condition of the plan we had laid out of the meeting with the NASDAQ, the continued listing requirement of a minimum of $2.5 million stockholder equity requirement. The second condition of our continued listing compliance plan, to regain compliance with NASDAQ minimum $1 bid price requirement. As we have laid out in our proxy statement, we seek to gain stockholder approval of a reverse stock spread at the upcoming 2023 Annual Meeting of Stockholders on June 15. If you are a stockholder listening today, I encourage you to review the materials and vote yes on this proposal. We continue to believe that the liquidity offers our stockholders of remaining listed on NASDAQ is worthwhile and believes the reverse split will enable us to regain compliance with NASDAQ's requirements. Although the sales for the first quarter continue to lag behind my long-term expectations for the business, we have shown improvement over the previous quarter with a smaller staff and no significant changes in available existing inventory as we continue to primarily sell through on-hand material, in particular, on the commercial side. Nonetheless, the existing -- the exciting piece for me is that we have continued to build a backlog of orders on both the military and commercial sides of our business in addition to generating a larger pipeline of revenues for the future. Our customer base is anxiously awaiting the arrival of fresh stock of RedCap, our emergency backup LED tube product in addition to our power line control EnFocus switches. Both products have faced significant supply chain challenges that we have successfully navigated in Q1 and have orders placed with arrival dates we expect beginning later this quarter and continuing in future periods. Additionally, we have been able to focus our development work on new products, including our recently announced LED mobile light tower retrofit product and our gallium nitride, or GaN, power supply products. In future periods, I look forward to making more announcements on new and exciting innovations that drive revenues with both lighting controls and energy solutions product spaces. Innovation has been the lifeblood that has driven the EFOI success. Putting a troubled past in the rearview mirror and driving towards the success of the future is what I am determined to do. These results are only the start of the new road ahead. Let me now review our Q1 financial results. We had net sales of $0.9 million for the first quarter of 2023, a decrease of 54.9% compared to sales of $1.2 million in the first quarter of 2022. This is driven by lower sales volumes and market adjusted pricing on the commercial side, and there was also $0.3 million of deferred military revenue recognized in Q1 of 2022. First quarter 2023 net sales in military products were $0.6 million, which is up $0.3 million or 48% when compared to $0.3 million of sales in the fourth quarter of 2022. This reflects a renewed focus on military sales after the strategic hire made in mid-2022. Bear in mind that the sales cycle for military maritime products are dependent on many factors, including government funding, U.S. Navy award and new ship construction schedules and the timing of vessel maintenance schedules. So this quarter is really the beginning of those renewed sales efforts. Sales of our commercial products were approximately $0.3 million or 34.5% of total net sales for the first quarter of 2023, down $813,000 as compared to first quarter of 2022. Commercial sales increased $260,000 over the prior quarter on a sequential basis. Volatility in our supply chain continued to be reflected in these results as we are primarily selling through on-hand legacy inventory while we rebuild our supply of our strongest sellers in higher-margin proprietary products like RedCap and EnFocus. However, our focus on sales execution and strategy has slowly started to improve our position in the commercial market and primed the relationships for expected inventory. Gross profit for the first quarter of 2023 was $16,800 compared to gross loss of $25,700 in the first quarter of 2022. As a percentage of revenue, gross margin was 1.8% in the first quarter of 2023 compared to negative 1.3% in the first quarter of 2022. The year-over-year increase in gross margin was primarily driven by lower cost of sales, favorable product mix as well as the impact from prior year inventory impairment adjustments. As compared to fourth quarter of 2022, gross margin rebounded significantly from a negative margin of 35.8% dragged down in the prior quarter by low sales volume and poor product mix. Adjusting gross profit margins for excess and obsolete, in-transit and net realizable value inventory reserve and scrap and write-offs related to our inventory reduction project contributed to the non-GAAP adjusted gross loss of 0.3% for the first quarter of 2023 compared to a gross profit margin of 5% in the first quarter of 2022. Sequentially, adjusted gross loss improved compared to an adjusted gross loss of 55.8% in the fourth quarter of 2022. Operating expenses in the first quarter of 2023 were $1.2 million compared to $2.6 million in the first quarter of 2022. The decrease was primarily attributable to lower SG&A expenses due to significantly decreased payroll and payroll-related expenses. Loss from operations in the first quarter of 2023 was $1.2 million, an increase over the prior year comparable quarter loss amount of $2.6 million. Loss from operations also decreased $821,000 as compared to the prior quarter. Net loss was $1.3 million or $0.08 per share of common stock for the first quarter of 2023 as compared with a net loss of $2.8 million or $0.44 per share of common stock in the prior year comparable quarter. Adjusted EBITDA, a non-GAAP measure, which excludes depreciation and amortization, interest expense, stock-based compensation and other nonrecurring charges and/or sources of income, such as incentive compensation, was a loss of $1.8 million for the first quarter of 2023 compared with a loss of $2.6 million in the first quarter of 2022. The improved adjusted EBITDA loss from the first quarter of 2023 was primarily due to significant cost reductions. Now I'd like to turn to the balance sheet. Cash was $301,000 as of March 31, 2023, as compared to $52,200 as of December 31, 2022. As of March 31, 2023, the company had a total availability of $401,000, which consisted of $301,000 of cash and additional borrowing availability of $100,000 under its credit facility. This compares to total availability of $107,000 as of December 31, 2022. 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 than simply looking at cash balance or even net debt on the balance sheet. During the first quarter of 2023, we reduced the maximum availability on our inventory lending facility to $500,000 and agreed with our receivables lender to terminate our accounts receivable lending facility. Excess borrowing availability on our credit facilities represents the difference between the maximum borrowing capacity of the credit facilities and our actual borrowings under these credit facilities. During the first quarter of 2023, cash used in operations was $1.2 million as accounts receivable grew with increased sales. Our net inventory balance of $4.9 million as of March 31, 2023, decreased from the $5.5 million balance at December 31, 2022, as we sold through on-hand inventory. Net excess and obsolete reserve adjustments during the quarter were not significant due to the levels of inventory reserve adjustments that were taken in prior periods. With that, I will make a few closing comments. Once again, the results that were delivered today are just the beginning of a turnaround for Energy Focus. Although there is a tremendous amount of work still to be done, I believe that our biggest hurdles are behind us, and our team is focused back on sales, new product development and innovation. I look forward to sharing this journey with you next quarter. With that, we would like to open the call to questions. Operator?

[Operator Instructions] Our first question comes from the line of Sameer Joshi with H.C. Wainright.

Yes. Glad to see progress on all fronts, including financing, restructuring and also on commercial performance. So good job on that. I just had a few questions. The gross profit improvement that we have seen, is it likely to stay in the next few quarters? Or was there any other onetime item that helped improve the gross margins?

So our goal is to improve our gross profit overall by introducing new products into the market, which will improve our overall margin as we move into future periods. So this is just the beginning of improvement on gross profit.

Understood. Got it. And so just to segue based on that response is that the inventory is at around $4.9 million. Is there a risk of this becoming stale or a requirement need to impair this anytime soon?

That's a great question. Right now, unfortunately, for us, a good portion of our inventory valuation is on our EnFocus tube products. However, as I mentioned in the presentation, we are still waiting on inventory for the switches. So the tubes don't sell as well without the switches. So I do not believe that this product will become stale as we have the 2 products in the stock, and we're just waiting on those switches to get really moving on those EnFocus power line control products.

Lesley, can I add one thought?

Absolutely, James.

Sameer, thank you for the questions. On the gross profit improvement, no onetime charges reflected in this quarter. And then on the -- like the inventory, the net inventory cost, I believe last quarter, we had the question of has inventory been mark-to-market. And to kind of answer both questions at the same time, the flat but positive gross profit margin is a sign of us delivering on the answer to that question, which is we took those charges in the past. The inventory is carried at what's salable. And then going forward, we're constantly monitoring that and looking to grow gross profit margin as our higher-margin products improve the mix down the road as supply chain backfills.

Yes, yes. And I understand -- I think I had asked this question last quarter. And it's good to see that $488,000 reduction. I think that should be considered a step change down, right? I mean that just is going to be there absent in the next few quarters. The next question is on -- I guess you answered it partially, Lesley. But going forward, should we see a sequential improvement in the top line? I know the new hire on military sales is a good step in the right direction. But how do we see product mix and revenues sequentially growing over the next few quarters?

Sure. So again, as we continue to do 2 efforts, one is bring new products to market that have higher profitability and better margins for the organization, and two is improve our cost standards on our existing products. That will help to grow our overall profitability in future periods and a better and healthier mix between both military and commercial sales. Again, our commercial margin was through sell-through products. So it had very little because of the impairment charges that we had put. And a lot of our military products, the sales that happened in Q1 were at contract pricing, many of them. And the cost of materials had slightly increased based off the old -- based off just what's happening in the world today. So our contract pricing is somewhat stale. So it's mixing the contract pricing sales with other higher margin sales of the same products to create a healthier balance.

Understood. Got it. And then just last one on the GaN power supplies. Do we have a time line on this in terms of development milestones as well as maybe commercial sales down the line?

Sure. So as you may or may not be aware, the power supply product is a much higher technical sale, and it requires a lot of development time and attention in order to be able to fully put it into market. We're currently working with our development team today to ensure that we meet all compliance and regulatory standards so that we can launch that product successfully, hopefully, before the end of the year. And another nice thing is we actually have a potential customer lined up for those products once we are able to launch them. So we are very excited to be able to officially announce that as available into the market.

Yes. Actually -- and I just have a follow-up on that. So this is a new product development effort. There are other products that are being developed. Should we expect R&D to increase from -- I mean you have reduced this in recent quarters, but going forward, should we see a slight pickup in R&D spend?

There could be a potential slight pickup. However, with our strategic investment partner, Sander Electronics, they've been working in conjunction with us to help bring some of these products to life. And that has helped us maintain the low R&D costs because we are working in conjunction with their teams on many of these new product developments.

[Operator Instructions] There are no further questions in the queue. I'd like to hand the call back to Lesley Matt for closing remarks.

Thank you, operator. Jim, I think you had one item.

Yes. Lesley, I just wanted to clarify 1 or 2 numbers from an earlier presentation. For adjusted EBITDA, a non-GAAP measure, we actually did even better than what we said the first time. Our loss was $1.2 million for adjusted EBITDA for the first quarter of 2023. And then for prior period, net sales, it was $2.1 million in the first quarter of 2022. So I just wanted to clean that up. But otherwise, back to you.

Thank you, Jim. I apologize in advance for fumbling over my words potentially with those items. Again, thank you, everyone, for your time and attention today. And once again, I appreciate your continued support of Energy Focus. And please remember that our annual meeting is on June 15, and we hope you review the materials if you are a shareholder and vote yes to the reverse split. Thank you again, and have a wonderful day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.