Q4 2021 Energy Focus Inc Earnings Call
Greetings and welcome to the energy focus fourth quarter and fiscal year end 2021 conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Note. This conference is being recorded I will now turn the conference over to your host Brett Maas with Hayden IR you may begin.
Thank you operator, and good morning, everyone. Joining me on the call today is Steven Sigoloff interim Chief Executive Officer, and director Tod Nester, Chief operating Officer, and Chief Financial Officer, Greg Luciano Senior Vice President of product management and engineering before we begin today's call I'd like to remind everyone that we will make forward looking statements. These statements are based.
Point of information the company 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 heading risk factors as well as forward looking statements. Their most recent 10-K filed the SEC 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 energy focus dot com in the investor relation.
Sections site I'll now turn the call over to Stephen King the floor is yours.
Thank you Brett good morning, everyone.
This is my first call as interim CEO of energy focus, but I have been involved with the company for over two years first joining the board of directors in May of 2019, and then becoming lead independent director in September 2019.
During that time I had become quite familiar with the opportunities and challenges in front of energy focus.
And the talented team that remains in place.
The management and engineering team at energy focus has historically been entrepreneurial driving innovation and using creativity to bring new compelling and proprietary solutions to market.
As a result, the company developed a strong portfolio of differentiated products as well as bringing a broader product line to market that allowed the company to offer a more complete solution to customers and the retrofit lighting market.
Unfortunately, the environment of the last couple of years challenge, both our markets as well as the pace of development of our new product portfolio, which you have seen in our results.
Now with the near completion of several exciting new products that we believe represent clear differentiated advantages.
The board determined that energy focus needed leadership more focused on execution and launching and bringing these new products to our core markets and capitalizing on these near term opportunities in.
In short, we expect we have the products and the team to succeed and we are aligning our resources on these opportunities to rebuild a durable competitive advantage in our lighting business.
My focus in the near term will be number one supporting the team executing on these initiatives.
Number two ensuring the disciplines and business processes to make sure we hit our launch and go to market plans.
And number three focusing on cash management and putting the company on a path to profitability.
My goal is to position the company well for a permanent CEO that our board is actively searching for to carry that vision and focus forward.
Yes.
Over the past two months since I became interim CEO , we have reorganized the team driving focus and accountability on our lines of business as well as engineering operations and sales functions.
We're also driving forward, our leading new lighting products at addressing supply chain issues for cost and responsiveness.
I have also recruited two new outstanding Board members. We recently named two new independent directors to our board of directors.
With with proven track records for driving growth and accountability.
First Jeff Parker has spent nearly 30 years managing companies in the led market for display medical and lighting applications.
His experience includes leadership roles at Luminary, Sarah and Rambus.
Brian Law Gardot is a seasoned financial executive with extensive global experience, leading global finance operations supply chain and human resources organizations.
Ian spent 12 years in executive roles at Shark Ninja, a global consumer product goods retail and direct to consumer E Commerce business, principally as Chief financial Officer from 2009 until 2017.
As I mentioned before we have realigned our organization to focus on rebuilding our core commercial and military lighting markets late last year, we hired Greg Galluccio as senior Vice President of product management and engineering. After a 35 year career in the electrical and lighting business with underwriters.
Laboratories, Lebreton manufacturing and Max light.
Greg is responsible for directing and implementing our product strategy engineering and portfolio management.
In a moment I will introduce Greg to talk about our new lighting products before.
Before I do that I will mention that we have now launched our Nouveau line of UV C disinfection solutions for mobile residential and commercial use.
We are in the early stages of market introduction, focusing first on mobile applications with the traveler product built to stand on a table or in a vehicle Cup holder and then our larger tower for stationery office use.
We have demonstrated the effectiveness of these products, killing pathogens with multiple studies and are enthusiastic about bringing this application of lighting technology to creating a healthy workspace.
Now, let me introduce Greg Luciano to talk about our new lighting products for commercial and military markets.
Thanks, Steve.
And I am excited to join energy focus.
And as you focus has for years carved out of position as an innovator in the lighting industry, bringing exciting technologies to market and addressing unique requirements of certain customer segments.
The Red Kap emergency lighting system is a great example of this bringing important reliability and functionality to key commercial and military markets.
My goal at energy focus is to expand on this legacy driving further innovation and R&D processes to expand the addressable market.
He will also oversee product management, ensuring strong business discipline across the entire product lifecycle.
With respect to new products first.
We're developing the next generation of our Red Kap battery backup emergency lighting product with additional features that we expect will continue to differentiated in the marketplace.
This has traditionally been one of our highest demand products supported by a broader lighting portfolio and we expect this to enhance our position in the retrofit tube market.
Next our innovative and patented and focus powerline control technology is the second pillar of the portfolio.
Put simply we can add hardwired digital dimming and color tuning control to any lighting circuit without additional control wiring we.
We believe this is a disruptive solution for our market.
We are now readying the launch of a broader portfolio of products built around this technology.
During 2021 and for the second consecutive year energy focus one to 2021 top product of the year Award from Avaya and energy leader for our N focus lighting control platform.
This prestigious accomplishment is a strong validation of the innovation and potential impact of our end focused solution from expert judges that consider the in focus platform. A top example of breakthrough work in energy and environmental management.
With this portfolio, we believe we can bring reliable networked lighting control into commercial applications, where concerns about security reliability or cost preclude the use of wireless wireless solutions.
And we can offer cost effective and user friendly human wellness lighting to hospitality spaces and homes, especially new home construction.
And with that I'll turn the call back to Steve.
Thank you Greg.
We expect this strategic refocusing and the associated initiatives to take a few quarters to deliver results work is well underway and I'm encouraged by the progress.
While we continue to work through some market and supply chain challenges. We believe we are well poised to grow revenue and see results over the next few quarters. We look forward to telling you more at the end of the second quarter and realize more meaningful contribution in the second half of this year in the form of increased sales.
With that I will turn the call to Todd to review, our financial performance for the quarter and the year Todd.
Thank you Steve.
Net sales of $2 4 million for the fourth quarter of 2021 decreased 35, 8% compared to sales of $3 7 million in the fourth quarter of 2020, driven mainly by a decrease in military sales.
When compared to $2 7 million in the third quarter of 2021 sequential net sales were down slightly due to a decrease in commercial product sales.
Sales of our commercial products were $1 2 million or 48, 6% of total net sales for the fourth quarter of 2021 flat as compared to the fourth quarter of 2020, reflecting the impacts of the COVID-19 pandemic due to fluctuations in the timing pace and size of commercial projects.
Sales of our military products decreased mainly due to the continued delays of government funding availability for certain projects and the continued delayed timing of orders.
The year over year decrease also reflects the impact of a large order that was shifted from third quarter of 2020 into the fourth quarter of last year, providing a one time boost for the quarter revenue.
Gross profit for the fourth quarter of 2021 was <unk> 2 million compared with $1 4 million in the fourth quarter of 2020, a decrease of 86, 8% year over year.
As a percentage of revenue gross profit margin was seven 9% in the fourth quarter of 2021 compared to 38, 3% in the fourth quarter 2020.
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 unfavorable inventory reserve adjustment of <unk> 2 million or nine 5% of net.
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These negatives were offset slightly by favorable pricing and usage variances for material and labor of 0.2 million or seven 4% of net sales in 2021.
Adjusted gross profit margins for excess and obsolete in transit and net realizable value inventory reserve resulted in the non-GAAP adjusted gross margins of 14, 7% for the fourth quarter of 2021 compared to 27, 7% in the fourth quarter of 2020 and 17, 9%.
In the third quarter of 2021.
Based on our levels of fixed costs. If we can again obtain quarterly sales levels greater than three $5 million to $4 million. We continue to expect our overall gross margins to be in the mid twenty's.
As we move forward on those run rates, we anticipate we will begin to approach the high twenties percentage range as we introduce new products and implement more aggressive value added value engineering initiatives to accompany our increased sales volume as well as depending on our sales mix.
And inventory valuations how.
However, we will continue to see some fluctuations quarter to quarter.
Operating expenses in the fourth quarter of 2021 were $2 5 million or 105, 8% of sales compared to $2 3 million or 61, 4% of sales in the fourth quarter of 2020.
The increase is attributable to increase in payroll and payroll related expenses due to our growth initiatives over the past year as well as increased advertising and promotion costs sequentially.
Sequentially operating expenses increased approximately 172000 from the $2 4 million in the third quarter of 2021, reflecting modestly higher product development and SG&A expense after the launch of our new <unk> product line.
Loss from operations for the fourth quarter of 2021 was $2 4 million up compared to an operating loss of <unk> 9 million in the fourth quarter of 2020.
Sequentially. This compares to a loss from operations of $1 8 million in the third quarter of 2021, an increase of $546000.
Net loss was $2 6 million or negative <unk> 50 per basic and diluted share of common stock for the fourth quarter of 2021, compared with net income of $65000 or one cent per basic and diluted share of common stock in the fourth quarter of 2020.
Which included the noncash impact of the final Mark to Mark adjustment on warrants that were modified for equity accounting in December 2020.
Sequentially. This compares with a net loss of $1 $1 million or a negative <unk> 22 cents per basic and diluted share of common stock in the third quarter of 2021.
Adjusted EBITDA, a non-GAAP measure, which excludes depreciation depreciation and amortization interest expense.
Stock based and other nonrecurring charges.
And our sources of income such as incentive compensation and changes in fair value of warrant liability was a loss of $2 2 million in the fourth quarter of 2021, compared with a loss of <unk> 8 million in the fourth quarter of 2020, and a loss of $1 7 million in the third quarter of 2021.
The increased adjusted EBITDA loss for the fourth quarter of 2020 was primarily due a combination of gross margin reductions from lower sales and higher operating expenses due to our investment for future growth primarily in the areas of sales and engineering personnel important to our consumer market efforts.
For the full year net sales were $9 9 million for 2021, compared with $16 8 million for 2020.
Net sales from our commercial products were $4 7 million or <unk> 47, 5% of total net sales for 2021, compared with $5 4 million or 32, 1% of net sales for 2020.
Net sales for military and maritime market products were $5 2 million or 52, 5% of total sales for 2021, compared with $11 4 million or 67, 9% of total net sales for 2020.
Gross profit was $1 7 million or 17, 2% of net sales for 2021, compared with gross profit of $5 2 million or 38% of net sales for 2020.
Gross margin for 2021 included favorable price and usage variances for material and labor of zero point $8 million or eight 3% of net sales and unfavorable inventory and warranty reserve adjustments of zero point $3 million or two 9% of net sales.
Adjusted gross margins was 18, 8% for full year 2021, compared to 27, 1% in the prior year, largely reflecting the loss of leverage in our fixed costs due to the reduction in sales.
Operating loss was $8 7 million for 2021, compared with an operating loss of $4 1 million for 2020.
Net loss was $7 9 million or negative $1 73 per basic and diluted share of common stock for 2021 inclusive of noncash pre tax gains of $1 7 million from the forgiveness of our paycheck.
Protection program loan and other income recording recorded relating to the employee retention tax credit.
This compares with a net loss of $6 million or a negative 138 per basic and diluted share of common stock for 2020, which included a noncash pre tax loss of $1 1 million, resulting from the revaluation of the warrant liability throughout 2020.
Adjusted EBITDA was a loss of $7 9 million for 2021, compared with a loss of $3 5 million for 2020 the.
The increased adjusted EBITDA loss in 2021 as compared to 2020 was primarily due to gross margin reduction from lower sales.
Now I'd like to turn to the balance sheet.
Cash was $2 7 million as of December 31, 2021, compared to $1 8 million as of December 31, 2020.
As of December 31, 2021, the company had total availability of $4 $4 million, which consisted of $2 7 million of cash and $1 7 million of additional borrowing availability under its credit facilities.
This compares to total availability of $3 5 million as of December 31, 2020.
As a reminder, total availability is a non-GAAP measurement of our access to cash at any given point in time. When we believe it is a much more relevant metric than simply looking at cash balances 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.
Excess availability under our credit facility was $1 7 million at the end of the fourth quarter of 2021, $1 7 million at the end of the third quarter of 2021.
And one seven at the end of the fourth quarter of 2020.
During the fourth quarter of 2021 cash used in operations was $1 3 million of which a net loss from operations used $2 2 million of cash, but that was offset by a source of cash attributable to working capital of <unk> 9 million, while cash used in investing activities was 132000 and the company Jan.
<unk> $3 $8 million in cash from financing activities.
Our net inventory balance of $7 97.
$7 9 million as of December 31, 2021 increased $2 2 million over December 31 2020.
With that we would like to open the call to questions operator.
Thank you and at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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One moment, please while we poll.
Four questions.
First question comes from the line of Amit Dayal with H C. Wainwright. Please proceed with your question.
Thank you good morning, everyone.
I appreciate all the changes in development. Please.
A company at this point.
Just a high level question for you guys.
Yes.
The broader guidance has always been pretty strong.
You haven't had much take on the commercial side of these things.
What do you think youre doing different that maybe you have not done in the past to maybe accelerate those efforts any color on that would be helpful. Thank you.
This is Steve Sokoloff speaking and nice to meet you Amit.
Thank you for your question.
I'll give you a partial answer and I'll, let Greg.
Provide some additional color as well.
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I think this company has traditionally been a very innovative and product oriented company.
And that's what builds that strength over the last years, but over the last couple of years.
There were some great products that were in development that took longer than we'd hoped to bring to market and.
Put a lot of effort into that in the last few quarters and that's why we're happy to report today.
Coming launch of both the new our new Redcap emergency lighting product as well as our and focus powerline control products. So we're really excited about these.
Two new products lines that we're bringing to the market.
And we are.
<unk> restructured the organization realigned engineering and operations.
And change the way, we work with our supply base.
All of which I think will facilitate the future development cycles, and bringing new products to market.
A final decision.
Greg Luciano I'll, just add a little bit of color to that.
As we are launching these products a lot of the benefit that comes from the innovative products is additional pull through on the the standard.
Lighting products that we also offer.
We've stepped up our efforts in terms of product management and our talent.
In product management, and as such were reducing.
Our costs on those products that are supplied from outside.
And increasing our visibility across.
Sales channels of the products that will pull pull through along with the new products. So I think we have the opportunity to really expand all of our sales not just the new product sales as well.
Understood. Thank you for that.
Hello, Steve.
Just trying to see how much time, you maybe sort of you know what I'm, giving to accomplish.
These goals and if not I mean is there any other strategic alternatives on the table or consideration in terms of M&A or.
You wouldn't a sale of the company to a larger player.
Yeah.
Putting insignificant time with the company as lead independent director over the last year.
So obviously I'm increased might commitment taking on the interim CEO role.
As we separated our prior CEO .
I am putting in significant time.
Working with the executive leadership team.
As I mentioned, we've reorganized the team and the way we operate to drive more accountability and responsibility into the organization.
And I think it's really improving the discipline and the organization's ability to perform.
We are big believers in the lighting business.
And very.
Very committed to the new products and the growth of that business. Both in the commercial and military markets and of course, we're excited to see the launch of the new <unk> product line as well and what we think that can bring the company. So we are very committed to organic growth at this point.
And.
And certainly.
We've got some great advisors around the table as well with our two new board members.
We will be open to considering strategic options as we go forward.
Okay.
That's all I have for now Steve. Thank you so much.
And again as a reminder, if anyone has any questions you May press star one on your telephone keypad to join the queue.
Our next question comes from Bill Hardy private Investor. Please proceed with your question.
Good morning.
And welcome from Dallas, Texas.
And to Mr. Sokoloff.
With shoes.
Yes.
Uh huh.
Good future with.
Sure.
Temporary CEO .
Uh huh.
Two questions.
One is.
On the.
B R U V which is.
Over with.
UV lamps.
Two.
Energy.
Both focus and focus waves.
It was the last.
Conference call.
Third quarter 'twenty one.
Mentioned that they would be available that would be available in the first quarter.
<unk> 22.
Could you give me a status on where we stand on that.
The product.
We haven't been happy with the progress in the development of that product.
First samples really didn't meet our expectations and so we've shelved that product for now.
So that product has.
Not being offered.
Sometime in 2022.
It's not ready for sale now and we're prioritizing in our.
R&D and operations.
Organization, the launch of the new Red Kap, and the and focused products as well as the new vault products. So I.
I would say may or may not be launched in 'twenty, two but it's not a priority of focus right now. Okay. There was also a comment that the.
Home.
And focus type product would be available also.
First quarter.
That's still on track or is it.
Awesome.
Yes. This is Greg Lucier, yes that product is completed.
It's launching now it is we expect to achieve revenue results from that product in the second half of the year.
Since Gregg runs our engineering and product organizations I'll, let Greg answer.
The trough for as well.
Yes, with regard to the troffer Theres a lot of proliferation throughout the commercial sector for these troughs.
Don't see a lot of movement.
And there is also some.
Confusion in the market as to what makes it good.
UV troffer, and what makes a less effective one and we want to make sure we come out on the correct side of that equation. So we're working with the.
Standards authorities and things like that to make sure that when we do launch.
If we launch a product like that that it will be an industry leader out of the gate.
And I'll just add this is tod I'll add to what Steven Gregg said, our current prioritization on the MVC side is the more consumer applications of the Nouveau traveler. That's the portable device that you might have seen.
As well as our Nouveau towers so.
As Steve said, we're prioritizing our efforts on products that are ready for sale and offer the market opportunities. We believe are attractive.
Okay.
Major question too.
The third quarter conference call. It was also.
Indicated that there were two military contracts, which were.
Process, but couldnt be released because the budget.
Approved.
I see recently.
It has been approved.
Do we still expect to see those contracts being released.
This is Tod again bill.
If not we have not seen them released yet and we're in continuous communications.
With the military about those orders.
But they are standard products that there will be future opportunities as well our military business is primarily a made to order business.
90% to 95% of the sales are that and with the products that were on the order there will be other opportunities in ships for us to bid on and win in that regard. We are a recognized leader in the product that we're providing and we continue to expect to remain that.
Well do you expect that those orders will will be released or.
We don't have any new information for new update on that as far as any indications that the budget being released.
Well my impression was that the budget was released.
Budgets are released in general or specific applications are purchased.
Purchase by purchase.
Category by category, and so theres prioritization that had been different than in the past currently.
Alright, well that's all I have thank you for your time and answering my questions I appreciate it.
Yeah. Thank you Bill.
And we have reached the end of the question and answer session and I'll now turn the call back over to Stephen Sokoloff for closing remarks.
Thank you all for listening today and I appreciate the opportunity to tell our story and we look forward to.
Visiting you again in a quarter and giving you the updates on our Q1 and progress through the year. Thank.
Thank you.
And this concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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