Q1 2022 Energy Focus Inc Earnings Call
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 path of observation.
Anyone sugar acquire operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
My pleasure to introduce your host Brett Maas of Hayden IR. Thank you Bret you may begin.
Thank you operator, and good morning, everyone. Joining me on the call today is Steven Socal off Chairman interim Chief Executive Officer, Tod Nester, Chief operating Officer, and Chief Financial Officer before we begin todays call I'd like to remind everyone that we'll be making certain forward looking statements. These statements are based upon information that company represents the company's current expectations or beliefs. These results.
Realize the results realized may differ materially from those stated for especially these risks that could affect our results. Please refer to the section under the heading risk factors as well as forward looking statements in our most recent 10-Q filed with the SEC.
<unk> 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 Relations section of the site I'll now turn the call over to Steve Steve The floor is yours.
Thank you Brad good morning, everyone.
Just a few weeks ago I introduced myself and spoke to you about our initiatives.
To improve the energy focused business.
Bringing more value added differentiated products to the marketplace.
Aligning our team around near term opportunities with an emphasis on execution.
<unk>, our expenses to reduce our cash burn.
We have made progress with 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 accountability on our lines of business as well as on the engineering operations and sales functions.
We're building on areas, where energy focus has an established reputation in the market such as with our Red hat products we.
We are on track with our plans for new product introductions are solutions that leverage our core expertise and innovative military industrial and commercial lighting and controls.
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 of our resources are fully aligned toward the same strategic goal.
A key rationale for our reorganization was to focus on improved execution we.
We have put initiatives in place to improve engineering and supply chain management with the goal of improving.
Inventory management, reducing costs and a proven quality.
We are simultaneously focused on improving sales execution in both our military and commercial markets.
This said, 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're 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.
Revenue and gross profit levels are simply not acceptable.
That's 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.
Needs to do a much better job of bringing new products to market successfully.
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 Red Kap 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 us 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 tradition of lineup to products to simplify and reduce costs.
We expect this refresh to improve customer satisfaction enable better inventory management and availability and improved margins.
Our major area of innovation involves our patented and focus powerline control technology. This offering enables hard wired digital dimming and color tuning control to any lighting circuit without additional control wiring.
We believe this is a disruptive solution for a 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 in home, 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 new boat line.
[noise] of UV C disinfection solutions for mobile residential and commercial use were introduced at the end of fourth quarter last year.
First quarter of this year, we have seen additional sales traction and are building both the new brand a new category of U B C area just in sectors 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 Doctor Phil show with additional media opportunities in the works.
We're focused our brand building efforts I do about traveler, which offers the lowest entry costs at a lower overall cost of ownership compared to its air purifier competitors.
With that I will turn the call to Todd to review, our financial performance for the quarter.
Todd.
Thank you Steve.
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, you had are dependent on many factors, including government funding U S. Navy award in new ship construction schedules and the timing of that maybe that's sold maintenance schedules.
When compared to $2 4 million in the fourth quarter of 2021 net 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.
221000, as compared to the first quarter of 2021.
Commercial sales were slightly below the prior quarter on a sequential basis.
As Steve mentioned, we're 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 in government funding for certain projects and the continued delayed timing of orders.
Gross profit for the first quarter of 2022 was a negative $26000 compared with positive 600000 in the first quarter of 2021.
As a percentage of revenue gross profit margin was negative one 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 the lower sales levels.
Product mix, primarily the margin impact from decreased military and maritime market product sales and the impact of higher freight costs.
And the price sensitive markets. We compete we're very limited in our ability to pass through higher freight cost to customers.
The focus on value engineering throughout our R&D and 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 expansion, reducing our square footage out of annual rent costs by approximately 415420 $5000 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 both gross profit margins for excess and obsolete in transit and that reliable value inventory reserve resulted in a non-GAAP adjusted gross margins of positive 5% for the first quarter of 2000 2022.
Compared to 24, 3% in the first quarter of 2021.
Based on a almost a fixed cost 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 twenties.
As we move forward. It was run rates, we untested anticipate we will begin to approach the high twenties percentage range as we introduce new products and then 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 with $2 6 billion compared to $2 9 million in the first quarter of 2020 one.
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 <unk> 44 per share of common stock for the first quarter of 2022, compared with a net loss of $1 6 million or negative <unk> 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 our sources of income such as incentive compensation and the gain on forgetting that the P. P. P loans and 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 for the first quarter of 2022 was primarily due to a combination of gross margin reductions in lower sales.
Now I'd like to turn to the balance sheet.
Cash was.
$200000 as of March 31, 2022, as compared to $2 $7 million as of December 31, 2021.
As of March 31, 2022 the.
The company had total availability of $1 $1 million, which consisted of 200 200000 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 31st 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 that simply looking at cash balance or even net debt on the balance sheet.
Excess borrowing availability availability on our credit facilities represents the difference between the maximum borrowing capacity of our credit facilities and our actual borrowings under our credit facilities.
During the first quarter of 2022 cash used in operations was $2 $7 million or.
Our net inventory balance of $7 4 million as of March 31, 2020 to decrease slightly from $7 9 million balance at the end of December 31st 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're 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.
Yeah.
Finally, as you May know given our recent 8-K announcement this will be my final earnings call, while the CLO 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.
<unk> to be supporters of energy focus and committing to the same quality and attention that it 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 of the company has already created in the form of Red Kap and focus and Nouvelle in new products I have no doubt are yet to come as well as the extremely high quality and durable product the company sells to U S military.
While gaining larger portions of projects with high quality white like Leds that are consistent with energy focus has very strong brand.
As the company strengthen enhances the selling and distribution capabilities.
All the earmarks for driving improved performance as the innovative and proprietary technologies gained 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 speak for closing comments.
Thank you Todd 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 Todd 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. We expect improved results in the second half of this year.
With that we'd like to open the call to questions.
Operator.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Thank you. Our first question is from Amit Dayal with H C. Wainwright. Please proceed with your question.
Good morning, everyone and thanks for taking my questions just to begin with.
How should we think about gross margin.
Expectations, you know down the line in next few quarters I know Todd mentioned you are working on some cost cutting their foods and if revenues pick up you could be at the mid 20% levels, but.
You know what kind of visibility do you do you have right now to sort of hit dues revenue.
Our revenue levels.
And Matt This is Todd I'll take that one so right now we are the the headwinds that we're battling in and actually getting some nice solutions to our the the sales with the fixed cost and as we noted.
Starting July 1st 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 were expecting well will also says we're also working on fleet cost per unit, our supply chain folks have developed methodologies to get more units and each container, which reduces our cost per unit I don't know you've probably heard from other companies.
You follow there have been literally five to 10 times 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.
So these are mostly inflationary pressures you're seeing or.
I mean, it's a mix of revenue levels and some supply chain slash 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 I'd say aye.
We've seen that in some of our parts I'm not across the entire portfolio as much as maybe other industries, but on the freight side and on the <unk>.
Cost side, where we're definitely taking significant making significant efforts to reduce those.
Yeah, I would just add that I would just add that you know.
We have it.
Reason, a bowl level of fixed cost and so you know the low sales level reporting.
You know it does absorb.
As much fixed cost as we'd like so you know just improvements in revenue that we expect will help.
And we've also done some things like as Todd said, reducing our.
Real estate footprint by about half, which takes significant you know fixed cost out of our.
Out of our P&L.
On the you know 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 you know we tend to see a higher margin on our military sales that are commercial sale.
So as you know we've been waiting for a couple of large projects on the military side. So it does come to fruition, we should see improved margins from that side of the business.
And as Todd reflected you'll probably the freight costs are the most inflationary component.
What we saw in the first quarter.
And we're working on some some better inventory management supply chain management too to address those so we.
We have a lot going on to improve margins over time.
Understood. So should should I assume operating costs to sort of stay where they are or maybe come down a little bit.
But maybe you based on seeing improvements on the cost of goods line because.
Because of these initiatives.
Yeah, we've we've taken a little bit about or out of operating costs 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.
From a liquidity perspective, I know, Doug you trying to reassure everyone about how to balance your disposition, but is that sort of you know.
A little bit of an overhang in terms of your ability to win contracts et cetera. Just wanted to understand you know how your balance sheet.
It's positioning you from that perspective.
It's a good it's a fair question, we have not had any feedback and or Ah indication back from our sales team or customer facing folks that our balance sheet is impacting sales.
So we've.
We've got a good set of agency and direct relationships.
In fact, we're expanding there.
And.
I haven't seen I haven't had any feedback that you know balance sheet is holding any went back on buying product.
Understood and any last question I guess, what is in the pipeline right now between sort of the order of them.
You know the the.
But the lighting products and the disinfectant offerings what is in the pipeline.
Our backlog if you could give us any color on that.
You mean in terms of current pipeline and current pipeline and backlog are you talking about new product introduction.
No garden pipeline backlog from from soon.
Legacy offerings.
We tend to 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 we do have some backlog, but I'd say that a significant amount of backlog as we do tend to ship as who receive orders.
Okay.
Those are my questions. Thank you so much.
Yeah.
Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone.
And then the question queue.
Thank you there are no further questions at this time I'd like to turn the floor back over to management for any thoughts.
One moment, we have one question in the queue.
Yeah.
Our next question is from Bill Hardy private Investor. Please proceed with your question.
Good morning, I almost got locked out.
I didn't hear the.
Response on the <unk>.
So my question was it.
My questions are more focus on actual prana.
Product suite.
We're.
More or less developed and committed to for the first quarter release.
It shouldn't happen in what is a sudden cycle product.
Which was intended.
For a home office use could you comment on its availability.
Hello.
Hey, Bill sorry, it's Todd that's okay.
It's so we are.
As we said in the script the expectation is and I apologize I don't remember the specific commitments in the first quarter, but we did state in our script that that's expected to rollout late second quarter early third into the market.
So the you know the product testing that goes with lighting products and the development.
Time to Cook, that's the timing, we're looking at right now and that's what we had in the script. So you should expect to see hit the market in that timeframe. So Oh late second quarter early third quarter, then for that product.
Yeah. So it was we call it it's being focus wine.
So 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.
Hey.
It was call it sounds like last.
Last year.
You did get a reward for it.
July has two significant product.
Oh gosh.
No I'm sorry, the breadth they trade trademark name changes it's unfolding.
Yeah.
The other question is on on the tower unit.
We're disinfecting.
Disinfection product line, which again.
We're scheduled for release in.
First quarter.
That was and then it was taken out of it.
Vale ability.
Wait.
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 challenge supply chain for some time now so we are working hard to get new boards and to.
To bring those products up to where we are.
Our ready to sell them.
So it's it's actually.
Well, let me just ask this question has the problems get solved.
And as the unit reliable now.
We're waiting for new boards to come in to test. So we havent done that testing okay. So.
Haven't verified the reliability.
We had a we had a supply problem with the initial set of boards at the units came in with and so we've worked through.
You know some some rework on those and we're waiting for a replacement set of boards to come into 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.
E traveler is as we mentioned in the call.
Travelers launched and out there and available and we've had some success with the Doctor Phil show another other approaches to marketing in that product.
Yeah I've read.
You know I guess, you had seven comments on it.
Houston and the acceptability.
On your Oh.
Right. Okay. Thank you very much I sure hope, we get sales coming much stronger than they are now thank you.
Yeah.
Thank you there are no further questions at this time I'd like to turn the floor back over to management for any closing comments.
So I'll just say thank you for all of your attention and support.
We said we also.
As Bill suggested certainly look forward to improving our business performance on both the topline and Bottomline.
Going forward.
We've got a lot of work we've been doing and will continue to do and we should see those results as we go forward.
And in the meantime, I will again, thank Todd for his support.
Over the last couple of years and and.
Seeing us through today's earnings call and transition over the next few weeks.
Yeah.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Yeah.
Thanks.
Yeah.
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