Q3 2022 Energy Focus Inc Earnings Call

Ladies and gentlemen, greetings and welcome to the energy focus fourth quarter 2022 earnings 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.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Jim voted senior Vice President and General Counsel of energy focus.

Please go ahead Sir.

Thank you operator, and good morning, everyone.

Joining me on the call today is Leslie map, Chief Executive Officer, and Stephen Sokoloff Chairman of the board.

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 required by law.

Also please note that this call and in the accompanying press releases certain financial metrics are presented on both GAAP and non-GAAP adjusted basis.

<unk> 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.

Now I'll turn the call over to Steve.

Thank you Jim good morning, everyone.

This is my third earnings call with energy focus.

With this call I am pleased to report the accomplishment of my number one objective of the year, which.

Which has been to find a permanent chief Executive officer that can help energy focus complete its turnaround and realize our vision to restore energy focus as an innovator and leader in the lighting industry.

Lastly, Matt lives locally in the Cleveland area, where energy focus is based she has been an executive in the lighting industry for a dozen years, leading marketing sales and operations.

She has already made a tremendous impact on the company.

I am happy to turn the baton over to Leslie and look forward to working closely with her our fantastic team and our supportive board to see through the turnaround of energy focus.

Now, let me introduce lastly, Matt our new CEO .

Thank you Steve as you are all aware. This is my first earnings call with energy focus since joining in September I came on board with the belief that the bounce here are good and that my experience libido straight paired with personnel. The terminal will provide me with the tools that are necessary to turn the company around I believe that my abilities.

Quickly analyze and execute strategy will be the driving force it for future success, while I have not been at the helm long enough to take responsibility for our third quarter results I want to highlight some of the items that have been implemented that will allow for future improvement I also want to thank C. Sokoloff for his service as interim Chief executive.

Officers This January Steve will be key.

So you're guiding the lighting for the company as chairman of the board.

As a reminder of what Steve had communicated previously we have been pursuing initiatives to improve the energy focused schedule through one providing value added differentiated products to the marketplace alongside expanding our lighting offering to aligning our team around near term opportunities with an emphasis.

On execution and three streamlining our expenses to reduce our cash burn and our goal was to realize improved financial results in the second half of this year now let me review, where we stand on each of those initiatives.

First our team is refreshing and excited with the progress and plans we have made regarding new product development, but our supply chain remains constrained our redcap emergency lighting products continued to see strong demand and supply limitations coppola, which impacted our results.

Currently we believe we are on track to alleviate that problem with additional engineering work and alternative sourcing options a revamped line of traditional tubular led products, which we call white cap will simplify and reduce inventory and improve margins are planned to be available for sale. Shortly finally, our old focus control.

Our products continue to gain interest as more customers are educated around this innovative power line control technology.

As more sites are deployed we are working to build marketing case studies that highlight the simplicity security and reliability of Infocus powerline control.

As we innovate and expand this product category, we're working to optimize our go to market plans.

Second in terms of aligning our team emphasizing execution I placed a significant emphasis on increasing the accountability and oversight on the sales and marketing teams I've made changes in sales leadership and adjusting staffing to eliminate silos and work collaboratively to drive revenue and result, it's early on.

With these changes and I look to the fourth quarter and 2023 as I watch for future pipeline reinvigoration that will impact with all our military sales team continues to set the bar on what pipeline growth and development looks like as we read in Germany, the maritime marine market, which unfortunately.

Lately has been allowed to whether it's Tom.

Third as Steve mentioned in the last review, we have been rationalized that rationalizing our team and expenses to reduce the burn through 2020 to right size. The organization for future success I undertook a significant reorganization, where we eliminated a number of positions to significantly reduce operating expenses.

Although these changes are difficult I went to create a culture that will all remaining and poised to have a future success with energy focus and build upon their careers I expect to see the impact of these changes on operating expenses more in the fourth quarter.

We have all looked at all opportunities to eliminate waste and they've been dealt a new mindset with employees to look at every expense to create a lean sustainable platform.

Following our shift to a reduced facility footprint in the second quarter. We have continued a large inventory management review and continued streamlining inventory to consolidate space and prepare for new product coming in.

As our product lines become available in 'twenty 'twenty three we expect that they will improve margin and we anticipate increased margin leverage with increased sale. Please.

We still have significant work to do to ramp the sales pipeline to support these levels and believe the upcoming products will refresh our offerings with meaningful revenue opportunities.

Now before I review, our quarterly financial results I want to comment on them.

Sequentially. It is early progress that we realized a modest increase in revenues closing the quarter at $1 8 million primarily through increased commercial sale. However, this is not year over year improvement on the topline, which will need to get back to on the positive side. The sales team ended the third quarter with a healthy backlog.

Clause of purchase commitments and particularly on the military side, where the order volume is typically a longer lead time made to order materials also after reporting modest gross margins in Q2, I hope that we could report a complaint rebound based on all of our improvements.

That remains tough with only $1 8 million of realized sale given the impact of our fixed costs and product mix and we slipped again into gross loss of 163000.

We are reporting negative nine 2% margin, which is in step backwards from the prior quarter. This quarter saw excess and obsolete inventory adjustment and scrap activity from us continuing to work through our inventory reduction project as well as the product mix impacts from supply chain challenges that impacted our highest margin product with <unk>.

Drove down margins I'm cautiously optimistic we will see progress in our turnaround over the next six months now let me review, our Q3 financial results.

Net sales of $1 8 million for the third quarter of 2022 decreased 35, 8% compared to sales of $2 7 million in the third quarter of 2021 mainly due to delayed funding related to military maritime projects utilizing our products as well as flux.

<unk> and the timing and pace of commercial sales projects and the lingering macro economic supply chain impacts as a result of the COVID-19 pandemic.

The sales cycle for the military maritime products are dependent on many factors, including government funding U S. Navy awarded new ship construction schedule and the timing of vessel maintenance schedules third quarter 2022 net sales of military products were flat when compared to.

Half a million of sales in the second quarter of 2022.

Well not yet the growth we are targeting we have stopped the bleeding off of just declining sales pipeline, a refocus military maritime sales effort in the third quarter.

Trading on rebuilding the channel, which has a longer sales cycle and lead times, reflecting what is frequently a made to order sale.

And we are seeing at this stages increased pipeline, which has to be worked through before it turns into revenue in the quarters to come.

Sales of our commercial products were approximately $1 3 million or 73% of total net sales for the third quarter of 2022 down 234000 as compared to third quarter 2021, commercial sales increased 313000 over the prior quarter honestly.

Actual basis volatility and the opportunities and timing related to larger commercial projects as well as supply chain impacts continue to be reflected in me it's resolved.

I mentioned, we are focused on sales execution combined with the introduction of new products to improve our position in the commercial market.

Gross loss for the third quarter 2022 was 163000 compared to gross profit of 563000 in the third quarter of 2021.

As a percentage of revenue negative gross margin was nine 2% in the third quarter of 2022 compared to 25% in third quarter of 2021 the year over year decline in gross margin was driven by lower sales less favorable product mix or in other words, primarily the margin impact.

The decrease in military and maritime market product sales as well as the impact of our inventory reduction initiatives.

Adjusted gross profit margins for excess and obsolete inventory in transit and that's where I live.

Value inventory reserve and scrap write offs related to our inventory reduction projects contributed to the non-GAAP adjusted gross margin of three 2% for third quarter of 2022 compared to a gross profit margin of 17, 9% in the third quarter of 2021 sequentially adjusted gross profit.

<unk> compared to an adjusted gross loss of five 1% in second quarter of 2022.

Operating expenses in the third quarter of 2022 were $2 2 million compared to $2 3 million in the third quarter of 2021. The decrease is primarily attributed to lower SG&A expenses due to decreased payroll and payroll related expenses.

Loss from operations in the third quarter of 2022 with $2 4 million an increase over the prior year comparable quarter loss amount of one 8 million.

Loss from operations also increased slightly as compared to the prior quarter.

Net loss was $2 7 million or 29 per share 29 cents per share of common stock for the third quarter of 2022 as compared with a net loss of $1 1 million or 22% per share of common stock in the prior year comparable quote.

Adjusted EBITDA.

non-GAAP measure.

Which excludes depreciation and amortization interest expense stock based compensation and other non reoccurring charges, an ore sources of income such as incentive compensation and the gain on forgiveness of the P. P. P long in prior periods with a loss of $2 3 million for the third quarter of 'twenty two.

Two compared with a loss of $1 7 million in the third quarter of 2021, the increased adjusted EBITDA loss in the third quarter of 2022 was primarily due to the combination of lower sales and gross profit margin reductions now I'd like to turn to the balance sheet.

Okay.

Cash was 41000 as of September 30th 'twenty, 'twenty, two as compared to $2 7 million as of December 31st 2021 as of September 30th 'twenty 'twenty. Two the company had total availability of 210000, which consisted of 41000 of cash and additional borrowing availability.

<unk> of 169000 under its credit facilities. This compares to the total availability of $4 4 million as of December 31st 2021.

As a reminder, total availability is a non-GAAP measure of our access 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 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 third quarter totaled 22 cash used in operations was $9 million.

Our net inventory balance of six 2 million as of September 30th 2022 decreased from $7 9 million balance at December 31st 2021, as a part of our expense reduction initiatives, we have significantly decreased our warehouse space beginning in the third quarter of 2022.

In connection with the space reduction in the second quarter of 'twenty 'twenty. Two we began disposing of a substantial portion of our highly reserved excess and obsolete commercial finished goods inventory as of September 30th 2022 on a gross value basis, approximately 563000 of such inventory.

Has been disposed off with an associated release of 555000 of excess and obsolete reserves.

Additional inventory management affects our pinching expected to continue in the fourth quarter of 2022.

Yeah.

On the financing side in September 2022 we entered into a short term unsecured bridge financing agreement and generated 450000 and net liquidity followed by an additional 650000 unsecured bridge financing in October and November with that I will make a few closing comments.

Yeah.

I took on this position understanding this is a turnaround effort that would require a new vision to set a path to success for the future.

Leave that energy focus has tremendous potential assuming we can bring to market the right product with the right partner at the right cost structure delivered by a lien aggressive team in order to show improved results. The entire team is focused on navigating through the storm and we aim to provide improving news as we move forward.

And speak to you again in a quarter.

With that we would like to open the call to questions operator.

Okay.

Thank you.

Ladies and gentlemen at this time, we'll 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.

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For participants using speaker equipment, it may be necessary to pick up your handset before pressing the stock east.

Ladies and gentlemen, we will wait for a moment, while we poll for questions.

Our first question comes from the line of Amit <unk>.

From H C. Wainwright. Please go ahead.

Thank you and good morning, everyone and congratulations on the new room.

I'm looking forward to hearing from you on these earnings calls going forward.

As you've taken over you know can you share with us maybe your confidence in the existing products suite at energy focus we do need to sort of reinvest in building a new set of offerings or do current offerings have a potential to gain some traction in the market.

Thank you Amit, yes, I believe that some of the current office offerings, including our Red Kap and our Infocus module.

Allow us to set the tone for future success. In addition to that we will need to come up with new and aggressive products, which our product development team has been working on in the background as we worked through supply chain constraints. However, in speaking with customers they loved being focused product and can't wait until we have more of it in stock so that they can put it in.

More beta application, it's very exciting for me as someone to watch that product line grow as powerline control I believe is a new way for the future. Additionally, as I mentioned in our press release, I think that energy focus will need to move beyond lighting products in order to have success in the future now that doesn't mean that we.

We'll move away from energy efficiency as our name is energy focus however, I believe that there's a huge market potential out there with new and innovative technology.

Can you touch on this a little bit you know where where should we expect maybe your efforts on this front.

So you'd be sort of around sort of legacy offerings.

Yeah. So there will be a tremendous amount of effort I see in the future maybe not in the immediate quarter. However in the future to develop new technologies to help service that market now I'm not prepared to fully speak on those today.

There will be more information in future quarters.

Okay.

And in terms of you know I'm sort of.

Just managing your cash burn and financing needs. You know how are you thinking about sort of you know your needs and that's why that's.

What options do you have you know.

I'm just I'm.

We'll get through this phase.

Get to a point, where you are.

Positioned to deliver a little bit more growth et cetera.

Yes from a cash perspective.

There was a tremendous amount of what I'll call leftover and right sizing of the business that needed to be done.

There were many things and many opportunities that were.

Happening, where we needed to make adjustments and spend and decreased makes it significant decreases in our cash burn in order to sustain our current sales level.

I believe that through Q4 and into early 2023, with a right sized team and new product coming in we will be able to start seeing the impact of those changes.

Okay Alright.

Alright, that's all I have for now thank you so much.

Thank you.

Okay.

Thank you.

Ladies and gentlemen, if you wish to ask a question. Please press star one.

Yeah.

Again.

Ladies and gentlemen, if you wish to ask a question. Please press star one on your telephone keypad.

Since there are no further questions I would like to hand the conference Google.

To Leslie <unk> for closing comments.

Thank you.

Again, there's an entire team focused on writing the ship with this moving forward, we work to make energy focus sustainable company not only for future quarters, but long into the future. We are taking this tremendously seriously and work to gain success as we move forward.

You all for your time and again speaking with you in future quarters.

Yeah.

Thank you the conference of Energy focus has now concluded. Thank you for your participation you may now disconnect your lines.

Okay.

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