Energy Focus, Inc.
Q2 2022 Earnings Call Transcript

Published: 11 Aug 2022

[Operator:]

Greetings, and welcome to the Energy Focus Second 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. [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 for Energy Focus. Thank you. You may begin.

[Jim Warren:]

Thank you, operator, and good morning, everyone. Joining me on the call today is Stephen Socolof, Chairman and Interim Chief Executive Officer; and Clifford Griffin, Senior Vice President, Corporate Controller and Chief Accounting Officer. Before we begin today's call, I'd like to remind everyone that, we'll be making certain forward-looking statements. These statements that are based upon information that represents the company’s current expectations or beliefs. These 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 Securities and Exchange Commission. 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 releases, 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.

[Stephen Socolof:]

Thank you, Jim. Good morning, everyone. To remind you, while we have been communicating over the last few months, we have been pursuing initiatives to improve the energy focused business through

[Clifford Griffin:]

Thank you, Steve. Net sales of $1.5 million for the second quarter of 2022 decreased 28.6% compared to sales of $2.1 million in the second quarter of 2021, mainly due to delayed funding related to military projects, utilizing our products, as well as fluctuations in the timing and pace of commercial projects, and the lingering macroeconomic supply chain impact as a result of the COVID-19 impact. The sales cycles for the military are dependent on many factors, including government funding, U.S. Navy award and new ship construction schedules and the timing of vessel maintenance schedules when compared to the 0.9 million of sales in the first quarter of 2022, net military sales declined to $0.5 million in to second quarter of 2022. 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. Sales of our commercial products were approximately $1 million or 65.9% of total net sales for the second quarter of 2022, down 103,000 as compared to the second quarter of 2021. Commercial sales were slightly below the prior quarter on a sequential basis. Volatility in the opportunities and timing related to larger commercial projects, as well as supply chain impacts from the COVID-19 pandemic continue to be reflected in these results. 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. Gross profit for the second quarter of 2022 was $109,000 compared to $393,000 in the second quarter of 2021. As a percentage of revenue, gross profit margin was 7.4% in the second quarter of 2022, compared to 18.9% in the second quarter of 2021. The year-over-year decline in gross margin was primarily driven by lower sales levels and less favorable product mix, primarily the margin impact from decreased military product sales. Adjusting gross profit margin for excess and obsolete in-transit and net realizable value inventory reserve and scrap write-offs related to our inventory reduction project contributed to the non-GAAP adjusted gross profit margins of negative 5.1% for the second quarter of 2022, compared to 17.6% in the second quarter of 2021. Operating expenses in the second quarter of 2022 were $2.3 million, compared to $2.6 million in the second quarter of 2021. The decrease is primarily attributable to lower SG&A expenses, due to continued tight cost management efforts and furloughing some employees. Loss from operations for the second quarter of 2022 was $2.2 million, relatively unchanged to the prior year comparable quarter loss amount. Net loss was $2.5 million or negative $0.35 per share of common stock for the second quarter of 2022, flat as compared with a net loss of $2.5 million or negative $0.59 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 non-recurring charges and/or sources of income such as incentive comp was a loss of $2.1 million for the second quarter of 2022, compared with a loss of $2 million in the second quarter of 2021. The increased adjusted EBITDA loss in the second quarter 2022 was primarily due to the combination of lower sales and gross profit margin reductions. Now, as I could turn to the balance sheet. Cash was $0.9 million as of June 30, 2022 as compared to $2.7 million as of December 31, 2021. As of June 30, the company had total availability of 2.5 million, which consisted of $0.9 million of cash on hand, and $1.6 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 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 and our actual borrowing under the credit facilities. During the second quarter of 2022, cash used in operations was $2.6 million. Our net inventory balance of $7.2 million as of June 30, 2022 decreased from the $7.9 million balance at December 31, 2021 as 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 2022, we began disposing a substantial portion of our excess and obsolete commercial finished goods inventory that was more than 90% reserved. As of June 30, 2022, approximately 204,000 of such inventory had been disposed of. Additional inventory management efforts are expected to continue in the third quarter of 2022. However, we do not expect these to have a meaningful impact on results given the level of reserves. In April 2022, we entered into an unsecured bridge financing agreement and generated 1.8 million in net liquidity. Also, in June of 2022, we completed a private placement for the issuance of common stock and warrants to certain institutional investors raising 3.5 million in gross proceeds and approximately 3.2 million in net proceeds after offering cost. With that, I will turn the call back to Steve for closing comments.

[Stephen Socolof:]

I want to thank Cliff and others for joining us to achieve our vision. As I said earlier this year, we prioritize positioning energy focus with new products, a reduced cost structure, and strong team to start to show improved results in the second half. Here we are, we are hard at work. We look forward to providing good news as we move forward and speaking to you again in the quarter. With that, we'd like to open the call to questions. Operator?

[Operator:]

[Operator Instructions] Our first question comes from the line of Amit Dayal with H.C. Wainright. Please proceed with your question.

[Amit Dayal:]

Thank you. Good morning everyone. So Steve, just to begin with, from a revenue execution perspective, do you feel with the visibility you have now or currently that 3Q and 4Q, you could start seeing improvements relative to 2Q 2022?

[Stephen Socolof:]

Yes, Amit. As I said, we actually got off to a good start with the backlog from Q2 that we've already shipped about 70% of. And I think that gave us a good head start. As I mentioned on the military side, we've already received orders so far this quarter that exceed what we shipped last quarter, and we're starting to see some good progress in terms of our RedCap sales, given that we now have – we're now well stocked with RedCap. And later this quarter, we'll have our [white caps] [ph] in. And as I said, we've got our first dozen customers deployed with and focus switches and we've got really good feedback from those, and our sales team is really excited to be out selling these new products in the market.

[Amit Dayal:]

Understood. Could you remind us what the backlog is or was at the end of [2Q 2022] [ph]?

[Stephen Socolof:]

I don't think we reported that.

[Amit Dayal:]

Okay. Understood. How much are you expecting to, you know, get from the remaining inventory that you have left? Do you have anything on that side?

[Stephen Socolof:]

You're asking for the 7 million of thereabouts of inventory in our book?

[Amit Dayal:]

The stuff that you are, sort of, you know, unloading, like, how much should investors, sort of expect you could get for all of that?

[Stephen Socolof:]

Yes, that's a good question. As I said, we've had a lot of inventory running about [$7 million] [ph] on the books for a couple of quarters now. And so, we've been going through a major inventory review of the salability and putting in place price sheets getting information out through our salespeople to our channel and trying to get that inventory moved as quickly as possible.

[Amit Dayal:]

Okay. And operating costs are down, sort of 20% from levels seen in the beginning of the year. Is that going to, sort of stay at those levels or do you foresee potential cuts beyond the 20% level?

[Stephen Socolof:]

On the cost structure side?

[Amit Dayal:]

Yes, yes.

[Stephen Socolof:]

Yes. And by the way, I just wanted to clarify when I'd say 7 million of inventory, I'm talking about net of reserves. So, we've also been as we mentioned, cleaning out our reserved inventory as part of our [base consolidation] [ph]. On the cost structure, I think we've made really good progress. I think we're very focused on continuous improvement there. And there's – as we all know some significant level of inflation in the world today and we are committed to continuing to reduce cost as we go forward.

[Amit Dayal:]

Okay. Yes, that's really all I have. I’ll take my other questions offline. Thank you so much.

[Stephen Socolof:]

Thank you, Amit.

[Operator:]

There are no other questions in the queue. I'd like to hand the call back to management for closing remarks.

[Stephen Socolof:]

Again, I really appreciate your attention on the call and participation. As I've said for the last few months, we've been very focused on coming into the second half of the year, well positioned for a substantial improvement in our business and results. And appreciate your support and we look forward to communicating our progress as we go forward. Thank you.

[Operator:]

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.