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spk07: Greetings. Welcome to the Energy Focus fourth quarter and fiscal year and 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. Please note, this conference is being recorded. I will now turn the conference over to your host, Brett Moss, with Hayden IR. You may begin.
spk04: Thank you, operator, and good morning, everyone. Joining me on the call today is Stephen Sokoloff, Interim Chief Executive Officer and Lead Independent Director, Todd Nestor, Chief Operating Officer and Chief Financial Officer, and Greg Galluccio, Senior Vice President of Product Management and Engineering. Before we begin today's call, I'd like to remind everyone that we'll make 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 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 from the most recent 10-K file of 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 during this call and in 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 Stephen. Stephen, the floor is yours.
spk06: 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 in the retrofit lighting market. Unfortunately, the environment of the last couple of years challenged 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-focused needed leadership more focused on execution in launching and bringing these new products to our core markets and capitalizing on these near-term opportunities. 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. 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 are also driving forward our leading new lighting products and 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, both 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 Lumini, Sora, and Rambus. Brian Legardo is a seasoned financial executive with extensive global experience leading global finance, operations, supply chain, and human resources organizations. Brian 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, Levitan Manufacturing, and MaxLight. 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 I do that, I will mention that we have now launched our NUVO line of UVC 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 stationary 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 Galluccio to talk about our new lighting products for commercial and military markets.
spk05: Thanks, Steve, and I'm excited to join Energy Focus. Energy Focus has, for years, carved out a position as an innovator in the lighting industry, bringing exciting technologies to market and addressing unique requirements of certain customer segments. The REDCap 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. I will also oversee product management, ensuring strong business discipline across the entire product lifecycle. With respect to new products, first, we are developing the next generation of our REDCap battery backup emergency lighting product with additional features that we expect will continue to differentiate it 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 N-Focus power line 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 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 won the 2021 Top Product of the Year Award from Environment and Energy Leader for our EnFocus Lighting Control Platform. This prestigious accomplishment is a strong validation of the innovation and potential impact of our EnFocus solution from expert judges that consider the EnFocus 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 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.
spk06: 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 am 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?
spk01: 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. 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 last year, providing a one-time boost for the quarter revenue. Gross profit for the fourth quarter of 2021 was $0.2 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 7.9% in the fourth quarter of 2021 compared to 38.3% in the fourth quarter of 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 0.2 million, or 9.5% of net sales. These negatives were offset slightly by favorable pricing and usage variances for material and labor of 0.2 million, or 7.4% of net sales in 2021. Adjusting 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 and a half to $4 million we continue to expect our overall gross margins to be in the mid-20s. As we move forward on those run rates, we anticipate we will begin to approach the high 20s 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. 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, operating expenses increased approximately $172,000 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 NUVO product line. Loss from operations for the fourth quarter of 2021 was $2.4 million, up compared to an operating loss of $0.9 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 $546,000. Net loss was $2.6 million, or negative 50 cents, per basic and diluted share of common stock for the fourth quarter of 2021, compared with net income of $65,000, or one cent, per basic and diluted share of common stock in the fourth quarter of 2020. which included the non-cash 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 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 and amortization, interest expense, stock-based and other non-recurring charges and or 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 $0.8 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 to 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 commercial products were 4.7 million or 47.5% of total net sales for 2021 compared with 5.4 million or 32.1% of net sales for 2020. Net sales from 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 30.8% of net sales for 2020. Gross margin for 2021 included favorable price and usage variances for material and labor of 0.8 million or 8.3% of net sales and unfavorable inventory and warranty reserve adjustments of 0.3 million or 2.9% of net sales. Adjusted gross margins was 18.8% for full year 2021 compared to 27.1% in the prior year, largely reflecting a 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 non-cash pre-tax gains of $1.7 million from the forgiveness of our Paycheck Protection Program loan and other income recorded relating to the Employee Retention Tax Credit. This compares with the net loss of $6 million or a negative $1.38 per basic and diluted share of common stock for 2020, which included a non-cash 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 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 31st, 2021, compared to 1.8 million as of December 31st, 2020. As of December 31st, 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-gap 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 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 1.7 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 attributed with a working capital of $0.9 million, while cash used in investing activities was $132,000, and the company generated $3.8 million in cash from financing activities. Our net inventory balance of $7.9 7.9 million as of December 31st, 2021 increased 2.2 million over December 31st, 2020. With that, we would like to open the call to questions. Operator?
spk07: 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 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would 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 start key. One moment, please, while we poll for questions. Our first question comes from the line of Amit Dale with HC Wainwright. Please proceed with your question.
spk08: Thank you. Good morning, everyone. I appreciate all the changes and developments taking place at the company at this point. Just a high-level question for you guys. I guess the product lineup has always been pretty strong, but we haven't had much take on the commercial side of these things. What are you thinking of 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.
spk06: 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. I think this company has traditionally been a very innovative and product-oriented company, and that's what built its 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 the coming launch of both our new REDCap emergency lighting product as well as our EnFocus power line control products. So we're really excited about these two new product lines that we're bringing to the market. We are, you know, we've restructured the organization, realigned engineering and operations, and changed 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.
spk05: This is Greg Lucci. 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 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, we're reducing our costs on those products that are supplied from outside. and increasing our visibility across sales channels of the products that we'll 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.
spk08: And maybe for Steve, you know, just trying to see how much time you maybe sort of, you know, giving to accomplish, you know, these goals? And if not, I mean, is there any other strategic alternative on the table or consideration in terms of M&A or, you know, even a sale of the company to a larger player?
spk06: Yeah, I was putting in significant time with the company as lead independent director over the last year. And so, yeah, Obviously, I've increased my commitment taking on the interim CEO role as we separated our prior CEO. So I am putting in significant time working with the executive and leadership team, which, 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 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 Nuvo product line as well and what we think that can bring the company. We are very committed to organic growth at this point, and certainly we've got some great advisors around the table as well with our two new board members, and we will be open to considering strategic options as we go forward.
spk00: Awesome.
spk08: That's all I have for now, Steve.
spk00: Thank you so much.
spk07: And again, as a reminder, if anyone has any questions, you may press star 1 on your telephone keypad to join the queue. Our next question comes from Bill Hardy, a private investor. Please proceed with your question.
spk03: Good morning, and welcome from Dallas, Texas. And to Mr. Sokoloff, I wish you the best and a good future with your new business. temporary CEO appointment. I have two questions. One is on the ABR UV, which is the troffer with a UV lamp and two energy focus or in-focus lamps. It was in the last conference call on the third quarter of 21 mentioned that that would be available in the first quarter of 2022. Could you give me a status on where we stand on that product?
spk06: We haven't been happy with the progress in the development of that product. The first samples really didn't meet our expectations, and so we've shelved that product for now.
spk03: So that product is not being offered sometime in 2022?
spk06: It's not ready for sale now, and we're prioritizing in our R&D and operations organization the launch of the new REDCap and the InFocus products, as well as the Nuvo products. So I would say it may or may not be launched in 2022, but it's not a priority of focus right now.
spk03: Okay. There was also a comment that a home InFocus-type product would be available also in the first quarter. Is that still on track, or is that –
spk05: Yeah, this is Greg Galluccio. Yes, that product is completed. It's launching now. We expect to achieve revenue results from that product in the second half of the year.
spk06: Since Greg runs our engineering and product organizations, I'll let Greg answer about the troffer as well.
spk05: Yes, with regard to the troffer, there's a lot of proliferation throughout the commercial sector for these troffers. We don't see a lot of movement, and there's also some confusion in the market as to what makes a 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.
spk01: And I'll just add, this is Todd, I'll add what Steve and Greg said. Our current prioritization on the UVC side is the more consumer applications of the Nuvo Traveler. That's the portable device that you might have seen, as well as our Nuvo Tower. So, you know, as Steve said, we're prioritizing our efforts on products that are ready for sale and offer the market opportunities we believe are attractive.
spk03: Okay. Major question two, in the third quarter conference call, it was also indicated that there were two military contracts which were processed but couldn't be released because the budget hadn't been approved. I see recently where the budget has been approved. Do we still expect to see those contracts being released?
spk01: This is Todd again, Bill. We have not seen them released yet. 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. About 90% to 95% of the sales are that. And with the products that were on order, there will be other opportunities and ships for us to bid on and win in that regard. We are a recognized leader in the product that we are providing, and we continue to expect to remain that.
spk02: Well, do you expect that those orders will be released?
spk01: We don't have any new information for a new update on that as far as any indications of the budget being released well my impression was that the budget was released budgets are released in general specific applications are on a purchase by purchase category by category and so there's prioritizations that have been different than in the past currently okay well that's all I have thank you for your time and answering my questions I appreciate it thank you Bill
spk07: And we have reached the end of the question and answer session, and I'll now turn the call back over to Steve and Sakhala for closing remarks.
spk06: Thank you all for listening today and appreciate the opportunity to tell our story, and we look forward to visiting you again in a quarter and giving you the updates on Q1 and progress through the year. Thank you.
spk07: And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.
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