This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk06: Greetings and welcome to 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. If anyone should require operator assistance during a conference, please put star zero on your telephone keypad. 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.
spk02: Thank you, Operator, and good morning, everyone. Joining me on the call today is Stephen Sokoloff, 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 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 10Q filed with the Securities 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 bases. 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 will now turn the call over to Steve.
spk03: Thank you, Jim. Good morning, everyone. To remind you what we have been communicating over the last few months We have been pursuing initiatives to improve the energy-focused business through, number one, bringing more value-added, differentiated products to the marketplace, number two, aligning our team around near-term opportunities with an emphasis on execution, and number three, streamlining our expenses to reduce our cash burn. Our goal was to position the company for improved financial results in the second half of this year. Now, let me review where we stand on each of these initiatives. First, we have made significant progress on new product development. Our REDCap emergency lighting products continue to be unique in the market and see strong demand. We were supply constrained by chip shortages, which you'll see had an impact on our results. Fortunately, we believe we've alleviated that problem with some great engineering work that expanded the available chips we could use and we have now secured additional supply. In a few months, we expect to have out our next generation version of this product. A revamped line of traditional tubular LED products, which we call our white caps, also are planned to be available for sale later this quarter. We anticipate these updated offerings will dramatically reduce inventory and logistics complexity and product costs. reducing risk of shortages, and improving margins. Finally, we are beginning to see a ramp up in sales of our InFocus control products. We have several versions of switches and lamps for both retrofit and new applications. We already have a dozen customer deployments and are building marketing case studies and go-to-market plans. We believe this innovative power line control product line that is simple to deploy even in retrofit applications, simple to manage, and reliable without the use of a radio will truly deliver on the innovation expected from energy focus in the lighting market. We also plan to expand the product line as we go forward with additional lamp and fixture styles. Second, in terms of aligning our team and emphasizing execution, I'm really pleased to report that our small but capable sales team has been one of the most stable parts of our organization over the last six months and remains highly focused on building our commercial sales pipeline. It's given us a chance to strengthen customer relationships, and they have added four new agencies to our distribution channels this quarter, in addition to expanding territory for an existing agent. Further, we just announced one week ago the addition of two new commercial leaders. Nick Paragin, who has 10 years of experience building and leading sales teams in the lighting industry, will join our sales team as a director of regional sales. Steve McGuire joined as director of business development to work with our head of product, Greg Galluccio, on OEM relationships that we are just beginning to develop with our power line control modules and lighting product integrations. Steve brings 25 years of experience from Philips Lighting and other companies in sales and operations, so we also expect him to help support our sales team through his industry relationships with their channel development efforts. I also want to commend Bob Smiles, who joined us in the middle of last quarter to lead our military business. Bob brings years of experience selling controls and energy management solutions to military and other government customers, following his service as a naval flight officer. It's great to have someone with his ability rebuilding our relationships in both ship applications as well as developing opportunities on military bases. We have already achieved more orders this quarter than we shipped in military last quarter. With this expanded commercial team, we are well poised to support the new product launches we expect in the second half of 22 that I mentioned. Finally, the third new hire we announced last week is Cliff Griffin, our new Senior Vice President, Corporate Controller, and Chief Accounting Officer. I'm so excited to have someone of his experience from Babcock and Wilcox as corporate controller. And prior to that, eight years at Advanced Lighting Technologies, a $200 million lighting products company. While he has only been with the company a week, I've asked him to cover our financial report today because I want our investors to get to know him. Third, as I mentioned in the last review, we have been rationalizing our team and expenses to reduce burns. We reduced our facility footprint in Solon, Ohio from 110,000 square feet to 62,000 square feet. Among other things, this required a large inventory management review, and we have been cleaning up inventory to consolidate space and prepare for the new products coming in. During Q2, we aggressively reassessed our cost drivers, and we reduced our headcount and payroll significantly. We have also aggressively attacked other administrative and IT expenses. In total, we believe we are entering Q3 with our operating expense run rate down by over 20% compared to the start of the year. Our new product lines are expected to help improve margins, and we anticipate increased margin leverage with increased sales. We have hard 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 turn the call over to Cliff to review our quarterly financial results, I want to comment on them. I was hoping we could come here to tell you that we realized a sequential and year-over-year improvement on the top line. Unfortunately, we closed the quarter at $1.5 million of revenues. However, on the positive side, the sales team ended the second quarter with strong backlog of purchase commitments. including a meaningful amount where fulfillment slipped into third quarter due to the supply constraints mentioned earlier. I applaud the efforts of our engineering and operations team that did everything they could do to deliver, and they have worked diligently into the beginning of this quarter to fulfill those orders. We have already shipped over 70% of this backlog. As a result, we start Q3 on stronger footing and are working to build momentum. Also, after reporting negative gross margins in Q1, I hope we could report a complete rebound based on all of our improvements, but that's tough with only a million and a half of realized sales, given the impact of our fixed cost and product mix. We are reporting 7.4% margins, which is a significant improvement over prior quarter. I am really looking forward to presenting continued progress in our turnaround over the second half of the year. Thank you very much. And now let me turn it over to Cliff Griffin to review our Q2 financial results.
spk01: 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, that military sales declined to 0.5 million in the 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 delay 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 margins 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 35 cents per share of common stock for the second quarter of 2022, flat as compared with a net loss of 2.5 million or negative 59 cents 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 increase adjusted EBITDA loss in the second 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. 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 borrowings 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 30th, 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.
spk03: 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 a quarter. With that, we'd like to open the call to questions.
spk05: Operator?
spk06: Ladies and gentlemen, at this time, we will be conducting a question and answer session. If you'd like to ask a question, you may press star one on your telephone keypad. The 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 getting speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Emmick Gale with HC Wainwright. Please proceed with your question.
spk04: Thank you. Good morning, everyone. So, Steve, just to begin with, you know, from a – Revenue execution perspective, do you feel, you know, with the visibility you have now or currently that 3Q and 4Q, you could start seeing improvements relative to 2Q22?
spk03: 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 red cap sales, given that we're now well-stocked with red cap. Later this quarter, we'll have our white caps in, and as I said, we've got our first dozen customers deployed with Enfocus 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.
spk04: Understood. Could you remind us what the backlog is or was, you know, at the end of Q22?
spk05: I don't think we reported that. Okay. Understood. how much are you expecting to, you know, get from these, you know, the remaining inventory that you have left? Do you have an idea on that side?
spk03: You're asking for the 7 million of thereabouts of inventory in our book.
spk04: The stuff that you are sort of, you know, unloading, like, you know, how much should investors sort of expect you could get for all of that?
spk03: Yeah, that's a good question. As I said, the, uh, We've had a lot of inventory, you know, running about 7 million on the books for a couple quarters now. And so we've been going through a major inventory review of the saleability and putting in place price sheets, getting information out through our salespeople to our channels, and trying to get that inventory moved as quickly as possible.
spk00: Okay.
spk04: 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?
spk03: On the cost structure side?
spk04: Yes, yes.
spk03: Yeah. And by the way, I just wanted to clarify, when I 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 space consolidation. 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 costs as we go forward.
spk04: Okay. Yeah, that's really all I have. I'll take my other questions offline. Thank you so much.
spk05: Thank you, Amit.
spk06: If there are no other questions in the queue, I'd like to hand the call back to management for closing remarks.
spk03: 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 substantial improvement in our business and results, and appreciate your support, and we look forward to communicating our progress as we go forward.
spk05: Thank you.
spk06: Ladies and gentlemen, this does include today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.
Disclaimer