Energy Focus, Inc. Q4 FY2022 earnings call

• Lesley Matt joined as CEO in mid-September 2022, focusing on returning to core, addressing supply chain constraints, cost-cutting, and workforce restructuring.
• Strategic investment from Sander Electronics in January 2023 improved balance sheet, restructured debt, and addressed supply chain issues.
• RedCap emergency lighting has a backlog, in-focus power line control is gaining interest, and government sales channel was strengthened.
• Expansion into gallium nitride power supplies, aligning with core business.

For the fourth quarter of 2022, net sales were $663,000. Commercial products had net sales of $349,000, which was 52.7% of total net sales. Military products' sales decreased. For the full year 2022, net sales were $6 million. Commercial products contributed $3.7 million (62.8% of total sales), and military and maritime products contributed $2.2 million (37.2% of total sales). Gross loss for Q4 2022 was $0.2 million, and for full year 2022, it was $0.3 million.

• Lesley Matt expects to at least reach 2021 sales levels, potentially exceed.
• Anticipates commercial and military mix to be around 50-50, with larger military backlog in Q1.
• Hopes to improve margins on both commercial and military lines with Sander's assistance.

• Supply chain challenges, particularly with ICs and RedCap componentry.
• Market price pressures on current inventory.

Q: In terms of the recovery of top line returning to previous levels, should we expect 2023 to revert to, say, 2021 levels or could you reach the 2020 level reached in excess of $15 million?

A: My expectation is to at least reach the 2021 models, if not exceed.

Q: In terms of the distribution between commercial versus military, how should we look at the mix going forward during the rest of the year from – and contribution from military over the year?

A: We have a large backlog heading into 2023, and I anticipate our mix to be around 50-50 as we continue throughout the year with a larger amount in Q1 because of that slippage that we reported in Q4 of ‘22.

Q: And are the margins – how is the margin profile? And will you just give us a high level on the type of products that are going to commercial versus military and the margin differences there?

A: There are large margin differences between our commercial and our military products. Through our cost reduction efforts, we are hopeful to improve our margin levels on both commercial and military lines as we move forward throughout 2023. And our partners, Sander Electronics are helping us improve those margin levels, which we hope to report in future quarters.

Q: On the EnFocus module, is that rollout underway for the EnFocus module?

A: Unfortunately, our EnFocus rollouts were delayed due to some supply chain challenges in 2022 and beginning – at the start of this year as well. We are hopeful to resume those activities and launch those products in 2023.

Q: On the military, how much visibility do you have like 1-year out, 2-year out, how should we think about it?

A: As we look at military sales, we – historically, we started to build our pipeline and backlog on military two quarters to three quarters out before those sales are due to the military. So, we have been rebuilding throughout the end of ‘22 into the beginning of ‘23, a significant portion of military pipeline that we will realize here in 2023.

Q: Is the inventory that you have mostly mark-to-market in terms of what you expect from sales, or should we expect negative gross margins from this going forward at least in the next few quarters?

A: It is mark-to-market. That is why we took the large E&O reserves at the end of 2022. So, that way, we started with a clean slate for 2023 and could have better margins moving forward.

Q: On the operating expense front, two-thirds of the headcount reduced, but in terms of dollars, how should we look at it? Is that the run rate, or should we expect further reductions?

A: There are further reductions that have been happening. And we expect to realize some, our Q4 number is pretty close, but we have reduced our payroll expense significantly over the prior year.

Q: In terms of cash availability, what is the level currently and throughout the year, how do you plan to like fund the operations and any rollouts of new products?

A: We likely spoke to kind of restructuring our secured lending facilities following that strategic investment. Looking ahead to 2023, I think we will be rebuilding our working capital and financing structures. We are working off of cash collections largely at this point. But we have significantly reduced our borrowing costs as we do that and working with our supply chain partners to kind of restart the engine there.

Q: Supply chain issues have been lingering. Is there any particular item or items that are a cause of the issues? And how do you expect them to be – these issues to be resolved over the next few quarters?

A: Our ICs are still a large component issue that we have been impacted by, and our industry has been impacted by as a whole as that continues to write itself, that will also free up our ability to bring those products in. Additionally, our RedCap product is a very unique product in its design and structure. So, we have had some challenges in ensuring that we can source the right componentry specific to that patented product. That we believe our sources have been able to restart their pipelines which will allow us to restart our pipeline.

Q: On the GaN power supplies, any insight into specific applications and timeline for introduction?

A: In regards to the GaN products, we are looking at working within the lighting industry first because that is where our expertise lie. Some of the opportunities that we are looking to go after may or may not be realized in 2023 and are more of a long-term strategic play just because it will involve additional development processes with potential partners. However, we are looking to be able to also supply within the lighting display market in module here hopefully before the end of the year.

Q: Can you provide any comment on monetizing the patent portfolio?

A: We currently look at all of our assets and continue to look at different ways to move our best foot forward as we continue to grow. Right now, my focus is on generating sales. But that’s something that we could put for the future.