Energy Focus, Inc. Q1 FY2023 earnings call

• Secured a strategic investment from Sander Electronics in January 2023, contributing to ~$4.8 million in balance sheet improvements. - Welcomed new Chairman Jay Huang and Board member Wen-Jeng Chang. - Addressed NASDAQ listing requirements, with conditional continued listing granted and plan to regain $1 bid price via reverse stock split at the 2023 Annual Meeting. - Sales showed improvement from prior quarter with smaller staff, built backlog of orders on military and commercial sides, and focused on new product development including LED mobile light tower retrofit and GaN power supply products.

For the first quarter of 2023, net sales were $0.9 million, a decrease of 54.9% compared to Q1 2022. Military products had net sales of $0.6 million in Q1 2023, up $0.3 million from Q4 2022. Commercial products had net sales of approximately $0.3 million, 34.5% of total net sales in Q1 2023, down from Q1 2022 but up sequentially from Q4 2022. Gross profit in Q1 2023 was $16,800 compared to a gross loss of $25,700 in Q1 2022. Gross margin was 1.8% in Q1 2023 compared to negative 1.3% in Q1 2022.

• Goal to improve gross profit by introducing new products with higher profitability and better margins. - Focus on new product development and cost standards to grow overall profitability and improve product mix between military and commercial sales. - Aim to launch GaN power supply products before end of 2023 with a potential customer lined up.

• Noncompliance with NASDAQ listing requirements and risk of delisting, though conditionally granted continued listing but need to address $1 bid price via reverse stock split.

Q: Glad to see progress on all fronts, including financing, restructuring and also on commercial performance. The gross profit improvement that we have seen, is it likely to stay in the next few quarters? Or was there any other onetime item that helped improve the gross margins?

A: Our goal is to improve our gross profit overall by introducing new products into the market, which will improve our overall margin as we move into future periods. So this is just the beginning of improvement on gross profit. Also, no onetime charges reflected in this quarter. The flat but positive gross profit margin is a sign of us delivering on the answer to that question, which is we took those charges in the past. The inventory is carried at what's salable. And then going forward, we're constantly monitoring that and looking to grow gross profit margin as our higher-margin products improve the mix down the road as supply chain backfills.

Q: Understood. Got it. And so just to segue based on that response is that the inventory is at around $4.9 million. Is there a risk of this becoming stale or a requirement need to impair this anytime soon?

A: That's a great question. Right now, unfortunately, for us, a good portion of our inventory valuation is on our EnFocus tube products. However, as I mentioned in the presentation, we are still waiting on inventory for the switches. So the tubes don't sell as well without the switches. So I do not believe that this product will become stale as we have the 2 products in the stock, and we're just waiting on those switches to get really moving on those EnFocus power line control products.

Q: The next question is on -- I guess you answered it partially, Lesley. But going forward, should we see a sequential improvement in the top line? I know the new hire on military sales is a good step in the right direction. But how do we see product mix and revenues sequentially growing over the next few quarters?

A: Sure. So again, as we continue to do 2 efforts, one is bring new products to market that have higher profitability and better margins for the organization, and two is improve our cost standards on our existing products. That will help to grow our overall profitability in future periods and a better and healthier mix between both military and commercial sales. Again, our commercial margin was through sell-through products. So it had very little because of the impairment charges that we had put. And a lot of our military products, the sales that happened in Q1 were at contract pricing, many of them. And the cost of materials had slightly increased based off the old -- based off just what's happening in the world today. So our contract pricing is somewhat stale. So it's mixing the contract pricing sales with other higher margin sales of the same products to create a healthier balance.

Q: And then just last one on the GaN power supplies. Do we have a time line on this in terms of development milestones as well as maybe commercial sales down the line?

A: Sure. So as you may or may not be aware, the power supply product is a much higher technical sale, and it requires a lot of development time and attention in order to be able to fully put it into market. We're currently working with our development team today to ensure that we meet all compliance and regulatory standards so that we can launch that product successfully, hopefully, before the end of the year. And another nice thing is we actually have a potential customer lined up for those products once we are able to launch them. So we are very excited to be able to officially announce that as available into the market.

Q: Actually -- and I just have a follow-up on that. So this is a new product development effort. There are other products that are being developed. Should we expect R&D to increase from -- I mean you have reduced this in recent quarters, but going forward, should we see a slight pickup in R&D spend?

A: There could be a potential slight pickup. However, with our strategic investment partner, Sander Electronics, they've been working in conjunction with us to help bring some of these products to life. And that has helped us maintain the low R&D costs because we are working in conjunction with their teams on many of these new product developments.