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| Statement |
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| In addition to the financial improvement, Jay and the Sander Electronic team has been instrumental in addressing the supply chain problems that hobbled Energy Focus in 2022 |
| Staying on the theme of a steady and increased demand, I’m pleased to report that the strategic hire that we made in May of 2022 to service our government sales channel continues to build a strong backlog of orders for the military maritime market |
| We look to improve and expand our in-focus power line control product portfolio so that customers can realize all of the wellness benefits of human-centric lighting while being cost conscious in their retrofit efforts |
| 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 |
| The turnaround on military looks promising as well |
| As a result of our pivot back to military, maritime and commercial and industrial lighting and controls products, the company has taken great strides in 2022 to streamline expenses and reduce our cash burn, taking an even more aggressive approach in Q4, and we anticipate seeing full results of our efforts throughout 2023 |
| Adjusted EBITDA improved from the prior year despite lower sales due to significant cost-cutting initiatives in SG&A |
| Our in-focused power line control products continue to gain interest as more customers are educated around this innovative power line control technology as we round out the product offering |
| Although it is premature to release all of the details today, I am personally excited as I look the prospective expansion plans for Energy Focus |
| Energy Focus entered 2022 with brilliant hopes that our previous ultraviolet-C light disinfection or UVCD products will transform us into a direct-to-consumer product company and provide us with great opportunities for expansion |
| That’s all I had and continued good luck by the way |
| So, that way, we started with a clean slate for 2023 and could have better margins moving forward |
| Despite the challenges that 2022 presented energy focus through our rigorous cost-cutting efforts, we were able to position ourselves for strategic investment by Sander Electronics in January of 2023 |
| We are grateful for his hard work and dedication towards improving energy focus during his time at the helm |
| At the time of the investment, Jay Huang, President of Sander Electronics joined the Energy Focus Board of Directors as Chairman bringing a wealth of industry knowledge, factory sources and manufacturing experience to a well-positioned board |
| The funding provided by the Sander investment has contributed to approximately $4.2 million in balance sheet improvements since the start of 2023 |
| Finally, orders for our popular RedCap emergency lighting products continues to build a healthy backlog that was not realized in 2022 because of sourcing challenges |
| In my time at Energy Focus, in focus has received positive feedback from current customer installations, and I’m looking forward to expanding sales in this category in 2023 |
| Additionally, our RedCap product is a very unique product in its design and structure |
| 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 |
| Although supply chain constraints in Q4 of 2022 prevented the company from fully realizing his efforts in the year-end results with some of the orders slipping into the first quarter of 2023, we have resolved these log jams and look forward to sharing what we anticipate being strong sales numbers in this channel in 2023 |
| So, some products will be a little bit easier than others, and we are hopeful that we will be able to start launching those here before the year is out |
| No, I think the GaN power supply and other power products looks promising, looking forward to updates on that |
| That we believe our sources have been able to restart their pipelines which will allow us to restart our pipeline |
| 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 |
| My main focus since joining has been helping the company return to its core, work through significant supply chain constraints in legacy inventory positions and significant cost-cutting and rightsizing to the point the company to move past its troubled operating history |
| Our new government sales lead immediately went to work shoring up the sales pipeline and continue to drive booked orders |
| Sequentially, this compares to a loss from operations of $2.4 million in the third quarter of 2022, an improvement of $383,000 |
| We believe that working together we will be able to expand our offering to include components and end products in energy-related fields |
| Statement |
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| Both commercial and military sales were heavily impacted by supply chain constraints, and the military channel also suffered from a weak sales pipeline early in the year prior to our strategic hire |
| Unfortunately, we continue to face supply chain challenges in Q4 on our best-selling products, combined with market price pressures on current inventory, which has impacted the financial results I am sharing with you today |
| Gross margin was heavily depressed by the impact of fixed costs on low sales levels as well as our inventory reduction program, including sell-through pricing, scrap and liquidation activity and excess and obsolete reserve activity |
| Adjusted gross margin was negative 4.8% for full year 2022 compared to 18.8% in the prior year due to higher variable costs from selling higher priced inventory on hand |
| Net sales of $663,000 for the fourth quarter of 2022 decreased 72.4% compared to sales of $2.4 million in the fourth quarter of 2021, driven mainly by a decrease in military sales |
| Sales of our military products decreased in fourth quarter, mainly due to the supply chain impacts as well as continued delays of government funding available for certain projects and the continued delay timing of orders |
| Unfortunately, our EnFocus rollouts were delayed due to some supply chain challenges in 2022 and beginning – at the start of this year as well |
| When compared to $1.8 million in the third quarter of 2022, sequential net sales were primarily down due to a decrease in commercial product sales |
| The year-over-year decline in gross margin was primarily driven by higher variable costs as we sold down inventory on hand |
| Net sales of our commercial products were $349,000 or 52.7% of total net sales for the fourth quarter of 2022, a decrease as compared to net sales of $1.2 million or 48.6% of total net sales for the fourth quarter of 2021, reflecting our supply chain constraints and the continued long-term impacts of the COVID-19 pandemic due to fluctuations in the timing, pace and size of commercial projects |
| As a percentage of revenue, gross profit margin was a negative 35.9% in the fourth quarter of 2022 compared to 7.9% in the fourth quarter of 2021 |
| Gross margin for 2022 included unfavorable price and usage variances for materials and labor of $0.7 million or 29% of net sales and unfavorable inventory and want to reserve adjustments of $0.5 million or 8.7% of net sales |
| Gross loss for the fourth quarter of 2022 was $0.2 million compared with gross profit of $0.2 million in the fourth quarter of 2021, a decrease of 200% year-over-year |
| While it’s early days for me here at the company, I will be frank that our results for the past year, I will review on this call are dismal and is essentially a story of survival from which it’s my job to lead us to rebuild |
| So, we have had some challenges in ensuring that we can source the right componentry specific to that patented product |
| Adjusting gross profit margins for excess and obsolete in-transit net realizable value inventory reserve resulted in the non-GAAP adjusted gross margins of negative 55.8% for the fourth quarter of 2022 compared to 14.7% in the fourth quarter of 2021 and 3.2% in the third quarter of 2022 |
| So, 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 |
| The increased adjusted EBITDA loss in 2022 as compared to 2021 was primarily due to gross margin reductions from lower sales and higher cost of goods sold |
| And last question, supply chain issues have been lingering |
| Gross loss was $0.3 million or negative 5.3% of net sales for 2022 compared with gross profit of $1.7 million or 17.2% of net sales for 2021 |
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