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Energy Focus, Inc. Reports Third Quarter 2020 Financial Results

Strong Growth in Sales to Military and Maritime Customers Offsets Pandemic-Related Softness in the Commercial Business; New Products Expected to Benefit 2021 Sales Growth

SOLON, Ohio–(BUSINESS WIRE)–
Energy Focus, Inc. (NASDAQ:EFOI), a leader in sustainable and human-centric lighting technologies, today announced financial results for its third quarter ended September 30, 2020.

Third Quarter 2020 and Subsequent Business Highlights:

• Net sales of $6.0 million, up 104.6% compared to the third quarter of 2019 and up 78.8% sequentially from the second quarter of 2020, reflecting increased penetration in the military market and a shift in the timing of the partial shipment of a certain military contract order from the second quarter to the third quarter of 2020;
• Loss from operations of $1.0 million, compared to a loss from operations of $0.8 million in the third quarter of 2019 and sequentially to a loss from operations of $0.9 million in the second quarter of 2020;
• Net loss of $1.2 million, or $(0.35) per basic and diluted share of common stock, compared to a net loss of $0.9 million, or $(0.38) per basic and diluted share of common stock, in the third quarter of 2019. Sequentially, the net loss improved by $3.2 million compared to a net loss of $4.3 million, or $(1.36) per basic and diluted share of common stock, inclusive of a $3.3 million non-cash adjustment in the fair value of outstanding warrants, in the second quarter of 2020;
• Cash of $2.6 million as of September 30, 2020, compared to $0.4 million as of December 31, 2019;
• Expanded available credit lines in August by completing two debt financing arrangements, which substantially increased the Company’s borrowing capacity and reduced its blended interest expense rate;
• Subsequent to the end of the third quarter of 2020, the Company launched a portfolio of germicidal UV-C disinfection (‘UVCD’) products with advanced, patent-pending technologies designed to inactivate over 99.9% of various pathogens such as influenza and coronavirus, including SARS-Cov-2.

“Our Military and Maritime business continues to demonstrate brisk, year-over-year growth with year-to-date net sales up more than 165% over the first nine months of last year,” stated James Tu, Chairman and CEO of Energy Focus, Inc. “Overall demand remained strong and steady, and we secured significant contracts for our new generation Intellitube products. On the other hand, during the quarter, the COVID-19 pandemic continued to significantly impact facility occupancy and retrofit budgets and activities, as well as timing and reliability of supply chain logistics, resulting in our sales coming in towards the lower end of our expected range.”

Mr. Tu continued, “Despite the myriad of short-term challenges brought on by the pandemic, we are more optimistic than ever in our long-term growth prospects, led by both our EnFocus^TM lighting control platform products, which continued to be well received with initial shipments beginning in the third quarter, as well as our UVCD product lines that we recently introduced in October. With the pandemic still raging across most parts of the world, and elevated and routine disinfection practices expected to become the new normal for buildings and facilities, we believe that our complementary air and surface UVCD products represent some of the most advanced, powerful and affordable disinfection solutions in the market today. We have started to receive positive and enthusiastic feedback from customers, as well as existing and new channel partners, and remain on schedule to start delivering the products in the first quarter of 2021.”

“The UVCD product launches following our EnFocus^TM launch in the second quarter this year, further bolster our position as a recognized leader in the emerging and rapidly growing human-centric lighting and healthy buildings markets,” continued Mr. Tu. “We continue to aggressively expand our agency and distribution network and we are in discussions with multiple significant channel partners to market and distribute our LED lighting and UVCD products that together, address broader needs for buildings and facilities seeking to improve sustainability as well as occupant health and safety.”

Third Quarter 2020 Financial Results:

Net sales were $6.0 million for the third quarter of 2020, compared to $2.9 million in the third quarter of 2019, an increase of 104.6%. Net sales from commercial products were $1.5 million, or 24.4% of total net sales, for the third quarter of 2020, down from $1.7 million, or 59.5% of total net sales, in the third quarter of 2019, reflecting the impact of the COVID-19 pandemic and related customer interruptions and project delays. Net sales from military and maritime products were $4.5 million, or 75.6% of total net sales, for the third quarter of 2020, up from $1.2 million, or 40.5% of total net sales, in the third quarter of 2019. Sequentially, net sales were up 78.8% compared to $3.3 million in the second quarter of 2020, reflecting a shift in the timing of the shipment of a portion of a $3.4 million U.S. Navy order for the Company’s new generation of military Intellitubes. On an aggregate basis, removing the impact related to the timing of this U.S. Navy order, second and third quarter 2020 aggregate revenue was $9.3 million compared to $6.0 million for the second and third quarters of 2019, representing period-over-period growth of 55.1%.

Gross profit was $1.4 million, or 23.1% of net sales, for the third quarter of 2020. This compares with gross profit of $1.0 million, or 35.3% of net sales, in the third quarter of 2019. Sequentially, this compares with gross profit of $1.3 million, or 40.3% of net sales, in the second quarter of 2020. Gross margin for the third quarter of 2020 was positively impacted by favorable price and usage variances for material and labor and changes in inventory reserves. These increases were more than offset by the negative impact from unexpected supply chain challenges related primarily to the Company’s military and maritime products, which negatively impacted gross margin by approximately 4.1% in the third quarter, and resulted in higher outbound freight costs. Adjusted gross margin, as defined under “Non-GAAP Measures” below, was 24.6% for the third quarter of 2020, compared to 23.6% in the third quarter of 2019 and 33.0% in the second quarter of 2020.

Operating loss was $1.0 million for the third quarter of 2020, compared to an operating loss of $0.8 million in the third quarter of 2019. Sequentially, this compares to an operating loss of $0.9 million in the second quarter of 2020. Net loss was $1.2 million, or $(0.35) per basic and diluted share of common stock, for the third quarter of 2020, compared with a net loss of $0.9 million, or $(0.38) per basic and diluted share of common stock, in the third quarter of 2019. Sequentially, this compares with a net loss of $4.3 million or $(1.36) per basic and diluted share of common stock, in the second quarter of 2020, which was inclusive of a $3.3 million non-cash, pre-tax loss resulting from the revaluation of the warrant liability at June 30, 2020.

Adjusted EBITDA, as defined under “Non-GAAP Measures” below, was a loss of $0.9 million for the third quarter of 2020, compared with a loss of $0.8 million in the third quarter of 2019 and a loss of $0.7 million in the second quarter of 2020. The increased EBITDA loss from second quarter of 2020 and third quarter of 2019 was due to a combination of gross margin fluctuation, supply chain challenges and higher operating expenses due to our investment for future growth.

Cash was $2.6 million as of September 30, 2020. This compares with $0.4 million as of December 31, 2019. As of September 30, 2020, the Company had total availability, as defined under “Non-GAAP Measures” below, of $4.9 million, which consisted of $2.6 million of cash and $2.3 million of additional borrowing availability under its credit facilities. This compares to total availability of $1.9 million as of December 31, 2019 and total availability of $3.9 million as of June 30, 2020.

Financings:

On August 11, 2020, the Company entered into two debt financing arrangements. The facilities consist of a two-year inventory financing facility for up to $3 million and a two-year receivables financing facility for up to $2.5 million. These facilities replaced our previous credit facility, substantially increasing the Company’s borrowing capacity and reducing its blended interest expense rate.

Fourth Quarter 2020 Outlook:

While activities for our military and maritime business remain stronger than levels a year ago, and we expect fourth quarter 2020 sales to grow from fourth quarter 2019, we continue to confront significant short-term uncertainties surrounding our commercial business and logistics challenges on select components due to the ongoing pandemic. Therefore, we are suspending our quarterly sales guidance for the time being and will resume outlook forecast as these external factors become more stable and predictable.

Earnings Conference Call:

The Company will host a conference call and webcast today, November 12, 2020, at 11:00 a.m. ET to discuss the third quarter 2020 results, followed by a Q & A session.

You can access the live conference call by dialing the following phone numbers:

• Toll free 1-877-451-6152 or
• International 1-201-389-0879
• Conference ID# 13712403

The conference call will be simultaneously webcast. To listen to the webcast, log onto it at: http://public.viavid.com/index.php?id=142169. The webcast will be available at this link through November 27, 2020. Financial information presented on the call, including this earnings press release, will be available on the investors section of Energy Focus’ website, investors.energyfocus.com.

About Energy Focus:

Energy Focus is an industry-leading innovator of sustainable LED lighting and lighting control technologies and solutions. As the creator of the first flicker-free LED lamps, Energy Focus develops high quality LED lighting products that provide extensive energy and maintenance savings, as well as aesthetics, safety, health and sustainability benefits over conventional lighting. Our EnFocus^TM lighting control platform enables existing and new buildings to provide quality, convenient and affordable, dimmable and color-tunable, circadian and human-centric lighting capabilities. Our patent-pending UV-C Disinfection technologies and products, announced in October 2020, aim to provide effective, reliable and affordable UVCD solutions for buildings, facilities and homes. Energy Focus’ customers include U.S. and foreign navies, U.S. federal, state and local governments, healthcare and educational institutions, as well as Fortune 500 companies. Since 2007, Energy Focus has installed approximately 900,000 lighting products across the U.S. Navy fleet, including tubular LEDs, waterline security lights, explosion-proof globes and berth lights, saving more than 5,000,000 gallons of fuel and 300,000 man-hours in lighting maintenance annually. Energy Focus is headquartered in Solon, Ohio. For more information, visit our website at www.energyfocus.com.

Forward Looking Statements:

Forward-looking statements in this release are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Generally, these statements can be identified by the use of words such as “believes,” “estimates,” “anticipates,” “expects,” “feels,” “seeks,” “forecasts,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “could,” “would” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include all matters that are not historical facts and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies, capital expenditures and the industry in which we operate. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Although we base these forward-looking statements on assumptions that we believe are reasonable when made in light of the information currently available to us, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in this release. We believe that important factors that could cause our actual results to differ materially from forward-looking statements include, but are not limited to: (i) disruptions and a slowing in the U.S. and global economy and business interruptions experienced by us, our customers and our suppliers as a result of the COVID-19 pandemic and related stay-at-home orders, quarantine policies, school attendance restrictions and restrictions on travel, trade and business operations; (ii) our ability to realize the expected novelty, disinfection effectiveness, affordability and estimated delivery timing of our UVCD products and their performance and cost compared to other products; (iii) market acceptance of our LED lighting, control and UVCD technologies and products; (iv) our need for additional financing in the near term to continue our operations; (v) our ability to refinance or extend maturing debt on acceptable terms or at all; (vi) our ability to continue as a going concern for a reasonable period of time; (vii) our ability to implement plans to increase sales and control expenses; (viii) our reliance on a limited number of customers for a significant portion of our revenue, and our ability to maintain or grow such sales levels; (ix) our ability to add new customers to reduce customer concentration; (x) our reliance on a limited number of third-party suppliers and research and development partners, our ability to manage third-party product development and obtain critical components and finished products from such suppliers on acceptable terms and of acceptable quality, and the impact of our fluctuating demand on the stability of such suppliers; (xi) our ability to timely and efficiently transport products from our third-party suppliers to our facility by ocean marine channels; (xii) our ability to increase demand in our targeted markets and to manage sales cycles that are difficult to predict and may span several quarters; (xiii) the timing of large customer orders, significant expenses and fluctuations between demand and capacity as we invest in growth opportunities; (xiv) our ability to compete effectively against companies with lower cost structures or greater resources, or more rapid development efforts, and new competitors in our target markets; (xv) our ability to successfully scale our network of sales representatives, agents, and distributors to match the sales reach of larger, established competitors; (xvi) our ability to attract and retain qualified personnel, and to do so in a timely manner; (xvii) the impact of any type of legal inquiry, claim or dispute; (xviii) general economic conditions in the United States and in other markets in which we operate or secure products; (xix) our dependence on military maritime customers and on the levels and timing of government funding available to such customers, as well as the funding resources of our other customers in the public sector and commercial markets; (xx) the possible impact on our military maritime customers and their ability to honor the timing for existing orders or place future orders due to COVID-19 breakouts amongst personnel that might impact the use of ships in service; (xxi) business interruptions resulting from geopolitical actions, including war and terrorism, natural disasters, including earthquakes, typhoons, floods and fires, or from health epidemics or pandemics or other contagious outbreaks; (xxii) our ability to respond to new lighting technologies and market trends, and fulfill our warranty obligations with safe and reliable products; (xxiii) any delays we may encounter in making new products available or fulfilling customer specifications; (xxiv) any flaws or defects in our products or in the manner in which they are used or installed; (xxv) our ability to protect our intellectual property rights and other confidential information, and manage infringement claims by others; (xxvi) our compliance with government contracting laws and regulations, through both direct and indirect sale channels, as well as other laws, such as those relating to the environment and health and safety; (xxvii) risks inherent in international markets, such as economic and political uncertainty, changing regulatory and tax requirements and currency fluctuations, including tariffs and other potential barriers to international trade; (xxviii)our ability to maintain effective internal controls and otherwise comply with our obligations as a public company; and (xxix) our ability to regain compliance with the continued listing standards of The Nasdaq Stock Market. For additional factors that could cause our actual results to differ materially from the forward-looking statements, please refer to our most recent annual report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission.

Condensed Consolidated Balance Sheets
(in thousands)
	September 30, 2020				December 31, 2019
	(Unaudited)
ASSETS
Current assets:
Cash	$	2,574			$	350
Trade accounts receivable, less allowances of $10 and $28, respectively	3,366				2,337
Inventories, net	5,259				6,168
Prepaid and other current assets	1,361				479
Total current assets	12,560				9,334
Property and equipment, net	420				389
Operating lease, right-of-use asset	923				1,289
Restructured lease, right-of-use asset	161				322
Other assets	3				405
Total assets	$	14,067			$	11,739
LIABILITIES
Current liabilities:
Accounts payable	3,089				1,340
Accrued liabilities	257				186
Accrued legal and professional fees	237				215
Accrued payroll and related benefits	662				360
Accrued sales commissions	76				32
Accrued restructuring	18				24
Accrued warranty reserve	230				195
Deferred revenue	105				18
Operating lease liabilities	588				550
Restructured lease liabilities	250				319
Finance lease liabilities	3				3
Warrant liability	2,928				—
Convertible notes	—				1,700
Iliad Note, net of discount and loan origination fees	192				885
PPP loan	362				—
Credit line borrowings, net of loan origination fees	2,025				715
Total current liabilities	11,022				6,542
Other liabilities	—				14
Operating lease liabilities, net of current portion	472				906
Restructured lease liabilities, net of current portion	—				168
Finance lease liabilities, net of current portion	1				4
PPP loan, net of current maturities	433				—
Iliad Note, net of current maturities	—				109
Total liabilities	11,928				7,743
STOCKHOLDERS’ EQUITY
Preferred stock, par value $0.0001 per share:
Authorized: 5,000,000 shares (3,300,000 shares designated as Series A Convertible Preferred Stock) at September 30, 2020 and 2,000,000 shares (no shares designated as Series A Convertible Preferred Stock) at December 31, 2019
Issued and outstanding: 2,597,470 at September 30, 2020 and no shares outstanding at December 31, 2019	—				—
Common stock, par value $0.0001 per share:
Authorized: 50,000,000 shares at September 30, 2020 and 30,000,000 shares at December 31, 2019
Issued and outstanding: 3,428,268 at September 30, 2020 and 2,485,684 at December 31, 2019	—				—
Additional paid-in capital	133,062				128,873
Accumulated other comprehensive loss	(3		)		(3		)
Accumulated deficit	(130,920		)		(124,874		)
Total stockholders’ equity	2,139				3,996
Total liabilities and stockholders’ equity	$	14,067			$	11,739

Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
	Three months ended September 30,								Nine months ended September 30,
	2020				2019				2020				2019
Net sales	$	5,964			$	2,915			$	13,082			$	9,174
Cost of sales	4,588				1,887				9,331				8,157
Gross profit	1,376				1,028				3,751				1,017
Operating expenses:
Product development	401				191				996				1,035
Selling, general, and administrative	2,003				1,689				6,003				5,524
Restructuring	(16		)		(19		)		(44		)		243
Total operating expenses	2,388				1,861				6,955				6,802
Loss from operations	(1,012		)		(833		)		(3,204		)		(5,785		)
Other expenses (income):
Interest expense	124				67				344				136
Loss on extinguishment of debt	159				—				159				—
(Gain) loss from change in fair value of warrants	(153		)		—				2,274				—
Other expenses	25				46				67				144
Loss before income taxes	(1,167		)		(946		)		(6,048		)		(6,065		)
Benefit from income taxes	(2		)		—				(2		)		—
Net loss	$	(1,165	)		$	(946	)		$	(6,046	)		$	(6,065	)
Net loss per share – basic and diluted
Net loss	$	(0.35	)		$	(0.38	)		$	(1.89	)		$	(2.47	)
Weighted average common shares outstanding:
Basic and diluted	3,308				2,474				3,196				2,455

Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)	Nine months ended September 30,
	2020				2019
Cash flows from operating activities:
Net loss	$	(6,046	)		$	(6,065	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	140				277
Stock-based compensation	96				557
Change in fair value of warrant liabilities	2,274				—
Provision for doubtful accounts receivable	(21		)		20
Provision for slow-moving and obsolete inventories	(229		)		(643		)
Provision for warranties	34				107
Amortization of loan discounts and origination fees	221				72
Loss on dispositions of property and equipment	—				15
Changes in operating assets and liabilities:
Accounts receivable	(1,070		)		400
Inventories	1,138				1,301
Prepaid and other assets	(471		)		368
Accounts payable	1,811				(2,311		)
Accrued and other liabilities	453				(421		)
Deferred revenue	87				(6		)
Total adjustments	4,463				(264		)
Net cash used in operating activities	(1,583		)		(6,329		)
Cash flows from investing activities:
Acquisitions of property and equipment	(171		)		(57		)
Net cash used in investing activities	(171		)		(57		)
Cash flows from financing activities:
Proceeds from the issuance of common stock and warrants	2,749				—
Proceeds from the exercise of warrants	676				—
Offering costs paid on the issuance of common stock and warrants	(474		)		—
Proceeds from PPP loan	795				—
Principal payments under finance lease obligations	(3		)		(2		)
Proceeds from exercise of stock options and employee stock purchase plan purchases	30				—
Common stock withheld in lieu of income tax withholding on vesting of restricted stock units	(3		)		(116		)
Payments on the Iliad Note	(976		)		—
Proceeds from convertible notes	—				1,700
Payments for Deferred Financing & Termination Fees	(320		)		—
Net proceeds from (payment on) credit line borrowings – AFS	(719		)		(896		)
Net proceeds from (payment on) credit line borrowings – New Facilities	2,223				—
Net cash provided by financing activities	3,978				686
Effect of exchange rate changes on cash	—				(1		)
Net increase (decrease) in cash and restricted cash	2,224				(5,701		)
Cash and restricted cash, beginning of period	692				6,335
Cash and restricted cash, end of period	$	2,916			$	634
Classification of cash and restricted cash:
Cash	$	2,574			$	292
Restricted cash held in other assets	342				342
Cash and restricted cash	$	2,916			$	634

Sales by Product
(In thousands)
	Three months ended September 30,								Nine months ended September 30,
	2020				2019				2020				2019
Net sales:
Commercial	$	1,456			$	1,733			$	4,250			$	5,847
MMM products	4,508				1,182				8,832				3,327
Total net sales	$	5,964			$	2,915			$	13,082			$	9,174

Non-GAAP Measures

In addition to the results in this release that are presented in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), we provide certain non-GAAP measures, which present operating results on an adjusted basis. These non-GAAP measures are supplemental measures of performance that are not required by or presented in accordance with U.S. GAAP and, include:

• Total availability, which we define as our ability on the period end date to access additional cash if necessary under our short-term credit facilities, plus the amount of cash on hand on that same date;
• Adjusted EBITDA, which we define as net income (loss) before giving effect to restructuring expenses, financing charges, income taxes, non-cash depreciation and amortization, stock compensation, incentive compensation, and change in fair value of warrant liability; and
• Adjusted gross margins, which we define as our gross profit margins during the period without the impact from excess and obsolete, in-transit and net realizable value inventory reserve movements that do not reflect current period inventory decisions.

We believe that our use of these non-GAAP financial measures permits investors to assess the operating performance of our business relative to our performance based on U.S. GAAP results and relative to other companies within the industry by isolating the effects of items that may vary from period to period without correlation to core operating performance or that vary widely among similar companies, and to assess liquidity, cash flow performance of the operations, and the product margins of our business relative to our U.S. GAAP results and relative to other companies in the industry by isolating the effects of certain items that do not have a current period impact. However, our presentation of these non-GAAP measures should not be construed as an indication that our future results will be unaffected by unusual or infrequent items or that the items for which we have made adjustments are unusual or infrequent or will not recur. Further, there are limitations on the use of these non-GAAP measures to compare our results to other companies within the industry because they are not necessarily standardized or comparable to similarly titled measures used by other companies. We believe that the disclosure of these non-GAAP measures is useful to investors as they form part of the basis for how our management team and Board of Directors evaluate our operating performance.

Total availability, adjusted EBITDA and adjusted gross margins do not represent cash generated from operating activities in accordance with U.S. GAAP, are not necessarily indicative of cash available to fund cash needs and are not intended to and should not be considered as alternatives to cash flow, net income and gross profit margins, respectively, computed in accordance with U.S. GAAP as measures of liquidity or operating performance. Reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP are provided below.

	As of
(in thousands)	September 30, 2020				June 30, 2020				September 30, 2019
Total borrowing capacity under credit facilities	$	4,577			$	2,566			$	2,517
Less: Credit line borrowings, gross*	(2,290		)		(1,397		)		(1,328		)
Excess availability under credit facilities**	2,287				1,169				1,189
Cash	2,574				2,727				634
Total availability	$	4,861			$	3,896			$	1,823
*Does not reflect debt financing costs of $199, $66 and $75 as of September 30, 2020, June 30, 2020 and September 30, 2019, respectively.
**Represents the difference between the maximum borrowing capacity under the credit facilities and actual borrowings.

	Three Months Ended
(in thousands)	September 30, 2020				June 30, 2020				September 30, 2019
Net loss	$	(1,165	)		$	(4,340	)		$	(946	)
Restructuring (recovery)	(16		)		(14		)		(19		)
Net loss, excluding restructuring	(1,181		)		(4,354		)		(965		)
Interest expense	124				87				67
Loss on extinguishment of debt	159				—				—
Income tax benefit	(2		)		—				—
Depreciation	48				46				77
Stock-based compensation	35				41				34
Change in fair value of warrant liability	(153		)		3,300				—
Other incentive compensation	52				134				—
Adjusted EBITDA	$	(918	)		$	(746	)		$	(787	)

		Three Months Ended
(in thousands)		September 30, 2020						June 30, 2020							September 30, 2019
		($)			(%)			($)				(%)			($)				(%)
Net sales		$	5,964					$	3,335						$	2,915
Reported gross profit			1,376		23.1	%			1,343			40.3	%			1,028			35.3	%
E&O, in-transit and net realizable value inventory reserve changes			90		1.5	%			(241	)		(7.2	)%			(340	)		(11.7	)%
Adjusted gross margin		$	1,466		24.6	%		$	1,102			33.0	%		$	688			23.6	%

 

View source version on businesswire.com: https://www.businesswire.com/news/home/20201112005281/en/

Investor Contact:

Brett Maas

(646) 526-7331

[email protected]

KEYWORDS: United States North America Ohio

INDUSTRY KEYWORDS: Other Defense Building Systems Residential Building & Real Estate Commercial Building & Real Estate Alternative Energy Construction & Property Energy Defense Other Transport Environment Maritime Transport Interior Design Other Energy Utilities Other Construction & Property

MEDIA:

Posted on November 12, 2020 8:33 am

Wilhelmina International, Inc. Reports Results for Third Quarter 2020

Third
Quarter Financial
Results

(in thousands)	Q3 20		Q3 1 9			YOY Change		Q3 20 YTD		Q3 1 9 YTD		YOY Change
Total Revenues	$	10,545	$	17,241		(38.8	%)	29,625		$	57,245	(48.2	%)
Operating Income (Loss)		114		(149	)	176.5	%	(4,665	)		488	*
Income (Loss) Before Provision for Taxes		107		(173	)	161.8	%	(4,671	)		399	*
Net Income (Loss)		22		(166	)	113.3	%	(5,338	)		176	*
EBITDA**		422		151		179.5	%	(3,714	)		1,373	*
Adjusted EBITDA* *		411		197		108.6	%	(2,966	)		1,538	*
Pre-Corporate EBITDA* *		556		448		24.1	%	(2,274	)		2,372	*
* Not Meaningful **Non-GAAP measures referenced are detailed in the disclosures at the end of this release.

DALLAS, Nov. 12, 2020 (GLOBE NEWSWIRE) — Wilhelmina International, Inc. (Nasdaq:WHLM) (“Wilhelmina” or the “Company”) today reported revenues of $10.5 million and net income of $22 thousand for the three months ended September 30, 2020, compared to revenues of $17.2 million and net loss of $0.2 million for the three months ended September 30, 2019. For the nine months ended September 30, 2020, Wilhelmina reported revenues of $29.6 million and net loss of $5.3 million compared to revenue of $57.2 million and net income of $0.2 million for the nine months ended September 30, 2019. During the three and nine months of 2020, the novel coronavirus (COVID-19) pandemic had a material impact on revenues. The decrease in revenues when compared to the same periods of the prior year was primarily due to postponement and cancellation of bookings by many of Wilhelmina’s customers while non-essential business activities were barred in the cities where the Company operates, as well as the closure of the Wilhelmina Studios division in the fourth quarter of 2019. The increase in net income for the third quarter of 2020 was due to a reduction in operating expenses from the Company’s cost savings initiatives, partially offset by lower revenue net of model costs. The increase in loss for the nine months ended September 30, 2020 was primarily due to the decrease in revenues net of model costs, partially offset by a decrease in operating expenses.

COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared the outbreak of novel coronavirus (COVID-19) as a pandemic, which has spread rapidly throughout the United States and the world. The Company’s revenues are heavily dependent on the level of economic activity in the United States and the United Kingdom, particularly in the fashion, advertising and publishing industries, all of which have been negatively impacted by the pandemic and may not recover as quickly as other sectors of the economy. There have been mandates from federal, state, and local authorities requiring forced closures of non-essential businesses. As a result, beginning in March 2020, the Company has seen a significant reduction in customer bookings, resulting in a negative impact to revenue and earnings. During the third quarter of 2020, bookings increased from the preceding months, but remained significantly below pre-pandemic levels.

In addition to reduced revenue, business operations have been adversely affected by reductions in productivity, limitations on the ability of customers to make timely payments, disruptions in talents’ ability to travel to needed locations, and supply chain disruptions impeding clothing or footwear wardrobe from reaching destinations for photoshoots and other bookings. Many of the Company’s customers are large retail and fashion companies, which have had to close stores in the United States and internationally due to orders from local authorities to help slow the spread of COVID-19. Some of these customers have filed for bankruptcy in 2020 and others may be unable to pay amounts already owed to the Company, resulting in increased future bad debt expense. These customers also may not emerge from the pandemic with the financial ability, or need, to purchase Wilhelmina’s services to the extent that they did in previous years. Some of our model talent have been quarantined with family far from the major cities where Wilhelmina’s offices are located, and also away from where most modeling jobs take place. Many U.S. and international airlines have decreased their flight schedules which, as economic activities resumes and clients increase booking requests, may make it difficult for our talent to be available when and where they are needed. While these disruptions are currently expected to be temporary, there continues to be uncertainty around the duration.

Postponed and cancelled bookings related to the pandemic contributed significantly to reduced revenues and increased operating losses during the first nine months of 2020. Although some clients increased activity and bookings during the third quarter of 2020, rising COVID-19 infection rates in cities where Wilhelmina operates could lead to a slower economic recovery in those markets, and possible additional business closings or local mandates that could slow the recovery in our operations there. Since Wilhelmina extends customary payment terms to its clients, even as bookings resume, there is likely to be a lag before significant cash collections return. In the meantime, the Company continues to have significant employee, office rent, and other expenses.

Reduced outstanding accounts receivable available as collateral under the Company’s credit agreement with Amegy Bank has limited access to additional financing. Net losses in recent periods have also impacted compliance with the financial covenants under the Amegy Bank credit agreement, further impeding the Company’s ability to obtain additional financing. Since the pandemic began, many stock markets, including Nasdaq Capital Market where Wilhelmina’s common stock is listed, have been volatile. A further decline in the Company’s stock price would reduce our market capitalization and could require additional goodwill or intangible asset impairment writedowns.

The Company has taken the following actions to address the impact of COVID-19 and the current recessionary environment, in order to efficiently manage the business and maintain adequate liquidity and maximum flexibility:

• In April 2020, obtained approximately $2.0 million in loans under the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (“SBA”).
• Eliminated discretionary travel and entertainment expenses.
• Suspended share repurchases.
• Did not renew the leases on three New York City model apartments when the terms ended in June and August, 2020.
• Suspended efforts to fill two highly compensated executive roles following the resignation of the Company’s Chief Executive Officer and Vice President in early 2020.
• Obtained from the landlord of the Company’s New York City office a deferral of $41 thousand in July 2020 rent until January 2021.
• Negotiated discounts with various vendors and service providers, in effect through the remainder of 2020.
• Effective July 1, 2020, implemented layoffs of approximately 36% of its staff, including employees at each of the Company’s five offices, and effected temporary salary reductions for the remaining staff. The salary reductions are expected to return to full salaries when business conditions improve.

If the quarantines and limitations on non-essential work are re-implemented, or persist for an extended period, the Company may need to implement additional cost savings measures.

F
inancial Results

Net income for the three months ended September 30, 2020 was $22 thousand, or $0.00 per fully diluted share, compared to net loss of $0.2 million, or $0.03 per fully diluted share, for the three months ended September 30, 2019. Net loss for the nine months ended September 30, 2020 was $5.3 million, or $1.03 per fully diluted share, compared to net income of $0.2 million, or $0.03 per fully diluted share, for the nine months ended September 30, 2019.

Pre-Corporate EBITDA was $0.6 million and ($2.3) million for the three and nine months ended September 30, 2020, compared to Pre-Corporate EBITDA of $0.5 million and $2.4 million for the three and nine months ended September 30, 2019.  

The following table reconciles reported net income under generally accepted accounting principles to EBITDA, Adjusted EBITDA and Pre-Corporate EBITDA for the three and nine months ended September 30, 2020 and 2019.

(in thousands)	Three months ended September 30,						Nine months ended September 30,
		2020			2019			2020			2019
Net income (loss)	$	22		$	(166	)	$	(5,338	)	$	176
Interest expense		21			27			71			89
Income tax expense (benefit)		85			(7	)		667			223
Amortization and depreciation		294			297			886			885
EBITDA**	$	422		$	151		$	(3,714	)	$	1,373
Foreign exchange gain		(14	)		(3	)		(65	)		–
Non-recurring items – goodwill impairment		–			–			800			–
Share-based payment expense		3			49			13			165
Adjusted EBITDA**	$	411		$	197		$	(2,966	)	$	1,538
Corporate overhead		145			251			692			834
Pre-Corporate EBITDA**	$	556		$	448		$	(2,274	)	$	2,372
**Non-GAAP measures referenced are detailed in the disclosures at the end of this release.

Changes in net income, EBITDA, Adjusted EBITDA and Pre-Corporate EBITDA for the three and nine months ended September 30, 2020, when compared to the three and nine months ended September 30, 2019, were primarily the result of the following:

• Revenues net of model costs for the three and nine months ended September 30, 2020 decreased by 36.2% and 49.8% primarily due to postponed and cancelled bookings resulting from COVID-19, as well as the closure of the Wilhelmina Studios division in the fourth quarter of 2019;
• Salaries and service costs for the three and nine months ended September 30, 2020 decreased by 49.4% and 28.4% primarily due to the closure of the Wilhelmina Studios division during the fourth quarter of 2019, employee layoffs in July 2020, temporary reductions in staff salaries, open positions for two executives that resigned in January 2020, and a reduction in share based payment expense;
• Office and general expenses for the three and nine months ended September 30, 2020 decreased by 23.5% and 15.2%, primarily due to reduced legal fees, rent expense, computer expense, utilities, postage, and other office expenses, partially offset by an increase in bad debt expense; and
• Corporate overhead expenses for the three and nine months ended September 30, 2020 decreased by 42.2% and 17.0%, primarily due to lower corporate travel costs and temporary reductions in fees to the Company’s Board of Directors.

Subsequent to September 30, 2020, the Company paid the final scheduled $0.6 million payment of principal and interest on one of its two Amegy Bank term loans.

WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

		(Unaudited) September 30 , 2020				December 31 , 2019
ASSETS
Current assets:
Cash and cash equivalents		$	4,952			$	6,993
Accounts receivable, net of allowance for doubtful accounts of $1,766 and $1,423, respectively			6,992				9,441
Prepaid expenses and other current assets			167				243
Total current assets			12,111				16,677
Property and equipment, net of accumulated depreciation of $5,113 and $4,300, respectively			1,202				1,925
Right of use assets-operating			833				1,261
Right of use assets-finance			242				316
Trademarks and trade names with indefinite lives			8,467				8,467
Other intangibles with finite lives, net of accumulated amortization of $8,737 and $8,737, respectively			–				–
Goodwill			7,547				8,347
Other assets			91				115
TOTAL ASSETS		$	30,493			$	37,108
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	2,946			$	3,815
Due to models			5,741				7,495
Lease liabilities – operating, current			678				1,055
Lease liabilities – finance, current			90				94
Term loan – current			2,039				1,257
Total current liabilities			11,494				13,716
Long term liabilities:
Net deferred income tax liability			1,352				725
Lease liabilities – operating, non-current			207				328
Lease liabilities – finance, non-current			161				225
Term loan – non-current			1,371				743
Total long term liabilities			3,091				2,021
Total liabilities			14,585				15,737
Shareholders’ equity:
Common stock, $0.01 par value, 9,000,000 shares authorized; 6,472,038 shares issued at September 30, 2020 and December 31, 2019			65				65
Treasury stock, 1,314,694 and 1,309,861 shares at September 30, 2020 and December 31, 2019, at cost			(6,371	)			(6,352	)
Additional paid-in capital			88,484				88,471
Accumulated deficit			(66,153	)			(60,815	)
Accumulated other comprehensive (loss) income			(117	)			2
Total shareholders’ equity			15,908				21,371
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	30,493			$	37,108

W
ILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(LOSS)

For the Three
and
Nine Months
Ended
September 30
, 2020
and
2019

 (In thousands, except per share data)
(Unaudited)

	Three Months Ended								Nine Months Ended
	September 30 ,								September 30 ,
	2020				2019				2020				2019
Revenues:
Service revenues	$	10,534			$	17,224			$	29,604			$	57,199
License fees and other income		11				17				21				46
Total revenues		10,545				17,241				29,625				57,245
Model costs		7,544				12,534				21,547				41,166
Revenues, net of model costs		3,001				4,707				8,078				16,079
Operating expenses:
Salaries and service costs		1,651				3,266				7,566				10,571
Office and general expenses		797				1,042				2,799				3,301
Amortization and depreciation		294				297				886				885
Goodwill impairment		–				–				800				–
Corporate overhead		145				251				692				834
Total operating expenses		2,887				4,856				12,743				15,591
Operating income (loss)		114				(149	)			(4,665	)			488
Other expense (income):
Foreign exchange gain		(14	)			(3	)			(65	)			–
Interest expense		21				27				71				89
Total other expense, net		7				24				6				89
Income (loss) before provision for income taxes		107				(173	)			(4,671	)			399
(Provision) benefit for income taxes:
Current		(56	)			(47	)			(40	)			(200	)
Deferred		(29	)			54				(627	)			(23	)
(Provision) benefit income taxes, net		(85	)			7				(667	)			(223	)
Net income (loss)	$	22			$	(166	)		$	(5,338	)		$	176
Other comprehensive income (loss):
Foreign currency translation income (loss)		120				(76	)			(119	)			(107	)
Total comprehensive income (loss)		142				(242	)			(5,457	)			69
Basic net income (loss) per common share	$	0.00			$	(0.03	)		$	(1.03	)		$	0.03
Diluted net income (loss) per common share	$	0.00			$	(0.03	)		$	(1.03	)		$	0.03
Weighted average common shares outstanding-basic		5,157				5,176				5,158				5,189
Weighted average common shares outstanding-diluted		5,157				5,176				5,158				5,189

WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Three
and
Nine Months
Ended
September 30
, 2020
and
2019

(In thousands)

		Common Shares		Stock Amount			Treasury Shares			Stock Amount				Additional Paid-in Capital			Accumulated Deficit				Accumulated Other Comprehensive Loss				Total
Balances at December 31, 2018		6,472		$	65		(1,264	)		$	(6,093	)		$	88,255		$	(56,029	)		$	(93	)		$	26,105
Share based payment expense		–			–		–				–				64			–				–				64
Net income to common shareholders		–			–		–				–				–			(109	)			–				(109	)
Purchases of treasury stock		–			–		(4	)			(24	)			–			–				–				(24	)
Foreign currency translation		–			–		–				–				–			–				28				28
Balances at March 31, 2019		6,472		$	65		(1,268	)		$	(6,117	)		$	88,319		$	(56,138	)		$	(65	)		$	26,064
Share based payment expense		–			–		–				–				52			–				–				52
Net income to common shareholders		–			–		–				–				–			451				–				451
Purchases of treasury stock		–			–		(25	)			(149	)			–			–				–				(149	)
Foreign currency translation		–			–		–				–				–			–				(59	)			(59	)
Balances at June 30, 2019		6,472		$	65		(1,293	)		$	(6,266	)		$	88,371		$	(55,687	)		$	(124	)		$	26,359
Share based payment expense		–			–		–				–				49			–				–				49
Net loss to common shareholders		–			–		–				–				–			(166	)			–				(166	)
Purchases of treasury stock		–			–		(9	)			(54	)			–			–				–				(54	)
Foreign currency translation		–			–		–				–				–			–				(76	)			(76	)
Balances at September 30, 2019		6,472		$	65		(1,302	)		$	(6,320	)		$	88,420		$	(55,853	)		$	(200	)		$	26,112

		Common Shares		Stock Amount			Treasury Shares			Stock Amount				Additional Paid-in Capital			Accumulated Deficit				Accumulated O ther C omprehensive L oss				Total
Balances at December 31, 2019		6,472		$	65		(1,310	)		$	(6,352	)		$	88,471		$	(60,815	)		$	2			$	21,371
Share based payment expense		–			–		–				–				6			–				–				6
Net loss to common shareholders		–			–		–				–				–			(2,660	)			–				(2,660	)
Purchases of treasury stock		–			–		(5	)			(19	)			–			–				–				(19	)
Foreign currency translation		–			–		–				–				–			–				(234	)			(234	)
Balances at March 31, 2020		6,472		$	65		(1,315	)		$	(6,371	)		$	88,477		$	(63,475	)		$	(232	)		$	18,464
Share based payment expense		–			–		–				–				4			–				–				4
Net loss to common shareholders		–			–		–				–				–			(2,700	)			–				(2,700	)
Purchases of treasury stock		–			–		–				–				–			–				–				–
Foreign currency translation		–			–		–				–				–			–				(5	)			(5	)
Balances at June 30, 2020		6,472		$	65		(1,315	)		$	(6,371	)		$	88,481		$	(66,175	)		$	(237	)		$	15,763
Share based payment expense		–			–		–				–				3			–				–				3
Net income to common shareholders		–			–		–				–				–			22				–				22
Purchases of treasury stock		–			–		–				–				–			–				–				–
Foreign currency translation		–			–		–				–				–			–				120				120
Balances at September 30, 2020		6,472		$	65		(1,315	)		$	(6,371	)		$	88,484			(66,153	)		$	(117	)		$	15,908

The accompanying notes are an integral part of these consolidated financial statements.

WILHELMINA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOW

For the
Nine Months
Ended
September 30
, 2020
and
2019

 (In thousands)
(Unaudited)

	Nine Months Ended September 30 ,
	2020				2019
Cash flows from operating activities:
Net (loss) income:	$	(5,338	)		$	176
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Amortization and depreciation		886				885
Goodwill impairment		800				–
Share based payment expense		13				165
Deferred income taxes		627				23
Bad debt expense (recovery)		131				(1	)
Changes in operating assets and liabilities:
Accounts receivable		2,318				(181	)
Prepaid expenses and other current assets		76				(77	)
Right of use assets-operating		428				802
Other assets		24				1
Due to models		(1,754	)			31
Lease liabilities-operating		(498	)			(854	)
Accounts payable and accrued liabilities		(869	)			(1,038	)
Net cash used in operating activities		(3,156	)			(68	)
Cash flows used in investing activities:
Purchases of property and equipment		(90	)			(304	)
Net cash used in investing activities		(90	)			(304	)
Cash flows used in financing activities:
Purchases of treasury stock		(19	)			(227	)
Proceeds from term loans		1,975				–
Payments on finance leases		(67	)			(83	)
Payment on term loans		(565	)			(438	)
Net cash provided by (used in) financing activities		1,324				(748	)
Foreign currency effect on cash flows:		(119	)			(107	)
Net change in cash and cash equivalents:		(2,041	)			(1,227	)
Cash and cash equivalents, beginning of period		6,993				6,748
Cash and cash equivalents, end of period	$	4,952			$	5,521
Supplemental disclosures of cash flow information:
Cash paid for interest	$	64			$	88
Cash paid for income taxes	$	14			$	5

Non-GAAP Financial Measures

EBITDA, Adjusted EBITDA and Pre-Corporate EBITDA represent measures of financial performance that are not calculated and presented in accordance with U.S. generally accepted accounting principles (“non-GAAP financial measures”). The Company considers EBITDA, Adjusted EBITDA and Pre-Corporate EBITDA to be important measures of performance because they:

• are key operating metrics of the Company’s business;
• are used by management in its planning and budgeting processes and to monitor and evaluate its financial and operating results; and
• provide stockholders and potential investors with a means to evaluate the Company’s financial and operating results against other companies within the Company’s industry.

The Company’s calculation of non-GAAP financial measures may not be consistent with similar calculations by other companies in the Company’s industry. The Company calculates EBITDA as net income plus interest expense, income tax expense, and depreciation and amortization expense. The Company calculates “Adjusted EBITDA” as EBITDA plus foreign exchange gain/loss plus share-based payment expense and certain significant non-recurring items that the Company may include from time to time. The Company calculates “Pre-Corporate EBITDA” as Adjusted EBITDA plus corporate overhead expense, which includes director compensation, securities laws compliance costs, audit and professional fees, and other public company costs.

Non-GAAP financial measures should not be considered as alternatives to net and operating income as an indicator of the Company’s operating performance or cash flows from operating activities as a measure of liquidity or any other measure of performance derived in accordance with generally accepted accounting principles.

Form 10-
Q
Filing

Additional information concerning the Company’s results of operations and financial position is included in the Company’s Form 10-Q for the third quarter ended September 30, 2020 filed with the Securities and Exchange Commission on November 12, 2020.

Forward-Looking Statements

This press release contains certain “forward-looking” statements as such term
is defined
in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relating to the Company
are based
on the beliefs of the Company’s management as well as information currently available to the Company’s management. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect” and “intend” and words or phrases of similar import, as they relate to the Company or Company management,
are intended
to identify forward-looking statements. Such forward-looking statements include, in particular, projections about the Company’s future results, statements about its plans, strategies, business prospects, changes and trends in its business and the markets in which it operates. Additionally, statements concerning future matters such as gross billing levels, revenue levels, expense levels, and other statements regarding matters that are not historical are forward-looking statements.
Management cautions that these forward-looking statements relate to future events or the Company’s future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance, or achievements of its business or its industry to be materially different from those expressed or implied by any forward-looking statements.
Should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected or intended. The Company does not undertake any obligation
to publicly update
these forward-looking statements. As
a result, no person should
place undue reliance on these forward-looking statements.

About Wilhelmina International, Inc. (www.wilhelmina.com):

Wilhelmina, together with its subsidiaries, is an international full-service fashion model and talent management service, specializing in the representation and management of leading models, celebrities, artists, photographers, athletes, and content creators. Established in 1967 by fashion model Wilhelmina Cooper, Wilhelmina is one of the oldest and largest fashion model management companies in the world. Wilhelmina is publicly traded on Nasdaq under the symbol WHLM.  Wilhelmina is headquartered in New York and, since its founding, has grown to include operations in Los Angeles, Miami, London and Chicago. Wilhelmina also owns Aperture, a talent and commercial agency located in New York and Los Angeles. For more information, please visit www.wilhelmina.com and follow @WilhelminaModels.

CONTACT:		Investor Relations Wilhelmina International, Inc. 214-661-7488 [email protected]