Earnings Call
Energy Focus, Inc/De (EFOI)
Earnings Call Transcript - EFOI Q3 2021
Operator, Operator
Greetings, and welcome to the Energy Focus Third Quarter twenty twenty one Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Brett Maas, Investor at Hayden IR. Thank you, Brett. You may begin.
Brett Maas, Investor Relations
Thank you, operator. And good morning, everyone. Joining me on the call today is James Tu, Executive Chairman and Chief Executive Officer; and Tod Nestor, Chief Operating Officer and Financial Officer. Before we begin today's call, I'd like to remind everyone that we'll 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 10-K, in addition to the forward-looking statements in our most recently filed 10-Q with the SEC. 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 measures are presented on both GAAP and non-GAAP adjusted basis. 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'll now turn the call over to James. James, the floor is yours.
James Tu, CEO
Thank you, Brett. Good morning, everyone, and thank you for joining our third quarter twenty twenty one earnings conference call. I'm excited to discuss the next phase of Energy Focus with you today. While sales for the third quarter twenty twenty one show some modest recovery from the previous quarter, our legacy LED lighting business continues to face ongoing challenges related to the pandemic. For our commercial business, with offices facing new work conditions and a distributed workforce, retrofitting lighting systems continues to be a lower priority for facility managers. We also continue to see some of our customers' retrofit projects being delayed with our customers in the school and hospital sectors. And the LED tube market remains intensely competitive. We continue to believe that our high-quality filter-free and ten-year warranty positioning offers the best long-term value proposition for large mission-critical facilities that seek to provide quality and reliable lighting with minimum maintenance and product weight, as well as reduced labor due to our product reliability. Looking forward, our upcoming Suncycle circadian lighting system, which marries our superior lighting products with our patented EnFocus power line control technology, will be able to offer a lighting experience with affordability and sustainability performances that we believe will further differentiate Energy Focus and bring our commercial lighting business to the next level. For our military business, third quarter military sales continue to be impacted by better budget availability for military spending. Several significant opportunities with the U.S. Navy and U.S. Army are still waiting for funding approval. Nonetheless, we expanded our product development efforts during the quarter for the Navy market, recently completing the development of the high-bay LED lighting product, and delivered our first unit to the Navy for their approval, a potential opportunity for up to five million dollars of orders for the product in the next five years. We have also started exploring how to bring additional lighting and control innovations to our military customers. Meanwhile, despite all the headwinds we have been encountering, we have stated over the past few quarters that we have not sat back and waited for the commercial lighting market to improve. We doubled down on innovation, primarily surrounding our EnFocus lighting control technology, as well as UV-C disinfection. The new products we have been developing since the beginning of the pandemic have already won several technical and industry awards this year and are about to enter the market in the coming months. Our upcoming network nUVo Air Disinfection devices represent the first innovations in this evolution. We recently received third-party validation of our disinfection performances, achieving ninety four point one percent to ninety nine point nine percent pathogen reduction over a half hour in one thousand cubic feet space for nUVo Tower and one hundred cubic feet space for nUVo traveler, respectively. We have received independent safety certification for nUVo traveler and are in the final stage of evaluating product samples. We also expect to receive safety certification for nUVo Tower shortly. We believe that these certifications are an important milestone, considering the powerful UV-C lens used in the nUVo products. Combined with our efficacy results, it means that nUVo disinfectors are powerful, effective, and safe in significantly reducing pathogens, whether they be mold, bacteria, or viruses, including the coronavirus, in personal and public places. We expect these products, including the nUVo Tower for largest spaces and cup holder-sized nUVo traveler for vehicles and other personal spaces, will be available for sale on nuvo.us/firstenergyhome.com as well as through our existing channel partners for commercial and military, adding in the fourth quarter of twenty twenty one. During the third quarter, we also continued the development of our patent-pending award-winning Suncycle circadian lighting, and expect to launch this product line to both residential and commercial markets during the earlier part of twenty twenty two. Our planned Suncycle systems composed of lens, picture, and controls powered by our EnFocus technology will provide filter-free, dimmable, color-tunable, and autonomous circadian optionality for both homes and offices without the operational complexity and cybersecurity concerns wireless lighting controls present. We believe that Suncycle, by seamlessly integrating high-quality lighting and EnFocus power line control, represents a true human-centric lighting system for both commercial and consumer applications. Both our human-centric lighting and UVC disinfection solutions present compelling opportunities for employers, landlords, hospitals, elder care communities, schools, and homes, where customers want a modern, comfortable, and healthy lighting solution that encourages productivity, safety, and well-being. We believe that these solutions are also ideal for residential homes, and for consumers who seek to significantly enhance environmental health and quality of life. As we look through the coming months and quarters, as we continue to navigate the unprecedented macro challenges of the pandemic for our existing LED lighting business, we believe our new products will position us for renewed growth. While we are certainly not satisfied with our financial results over the past three quarters, we believe our new innovations and products will significantly expand our addressable markets and diversify our customer base, providing exciting long-term and potentially transformative growth opportunities. And unlike the commercial and military market, the customer market has held up well during the pandemic. And many of us work from home and are looking to improve our home environment. We expect this new market could meaningfully contribute to our top and bottom line starting twenty twenty two with the launch of nUVo and Suncycle products. With that, I will turn the call to Tod to review our financial performance for the quarter. Tod?
Tod Nestor, CFO
Thank you, James. Net sales of two point seven million dollars for the third quarter of twenty twenty one decreased fifty three point nine percent compared to sales of six million dollars in the third quarter of twenty twenty, driven exclusively by decreases in military sales. When compared to two point one million dollars in the second quarter of twenty twenty one, net sales were up thirty two point five percent on a sequential basis, reflecting the timing of orders that slipped from second to third quarter. Sales of our commercial products for the nine months ended September thirty, twenty twenty one decreased seventeen point three percent compared to the same period in twenty twenty, reflecting a decrease in sales caused by delayed orders and project delays for our customers in the healthcare, education, commercial, and industrial sectors because of the continuing microeconomic slowdown and our customers' purchasing decisions delayed due to the COVID-19 pandemic. In addition, sales from our agency network were also lower, again reflecting the impact from the COVID-19 pandemic on our customer base. Sales of our military products for the nine months ended September thirty, twenty twenty one decreased fifty five point three percent, mainly due to availability of government funding for certain projects and the continued delayed timing of orders, as well as our fulfillment of a significant contract in the third quarter of twenty twenty. Sequentially, sales of our commercial products for the third quarter of twenty twenty one increased forty one point two percent compared to the second quarter of twenty twenty one. And net military product sales increased twenty point two percent from the second quarter of twenty twenty one. The increases primarily reflect the timing of delayed orders from the second quarter of twenty twenty one that were pushed into the third quarter of twenty twenty one. Sales to our top ten customers for the total company for the third quarter of twenty twenty one decreased fifty nine point eight percent, and sales to our top twenty customers decreased fifty seven point seven percent compared to the third quarter of last year. From a mix perspective, military sales were one point two million dollars for the third quarter of twenty twenty one, representing forty four point six percent of total net sales compared to four point five million dollars or seventy five point six percent of total net sales for the third quarter of twenty twenty. Sales to commercial customers were one point five million dollars in the third quarter of twenty twenty one, representing fifty five point four percent of total net sales for the quarter. Flat as compared to one point five million dollars or twenty four point four percent of total net sales in the third quarter of twenty twenty. Gross profit for the third quarter of twenty twenty one was zero point six million dollars compared with one point four million dollars in the third quarter of twenty twenty, a decrease of fifty nine point one percent year over year. On a sequential basis, gross profit increased by zero point two million dollars or forty three point three percent compared to gross profit of zero point four million dollars in the second quarter of twenty twenty one. As a percent of revenue, gross profit margin was twenty point five percent in the third quarter of twenty twenty one, reflecting less leverage of our fixed costs due to the lower sales compared to twenty three point one percent in the third quarter of twenty twenty. Gross margin for the third quarter of twenty twenty one was positively impacted by favorable price and usage variances for material and labor of zero point one million dollars and inventory reserves recorded of zero point one million dollars, partially offset by low sales which impacted our gross profit rate. Adjusting gross profit margins for excess and obsolete, in-transit, and net realizable value inventory reserve resulted in non-GAAP adjusted gross margins of seventeen point nine percent in the third quarter of twenty twenty one compared to twenty four point six percent in the third quarter of twenty twenty and seventeen point six percent in the second quarter of twenty twenty one. As sales return to normalize and improve levels, we expect our overall gross margins to continue being in the mid-twenties in the near term. Going forward, we anticipate we'll begin to approach the high twenties percent as we introduce new products and negotiate better pricing to accompany our increased sales volume, and depending on our product and channel mix as well as inventory valuations. However, we may see fluctuations quarter to quarter. Operating expenses in the third quarter of twenty twenty one were two point four million dollars compared to the same two point four million dollars in the third quarter of twenty twenty. Sequentially, operating expenses declined approximately two hundred thousand dollars from the two point six million dollars in the second quarter of twenty twenty one, reflecting belt-tightening efforts and a decrease in professional fees and stock compensation-related expenses. Loss from operations for the third quarter of twenty twenty one was one point eight million dollars as compared to an operating loss of one million dollars in the third quarter of twenty twenty. Sequentially this compared to a loss from operations of two point two million dollars in the second quarter of twenty twenty one, a lower loss of four hundred thousand dollars. Below the operating line, we have an eight hundred and sixty thousand dollars gain on the payroll credits related to the employee retention tax credit program. This resulted in a net loss of one point one million dollars or negative zero point two two dollars per basic and diluted share of common stock for the third quarter of twenty twenty one compared with a net loss of one point two million dollars or negative zero point three five dollars per basic and diluted share of common stock in the third quarter of twenty twenty. Sequentially, this compares with a net loss of two point five million dollars or negative zero point five nine dollars per basic and diluted share of common stock in the second quarter of twenty twenty one. Adjusted EBITDA, a non-GAAP measure, which excludes depreciation and amortization, interest expense, stock-based and other incentive compensation, non-routine charges to other income or expense, and changes in fair value of warrant liability for prior year, was a loss of one point seven million dollars in the third quarter of twenty twenty one compared with a loss of zero point nine million dollars in the third quarter of twenty twenty and a loss of two million dollars in the second quarter of twenty twenty. The higher adjusted EBITDA loss from the third quarter of twenty twenty was primarily due to a combination of gross margin reductions due to lower sales. Now, I'd like to turn to the balance sheet. As of September thirty, twenty twenty one, we had cash of zero point four million dollars. This compares with one point eight million dollars as of December thirty one, twenty twenty. As of September thirty, twenty twenty one, the company had total availability of two point one million dollars, which consisted of zero point four million dollars of cash and one point seven million dollars of additional borrowing availability under our credit facilities. This compares to total availability of four point nine million dollars as of September thirty, twenty twenty and total availability of four point one million dollars as of June thirty, twenty twenty one. As a reminder, total availability is a non-GAAP measurement of our access to cash at any given point in time, and we believe it 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 of the credit facilities and our actual borrowings under the credit facilities. Excess availability under our credit facilities was one point seven million at the end of the third quarter twenty twenty one, two point three million dollars at the end of the third quarter of twenty twenty, and two point eight million dollars at the end of the second quarter of twenty twenty one. During the third quarter of twenty twenty one, cash used in operations was two point three million, of which the majority consisted of cash used in operations, and another zero point four million dollars was attributed to working capital investments. Our cash used in investment activities was one hundred thousand dollars and we accessed one point one million dollars of cash from financing activities. Our net inventory balance of seven point eight million dollars as of September thirty, twenty twenty one, increased two point one million dollars over December thirty, twenty twenty. This increase primarily relates to global supply chain challenges, which are impacting our inventory purchasing strategy, leading to a buildup of inventory and inventory components in an effort to manage both shortages of available components and longer lead times in obtaining components and finished goods, as well as reduced sales leading to longer hold times for inventory. Our accounts payable balance as of September thirty of twenty twenty one increased by zero point two million dollars over December thirty of twenty twenty, primarily related to this inventory buildup.
Operator, Operator
Thank you. We’ll now be conducting a question-and-answer session. Our first question is from Sameer Joshi with H.C. Wainwright. Please proceed with your question.
Sameer Joshi, Analyst
Hi, James. Hi, Tod. Thanks for taking my questions.
James Tu, CEO
Hi. Good morning, Sameer.
Sameer Joshi, Analyst
How are you?
James Tu, CEO
Good. Thanks.
Sameer Joshi, Analyst
So the new offering, you mentioned it will be available on a couple of websites. Did you say starting in the fourth quarter of twenty-one? So it should be active right now. Is that right?
James Tu, CEO
Yes. As we mentioned, it's the products that are being evaluated, the product samples. We are still waiting for the nUVo Tower certification, which we are expecting anytime now. So our goal is to launch as soon as we are ready. It will be in Q4, and as I said, it will be as soon as we can.
Sameer Joshi, Analyst
And what is the addressable market or at least the targeted addressable market that you see for this product and say one or two years from now, how do you see grabbing some market share of that? What are your views on that?
James Tu, CEO
Sure. This is a unique line of products. There is really nothing exactly the same in the market. There are new buyers that have used some UV, but this is, I think, one of the first, if not the first, product line that uses very strong UV-C lamps and with our patent-pending blocking technology to be able to block the lights for safety, but also still enable the airflow. We are pretty excited about this product; we have been testing the market on our own and the response has been pretty positive. I think our partner – our channel partners are very excited; First Energy Home, for example, they are getting ready as well. So, I think we are looking at not necessarily grabbing anybody's market share, because there's really no such thing. It’s a new category. It's a personal disinfector, as you can probably have noticed that we are using disinfector instead of air purifier because it's not an air purifier; this is to kill all the pathogens as much as possible, which our independent study has shown we can. So this goes anywhere people are mingling with other people. I would say that this is a new category we are creating, we are starting on the customer side, but also selling through our existing channel partners. We will be creating new channel partners. I see this in the future, one year, two years down the road in retail outlets and all that. I think it’s an exciting phase in the company when we're ready to launch these products; initially we are only operating on our website, in firstenergyhome.com. We are expecting to expand into other third-party channels like Amazon and others.
Sameer Joshi, Analyst
Yes. And so I had a similar question for Suncycle, but there too you are sort of creating the market for that? Is that true?
James Tu, CEO
Yes, the Suncycle product we are expecting to launch in the first quarter of twenty twenty two. That's also the first time we are taking our lighting products to the consumer sector. It’s going to be using very similar channels that we are creating now for nUVo. Again, as we’ve said in the past few quarters, we are also taking our technology into the customer sector, and that’s both expanding the impact of our technology but also diversifying our customer base. Suncycle, as you have seen, will be able to provide autonomous circadian lighting for homes and other commercial buildings, nursing homes, hospitals, and all that. So it's a pretty wide application because at the end of the day, our technologies reach out to people when they are indoors; right? People spend ninety percent of their time indoors. So we are applying our technologies where they can be to make the environment safer and healthier.
Sameer Joshi, Analyst
Yes. And in terms of the gross margin outlook, that’s in the high twenty, it takes into account the pricing and margins for these products. Is that right?
Tod Nestor, CFO
This is Tod. So, yes, when I spoke to going into the higher twenty, it does take into account the expectation of these new products becoming a larger part of our mix. It'll evolve as they become a heavier portion of our mix, but yes.
Sameer Joshi, Analyst
Understood. Tod, you mentioned inventory; is there any inventory related to the nUVo product that you included in the seven point eight million figure?
Tod Nestor, CFO
So the new products have a much faster turnover that are targeted to the consumer side. We will bring those in, and then they will turn the sales cycles much shorter. Our expectation is, our hope, I should say, is that we can actually get a good source of cash based on the terms we have as we enter into this consumer part of the market more.
Sameer Joshi, Analyst
Understood. Just one last one for me. I think you mentioned Navy a bid of five million dollars and you mentioned the time period; I'm sorry I missed that. Can you say that again?
Tod Nestor, CFO
James, do you want to handle or do you want me to give it?
James Tu, CEO
Yes, that's fine. I can confirm that it's up to five million dollars over five years.
Sameer Joshi, Analyst
Okay, okay. And are there other similar bids that you see in your pipeline or visibility from military?
James Tu, CEO
We continue to win the Request For Proposals (RFPs) in a pretty healthy percentage. I think there is not a significant change around the competitive landscape. As I mentioned in the script, we're excited to explore applying the EnFocus control technologies to the Navy lighting as well. We are in the initial stage of doing that, and we are very excited about those prospects down the road. We don't have much update right now, but that's an exciting initiative that has started. Just to mention, the Navy sales being indoor allows us to provide the circadian lighting to them. I think that's a – and also the Navy shifts usually don't allow wireless communication for controls and EnFocus is a perfect fit for that?
Sameer Joshi, Analyst
Yes, that led me to my last question actually, is Suncycle going to be given for some of the Navy or military kind of application? Thanks for that info. That’s all from me.
James Tu, CEO
Yes. Sure. Thank you. Thank you, Sameer.
Operator, Operator
Thank you. Our next question comes from Amit Dayal with H.C. Wainwright. Please proceed with your question.
Amit Dayal, Analyst
Hey, good morning, guys.
James Tu, CEO
Good morning, Amit.
Amit Dayal, Analyst
With respect to the disinfectant products or the product line, what's the strategy going forward? Are you going to continue investing in this product line developing some new versions, etcetera, or – sorry, is this the end of this effort? How should we think about the future of this strategy?
James Tu, CEO
We believe it's still early to determine the potential size of that market for us, but we're excited about it. Based on our internal market research, there seems to be significant demand. However, we won't know for sure until we start selling it, which we hope to do soon. Our current plan is to expand in this area. Currently, we are focusing on two major technological platforms. One is the EnFocus space control platform, which we are expanding into the Suncycle platform for both residential and commercial locations, as well as military applications. We believe we hold the necessary patents and have various capabilities that we will continue to invest in and grow. The second platform is the UV-C disinfection platform, where we are developing patent-pending technology that can deliver strong disinfection capabilities for both personal and public spaces. We see this as impactful technology that we can further expand. We're starting with two product lines: nUVo traveler, a portable option for cars and personal use, and nUVo Tower, designed for meeting rooms, living rooms, and office spaces. There are numerous potential applications for these products. Importantly, our disinfection solutions require minimal maintenance, as they have no filters and are chemical-free. Additionally, we are working on the Suncycle lighting control that integrates both lighting and UV-C disinfection, which is still in development. We're hopeful to introduce this product in the first quarter as well. We're committed to broadening our offerings, including the robust disinfection robot we are developing. We see this as a new market opportunity where our entrepreneurial culture can drive impactful products effectively, helping us establish our UV brand in this emerging field. These two technology platforms align with the lighting wellness concept we're pursuing, emphasizing human-centric lighting to enhance human biological performance, safety, health, and well-being. This is the direction we're taking as a company, focusing on investment and innovation.
Amit Dayal, Analyst
Yeah. Understood. Margins for this line of products, do you have any sort of visibility on what you might get in terms of margins for the products?
Tod Nestor, CFO
Hi, it’s Tod. Nice to talk to you again. Yes, we have some insights; it'll actually differ by channel. I'll say by mode of transportation, how we bring it in, but they are all the type of margins that help us get up into that high twenty range as they become a larger part of our mix. Clearly, there are going to be favorable margins to help get us there, but they are nice margin products that we feel can help the gross margins quite a bit.
Amit Dayal, Analyst
Okay. And sequentially, I mean, fourth quarter, we should anticipate it to be an improvement over the third quarter, right?
James Tu, CEO
Yes. That's too early to tell. We definitely are hoping that we could do better and better from here. But as I said, the timing of these contracts, we have mentioned a few times now, the military contract approvals. We have several good opportunities that we have already won that haven't got the funding. And that's the timing we're looking at. Obviously, depending on how much contribution we're going to see from the nUVo product line, we will launch—most likely you'll be seeing impact in the last month of the year. That will also obviously sway the quarterly results, and as I said a few quarters ago, we are now in the quarterly projection. We are not giving up on quality projections for now. I think once we have better visibility sometime in the next few quarters, we could start doing that, but we are not in that position now.
Amit Dayal, Analyst
Okay. Understood, James. Thank you so much.
James Tu, CEO
Thank you, Amit.
Operator, Operator
Thank you. Our next question comes from a private investor. Please proceed with your question.
Q – Unidentified Analyst, Private Investor
Hi. Good morning. A few questions actually if I can ask. The first question is on the financing; we're running out of cash here and I was just wondering if you can give us a picture of how we're going to make it through the next quarters here?
James Tu, CEO
Sure. You have a question, I guess based on financing. But your first question about capital. Yes, we have always been looking for capital to fund our operations in the past two years. And that's not going to change until we start getting to breakeven. The amount of the capital we need depends on how much contribution these renewable products make because these products are customer-oriented; the payment terms are a lot better than the commercial market. But we currently evaluate different options for funding capital to grow. The company’s focus has always been in the past year, two years since COVID started, to create a stronger intrinsic value with the technologies and patents and products. I think these products that we have developed over the past two years are being launched pretty soon. We have created a lot of potential for the company, and our goal is to make sure that when we have to raise capital, we are able to do so at a favorable valuation because of the intrinsic value we have created from these technologies and products.
Q – Unidentified Analyst, Private Investor
I would like to know more about the possible Army contract you mentioned, as this is the first time I have heard of it. I am aware that we have been working with the Navy. Could you provide some details on this? That concludes my questions.
James Tu, CEO
Sure. We see potential opportunities with Army bases that will utilize our lens technologies. This is an area where we can expand further. While we have these opportunities in mind, we are currently waiting for funding.
Q – Unidentified Analyst, Private Investor
I appreciate that. I'm still a bit concerned about the expectation of increased inflow from the sale of the nUVo products to help support operations. It seems like things are very tight for the upcoming quarter, which is what has me worried. Do you think you can manage through next quarter?
James Tu, CEO
Sure. And I think, again, I go back to what I just said: if we have created significant potential for the company, which I think if you look at our product lines today, the technology we have developed, it's a pretty exciting phase of the company. Historically, these are very unique IP with products that are going to be launched soon. So, if we need capital, we have to raise it. But I think the key is being able to have the products that are ready to grow and realize the potential, so investors are willing to fund the operation.
Q – Unidentified Analyst, Private Investor
Thank you. Being patient, but it’s hard.
James Tu, CEO
I’m like you.
Operator, Operator
Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.
James Tu, CEO
Thanks again for your participation in the conference call, and we look forward to reporting our progress for the twenty twenty one earnings later in the first quarter. Thank you. Have a good day.
Operator, Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.