Energy Focus Inc (EFOI) 2021 Q3 法說會逐字稿

Greetings, and welcome to the Energy Focus Third Quarter 2021 Earnings Conference Call.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brett Maas, Investor Hayden IR. Thank you, Brett. You may begin.

Thank you, operator, and good morning, everyone. Joining me on the call today is James Tu, Executive Chairman and Chief Executive Officer; and Todd Nester, Chief Operating Officer -- 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 forming statements in our most recent filed tension 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 required by law. Also, please note that during this call and in the accompanying press release, certain financial metrics are present 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, energyfocus.com in the Investor Relations section of the site.

I'll now turn the call over to James. James, the floors is yours.

Thank you, Brett. Good morning, everyone, and thank you for joining our third quarter 2021 earnings conference call. I'm excited to discuss about the next phase of Energy Focus with you today. While sales for the third quarter of 2021 shows a 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 the distributed workforce, retrofitting lighting systems continue 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 flicker-free and 10-year warranty positioning after the best long-term value proposition for large mission-critical facilities that seek to provide quality and reliable lighting with minimal maintenance and product waste 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 and focused power line control technology will be able to offer an equal 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 federal budget availability for military spending. But 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 deliver our first units to the Navy for their approval, a potential opportunity for up to $5 million of orders for the product in the next 5 years. We have also started exploring how to bring additional lighting and contour innovations to our military customers.

Meanwhile, despite of 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 markets to improve. We doubled down on innovation, primarily surrounding our EnFocus lighting control technology as well as UVC disinfection. The new products we've 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 nUVo air disinfection devices represent the first innovations in this evolution. We recently received third party validation of our disinfection performances achieving 94.1% to 99.9% pathogen reduction over 0.5 an hour in a 1,000 cubic feet space for nUVo Tower and the 100 cubic free state for nUVo Traveler, respectively. We have received independent safety certification of nUVo Traveler and are in the final stage of evaluating product samples. We also expect to receive safety certification on nUVo Tower shortly. We believe that these certifications are an important milestone considering the powerful UVC lamp used in the nUVo products.

Combined with our efficacy results, it means that nUVo disinfectors are powerful, effective and safe in significantly reducing pathogen, be it mold, bacteria or virus, including the coronavirus, in personal and public spaces. We expect these products, including the nUVo Tower for larger spaces and a cup holder size nUVo Traveler for vehicles and other personal spaces to be available for sale on nuvo.usfirstenergyhome.com as well as throughout our existing channel partners for commercial and military starting in the fourth quarter of 2021.

During the third quarter, we also continued to develop -- the development of our patent pending award-winning Suncycle circadian lighting system and expect to launch this product line to both residential and commercial markets during the earlier part of 2022. Our planned Suncycle systems composed of land, fixture and controls, powered by our EnFocus technology will provide flicker-free, dimmable, color tunable and autonomous circadian functionality for both homes and offices without the operational complexity and cybersecurity concerns, wireless lighting controls present. We believe that Suncycle by similarly 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 payer 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 for consumers who seek to significantly enhance environmental health and quality of life.

As we look to the coming months and quarters, as we continue to navigate 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 few quarters, we believe our new innovations and products will significantly expand our addressable markets and diversify our customer base and provide 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 as many of us work from home and are looking to improve our home environment. We expect this new market to meaningfully contribute to our top and bottom line starting 2022 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?

Thank you, James. Net sales of $2.7 million for the third quarter of 2021 decreased 53.9% compared to sales of $6 million in the third quarter of 2020, driven exclusively by a decrease in military sales. When compared to $2.1 million in the second quarter of 2021, net sales were up 32.5% on a sequential basis, reflecting the timing of orders that slipped from second to third quarter. Sales of our commercial products for the 9 months ended September 30, 2021, decreased 17.3% compared to the same period in 2020, 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 macroeconomic slowdown and our customers' purchasing decisions delay due to 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 9 months ended September 30, 2021, decreased 55.3%, 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 2020.

Sequentially, sales of our commercial products for the third quarter of 2021 increased 41.2% compared to the second quarter of 2021. And net military product sales increased 23.2% from the second quarter of 2021. The increases primarily reflect the timing of delayed orders from the second quarter of 2021 that were pushed into the third quarter of 2021. Sales to our top 10 customers for the total company for the third quarter of 2021 decreased 59.8% and sales to our top 20 customers decreased 57.7% compared to the third quarter of last year.

From a mix perspective, military sales were $1.2 million for the third quarter of 2021, representing 44.6% of total net sales compared to $4.5 million or 75.6% of total net sales for the third quarter of 2020. Sales to commercial customers were $1.5 million in the third quarter of 2021, representing 55.4% of total net sales for the quarter flat as compared to $1.5 million or 24.4% of total net sales in the third quarter of 2020.

Gross profit for the third quarter of 2021 was $0.6 million compared with $1.4 million in the third quarter of 2020, a decrease of 59.1% year-over-year. On a sequential basis, gross profit increased by $0.2 million or 43.3% compared to gross profit of $0.4 million in the second quarter of 2021. As a percent of revenue, gross profit margin was 20.5% in the third quarter of 2021, reflecting less leverage of our fixed costs due to the lower sales compared to 23.1% in the third quarter of 2020. Gross margin for the third quarter of 2021 was positively impacted by favorable price and usage variances for material and labor of $0.1 million and inventory reserves recorded at $0.1 million, 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 the non-GAAP adjusted gross margins of 17.9% in the third quarter of 2021 compared to 24.6% in the third quarter of 2020 and 17.6% in the second quarter of 2021. As sales returned to normalized and improved levels, we expect our overall gross margins to continue being in the mid-20s in the near term. Going forward, we anticipate we will begin to approach the high 20s 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 2021 were $2.4 million compared to the same $2.4 million in the third quarter of 2020. Sequentially, operating expenses declined approximately $200,000 from the $2.6 million in the second quarter of 2021, reflecting belt-tightening efforts and a decrease in professional fees and stock compensation-related expenses.

Loss from operations for the third quarter of 2021 was $1.8 million as compared to an operating loss of $1 million in the third quarter of 2020. Sequentially, this compares to a loss from operations of $2.2 million in the second quarter of 2021, a lower loss of $400,000. Below the operating line, we had an [$860,000] gain on the payroll credits related to the employee retention tax credit program. This resulted in a net loss of $1.1 million or negative $0.22 per basic and diluted share of common stock for the third quarter of 2021 compared with a net loss of $1.2 million or negative $0.35 per basic and diluted share of common stock in the third quarter of 2020. Sequentially, this compares with a net loss of $2.5 million or a negative $0.59 per basic and diluted share of common stock in the second quarter of 2020.

Adjusted EBITDA, a non-GAAP measure, which excludes depreciation and amortization, interest expense stock-based and other incentive compensation, nonroutine charges to other income or expense and changes in fair value of warrant liability for prior year periods was a loss of $1.7 million in the third quarter of 2021 compared with a loss of $0.9 million in the third quarter of 2020 and a loss of $2 million in the second quarter of 2021. The higher adjusted EBITDA loss from the third quarter of 2020 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 30, 2021, we had cash of $0.4 million. This compares with $1.8 million as of December 31, 2020. As of September 30, 2021, the company had total availability of $2.1 million, which consisted of $0.4 million of cash and $1.7 million of additional borrowing availability under our credit facilities. This compares to total availability of $4.9 million as of September 30, 2020, and total availability of $4.1 million as of June 30, 2021.

As a reminder, total availability is a non-GAAP measurement of our access to cash at any given point in time, and we believe is a much more relevant metric than simply looking at cash balance or even net debt on the balance sheet. Excess volume 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 $1.7 million at the end of the third quarter 2021, $2.3 million at the end of the third quarter of 2020 and $2.8 million at the end of the second quarter of 2021. During the third quarter of 2021, cash used in operations was $2.3 million, of which the majority consisted of cash used in operations and another $0.4 million was attributed to working capital investments. Our cash used in investment activities was $100,000, and we accessed $1.1 million of cash from financing activities.

Our net inventory balance is $7.8 million as of September 30, 2021, increased $2.1 million over December 30, 2020. 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 those 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 30, 2021, increased by $0.2 million over December 30, 2020, primarily related to this inventory build.

With that, we would like to open the call to questions. Operator?

(Operator Instructions)

Our first question is from Sameer Joshi with H.C. Wainwright.

So the new offering, you mentioned it will be available on the website a couple of sites -- Did you say starting 4Q '21, so it should be active right now. Is that right?

Yes. We are -- as we mentioned, it's -- the product are being evaluated, product samples. We are still waiting for the tower -- nUVo Tower certification, which we are expecting any time now. And so our goal is to launch as soon as we are ready, will be in Q4. And as I said, it will be as soon as we can.

And what is the addressable market or at least the targeted addressable market that you see for this product? And say, 1 or 2 years from now, how do you see grabbing some market share of that? What are your views on that?

Sure. This is a unique line of products. There's 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, it's not the first, product line that use very strong UVC lamps and with our patent blocking technology to be able to block the light for safety, but also still enable the airflow. And so we are pretty excited about this product. We have been testing the market on our own, and responses have been pretty positive. I think our partner -- 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 a thing as a new category, it's a personal disinfector as you can probably have -- because you have noticed that we are using this disinfector instead of air purifier because it is not to be air purifier is to kill all the pathogens as much as possible, which our independent study has shown, we can.

So this goes anywhere there are people mingling with other people. So I would say that this is a new category, we're creating. We are starting in the consumer side, but also selling through our existing channel partners. We will be creating new channel partners. I see this in the future in 1 year, 2 years down the road in retail outlets and all that. I think the -- It's a very exciting phase in the company when we are ready to launch these products. And we have to -- initially, we are only offering on our website at firstenergyhome.com. We are expecting to expand into other third-party channels like Amazon of the world. So it's a little detail, but we're very excited about the initial responses we've got so far.

Yes. And so I had sort of a similar question for Suncycle, but there too -- you are sort of creating the market for that. Is that true?

Yes. The Suncycle products, we are expecting first quarter 2022 launch. That's also the first time we're taking our lighting products to the consumer sector. It's going to be using very similar channels that we are creating now for mobile. And so that's -- again, as we -- consistent with what we have said in the past few quarters, we are also taking our technology into the consumer sector, and that's both expanding the impact of our technology but also diversifying our customer base. And Suncycle, as you have seen, is you will be able to provide autonomous circadian lighting for homes and other commercial buildings, nursing home, hospitals and all that. So it's a pretty wide application because in the end of the day, our technologies to reach out to people, when they are indoor, right? People spend 90% of their time indoors. So we are applying our technologies where they can be to make the environment safer and healthier.

Yes, yes. And in terms of the gross margin outlook that in the high 20s, that takes into account the pricing and margins for these products. Is that right?

This is Tod. Yes. So yes, the -- when I spoke to going in the higher 20s, it does take into account the expectation of these new products becoming a larger part of our mix. And we'll evolve to that as they become a heavier portion of our mix, but yes.

Understood. And Tod, speaking about inventory. Is there any inventory associated with the at least the newer product that is reflected in that $7.8 million number?

So the new products have a much faster turnover that are targeted at the consumer side. So we will be bringing those in, and then they will turn the sales cycle is much shorter. So 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.

Understood. Just one last one from me. I think you mentioned a Navy bid for $5 million. And you mentioned the time period. I'm sorry, I missed that. Can you say that again?

James, do you want to handle that? Do you want me to give it.

Yes. So yes, okay. I can -- so it's 5 years, it's $5 million -- up to $5 million in 5 years.

Okay. Okay. And are there other similar bids that you're working on or do you see in your pipeline or visibility from military?

We continue to win the RFPs in a pretty healthy percentage. I think -- I don't think there is a significant change on the competitive landscape. As I mentioned in the script that we're very excited to explore the applying the EnFocus control technologies to the Navy's lighting as well. We are in the initial stage of doing that. And we're very excited about that prospect down the road. We don't have much to update right now, but that's an exciting initiative that was started. Just imagine the Navy sailors being indoor and we're able to provide circadian lighting to them. I think that's -- and also the navy ships usually don't allow wireless communication for controls and EnFocus is a perfect fit of that.

Yes, that was going to be my last question actually that Suncycle is going to be targeted for some of the Navy or military kind of application.

Our next question comes from Amit Dayal with H.C. Wainwright.

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 sort of new versions, et cetera? Or is this the end of this effort. How should we think about the future of this strategy?

Sure. We believe so. Obviously, it's still too early to tell how big that market could be for it. We are excited about it. We -- as I said, we've done our internal market research and I think there's a good amount of demand there. But obviously, nothing is for sure until you start selling it, which we obviously hope soon. And the plan right now is obviously to continue to expand that. If you look at the company right now, there are 2 major technological platforms that we are focusing -- we have been focusing on over the past year also. One is obviously the EnFocus based control platform that we are expanding into the Suncycle platform, both for residential and commercial locations and many other patients such as military.

We believe that we have the patent there and we can -- there's a lot of capabilities and applications there that we will continue to invest and expand. The other platform is the UVC disinfection platform, and we have our patent pending technology blockers that can enable us to bring very powerful disinfection capabilities to people in their personal and public spaces. We definitely think that that's a pretty impactful technology that we can continue to expand. We are starting with nUVo Traveler, which is affordable one for a car and for personal use and also nUVo Tower, which is for meeting rooms and living rooms and all that, doctor's office, things like that. You can imagine a lot of the locations for these products.

But again, it's being able to provide a powerful disinfection with very little maintenance required because there's no filter in it, it's chemical-free. So we're starting with these 2 product lines. We have mentioned about a curve, which is the lighting integrated Suncycle, lighting control and UVC Disinfection Troffer. That is still under development, and we are also very excited about that product. We are hopeful that it could be introduced in the first quarter as well. So we are definitely expanding. And as you heard about our mUVe Robot, disinfection robot that's being developed as well.

So we believe that that's a new market that we could take advantage of our feed and our sort of entrepreneurial and innovative culture to develop very impactful products and move fast to create the UV brand in this new market. So that's another area we are planning to continue to invest and expand.

You can look at nUVo product for [limbo], you can see additional variations from the nUVo family, right? So that's for now, we definitely want to continue to invest and expand in that sector. If you bring these 2 major technology platforms that we're developing, they are -- they're all fitting into this lighting wellness concept where that's what we've been talking about human-centric lighting, which is bring lighting technologies to impact human biological performances like safety, health, wellbeing. That's the direction that this company is going after and investing and innovating on.

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?

It's Tod. Nice to talk to again. Yes, we have some insights that will actually -- it differs by channel and, I'll say, by motive transportation and how we bring it in, but they are all the type of margins that help us get up into that high 20s range as they become a larger part of our mix. Clearly, they're going to be favorable to help get us there. But they are nice margin products that we feel can help the gross margins quite yet.

Okay. And sequentially, I mean, fourth quarter, we should anticipate it to be an improvement over the third quarter, right?

Yes, that's still too early to tell. We are definitely 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 pretty significant opportunities that we have already won that just haven't got the funding and that's the timing we're looking at. And obviously, depending on how much contribution we're going to see from the nUVo product line. It will be launched -- most likely you'll be seeing impact in the last month of the year, and that will also obviously say the quarterly results. And we -- as we said a few quarters ago, we are not in the quarterly projection. We're not giving up quality projections for now, but I think once we have a bit of visibility sometime in the next few quarters, we could start doing that, but we're not in that position now.

Our next question is from David Hurdman, private investor.

Just actually a few questions actually, if I can make. The first question is on the financing. We're running out of cash here, and I was just wondering if you can give us some picture of how we're going to make it through the next quarters here. And the other question is you mentioned something about an Army -- possible Army contract. And I didn't -- that's the first I've ever heard of the Army. I know we've been dealing with the Navy. So if you could give a little color on that. And that's basically my questions.

Sure. Your question again, (inaudible) add, but your first question about capital. Yes, we might -- we have always been looking for capital to fund our operations since in the past 2 years. And that's not going to change until we start getting to breakeven, right? And the amount of the capital we need because on how much, for example, this new products contributing because these products are customer-oriented. The payment terms are a lot better than the commercial market. So we constantly evaluate different options of capital or the capital to grow. The company's focus has always been in the past year, 2 years since the COVID started to create stronger intrinsic value with the technologies and patents and products. And I think these products that we have developed over the past 2 years are being launched pretty soon. It has created a lot of potential for the company. And our goal is to make sure that when we -- When we had to raise capital, we are able to raise the capability at the right -- a better valuation because of the intrinsic value we have created from this IP and technology and product.

Your second question about the Army. These are -- we remain the opportunity per se, but these are, how many basis are going to be using our land, our land technology for the basis. And that's obviously an area that we could also expand. And again, we have got the opportunities. Our partners have got the opportunities, but we are still waiting for the funding.

Okay. I appreciate that. I'm just still a little concerned about -- obviously, you're expecting a more inflow from the sale of the nUVo products to kind of tide you over is what I'm hearing. Because I mean you're -- it just seems like you're extremely tight in this next quarter here and that's what got me concerned is, do you think you can make it in the quarter.

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 line today, the technology will develop. It's a pretty exciting phase of the company historically. These are very unique IP with products that going to be launched soon. So we will -- if we need the capital, we will have to raise the capital. But I think being able to have the products that are ready to grow and realize the potential, so investors are willing to fund the operation.

Being patient, but it's hard, it's hard, I think.

There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Thanks again for your participation for the conference call, and we look forward to reporting our progress for the 2021 earnings later in the first quarter. Thank you. Have a good day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.