Q2 2021 Energy Focus Inc Earnings Call
[music].
Good day and welcome to the energy focus second quarter 2021 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your touch.
Phone and to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Brett Maas. Please go ahead Sir.
Thank you operator, and good morning, everyone. Joining me on the call today is James to Executive Chairman, Chief Executive Officer, Tod Nester, President and Chief 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 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 metrics 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 energy focus dot com in the Investor Relations section of the site and now I'll turn the call over to James James The floor is yours.
Thank you Brad good morning, everyone and thank you for joining our second quarter 2021 earnings Conference call.
As we lay out in the earnings release.
Second quarter results were impacted by the ongoing challenges for all customers in the lighting retrofit market, particularly for the commercial markets that continue to face highly uncertain building occupancy and suspended or reduced capital budgets.
Simultaneously our military business was also impacted by delay up authority through the funding availability of the Navy.
Corresponding to the new defense budget and priority under the New administration.
Last but not least conditions of global logistics company that can be challenging during the quarter and caused not only shipment delays, but also significant increases in freight costs.
He has really been the perfect storm.
That undercut our sales impacted our margin.
That said, we believe we have not lost the tee up authorities, we have been pursuing and things beginning of the third quarter. We have received a few commercial orders that were delayed from the first half of 2021.
That's the best I mentioned, continuing to expand and Lockdowns become a thing of the past.
I'm cautiously optimistic that overall lighting retrofit demand, particularly in the education and health care markets might start to stabilize and Hello again.
In the meantime, and spoke because of continuing to innovate.
To adapt to and grow under this new market paradigm.
The pandemic has likely impacted occupancy level and use your usage patterns of commercial buildings for extended periods of time, and therefore, the commercial lighting retrofit market could face challenges and uncertainty until economic life settle into a new normal.
We have standardized and move quickly and in both steps could be.
<unk>, new innovative products, including primarily our UV disinfection products and the upcoming Sun's cycle autonomous opinion lighting systems.
That could address both commercial and consumer markets in this new paradigm.
Fast forward to today, while many commercial buildings are still sitting possibly if not a lots of the empathy empty and property owners and tenants are temporarily tabling retrofit projects consumers are now spending more time at home and are therefore actively.
Seeking ways to make their home safer and more comfortable.
Many of us.
Also converting possible houses into offices and this requires introducing new equipment or technology.
Remote and hybrid work.
A tight labor market high savings rate and low interest rates, Oh fielding the spending on home improvement as well.
We have already seen by the bullion sales of both online and offline retailers.
And we believe that our new lines of products surrounding human centric lighting.
Now we have been developing over the past 12 to 18 months.
And are entering the market in the next few months can make homes and offices healthier more joyful and more productive.
While providing energy focus potential and diversified sales growth opportunities.
Expect it to come into the market first later in September and October are Novo traveler.
Personal tumble of size.
You'll be sea air disinfection device for car and personal use.
As well as the new low power portable freestanding usually see air disinfection devices designed for spaces up to 500 square feet.
Both devices are designed to uniquely and powerful the intercept virus in real time and to destroy 99.9% plus of pathogens, including influenza and Corona virus and its various passing through the devices.
These products.
The scientifically proven generally by the power of new Ultra light.
Altra violate like how long do we see.
All to our private portal, a planetary aerodynamic designs and our patent pending UV blocking technology.
They're not designed to safely capture and eliminate many contagious pathogen.
And unlike traditional air purifiers, they do not require frequent filter changes that could be costly and hazardous.
We plan to offer these products initially on our own as well as third party E commerce platforms.
Through our channel partners, such as first energy home and first energy advisors through U V and our lighting distributors.
As well as directly to large businesses and industries such as ride sharing.
Hospitality health care financial service and retail franchises.
In the meantime, we continue to improve the design of our above human centric lighting UBC troffer.
As well move this infection robot and we expect to start selling these products later in the fourth quarter as well.
In addition, our patent it sounds like the lighting system based on our in focus lighting control platform won product of the year of war from E. M E I pretty speeches and influential environment and energy technology publication.
Due to its ease of installation.
Youth and maintenance in providing energy efficient high quality and autonomous circadian lighting capability and we're planning for launch cycle products in the fourth quarter of 2021 or early 2022.
So Katy and lighting has proven to me so significantly improve sleep productivity and overall health, but with human lumen level and color temperature controls that correspond to the 24 hour circadian rhythm cycle.
It is therefore, particularly powerful to help improve human wellbeing experience and quality of life. When people are staying at home throughout the whole day into the evening.
With sudden cycle, we look forward to bringing cost effective and user friendly human centric lighting to both homes and workplaces.
For the first time.
To be sure regardless of the unexpected military funding delays and the commercial order delays or the ongoing pandemic. The company was the impact on our overall business.
We're not satisfied with our second quarter results, we reported today.
That said, we believe the new lines of UV, and Batavia, and lighting products that are slated to enter the market over the coming months will enable us to both expand our offerings for the commercial market, but also address a whole new consumer market.
And we expect these could meaningfully contribute to our top and bottom line starting in the fourth quarter of 2021 M. P. M.
Due to continuing myriad market uncertainties that we lay out in the earnings release and that I described earlier, we're still not in a position to provide specific financial guidance.
However at this point, we anticipate that sales for the third quarter will be better than the first and the second quarter.
And the UV C products games sales traction, we expect sales for the second half of 2021.
It could be better than the first half.
Schools hospitals, and government businesses already leading the recovery of facility utilization.
Which should accelerate our daily lives gradually resumes to normal.
And we believe that the climate change I'm building energy efficiency programs to be implemented starting in the coming months and quarters by the current administration well also breathe new life to the overall lighting retrofit market.
With that I'll turn the call to talk to review our financial performance for the quarter pop.
Thank you James net sales of $2.1 million for the second quarter of 2021 decreased 37, 8% compared to sales of $3.3 million in the second quarter of 2020, driven by decreases in both commercial and military sales when.
When compared to $2.6 million for the first quarter of 'twenty 'twenty. One net sales were down 21, 4% on a sequential basis.
Sales of our commercial products decreased mainly due to project delays for our customers and the health care education, commercial and industrial sectors because of the continuing macroeconomic slowdown.
Our customers' purchasing decisions related to the Covid 19 pandemic.
In addition sales from our agency network. We're also Lora again, reflecting the impact from the Covid 19 pandemic on our customer base.
Sales of our military products decrease mainly due to availability of government funding for certain projects and the continued delayed timing of orders.
Sales to our top 10 customers for the total company for the second quarter of 2021 decreased 45, 4% and sales to our top 20 customers decreased 41, 9% compared to the second quarter of last year.
From a mixed perspective military sales were $1 million for the second quarter of 'twenty 'twenty, one representing 48% of total net sales compared to $2.3 million or 68, 3% of total net sales for the second quarter of 2020.
Sales to commercial customers were $1.1 million in the second quarter of 'twenty and 'twenty, one representing 52% of total net sales for the quarter flat as compared to $1.1 million or 31.7.
31, 7% of total net sales in the second quarter of 2020.
Gross profit for the second quarter of 2021 was zero point $4 million compared with $1.3 million in the second quarter of 2020, a decrease of 77% year over year.
On a sequential basis gross profit declined compared to gross profit of <unk> 6 million in the first quarter of 'twenty 'twenty one.
As a percentage of revenue gross profit margin was 18, 9% in the second quarter of 2021, reflecting lost leverage of our fixed cost due to the lower sales compared to 40, 43% in the second quarter of 2020.
Gross profit margin was down 21, 3% in the second quarter of 'twenty 'twenty, one compared to the second quarter of 2020.
Approximately 19% was driven by volume and 2% was driven by product and business mix.
Also gross profit dollars were down $1 million versus prior year, and zero point $7 million, driven by volume and zero point $3 million driven by product and business mix.
Adjusted gross profit margins for the excess and obsolete and transit and that realizable value inventory reserve.
It resulted in a non-GAAP adjusted gross margins of 17, 6% for the second quarter of 2021 compared to 33% in the second quarter of 2020, and 24, 3% in the first quarter of 2021.
Due to fixed cost our quarterly sales levels of $3, three $3.5 million or more we continue to expect our overall gross margins to be in the mid twenty's in the near term.
As we move forward, we anticipate we will begin to approach the high twenties percentage range as we introduce new products and negotiate better pricing to accompany our increased sales volume and depending on our sales mix and inventory valuations. However, we may see some fluctuations quarter to quarter.
Operating expenses in the second quarter of 2021 or $2.6 million or 127, 1% of sales compared to $2.3 million or 68, 2% of sales in the second quarter of 2020.
The increase is attributable to increase in payroll and payroll related expenses due to our growth initiatives and an increase in stock expense as well as travel and marketing related expenses for growth offset by lower legal expenses driven by efforts to lower costs.
Operating expenses were $2.9 million in the first quarter of 2021 zero point $3 million higher than the second quarter of 2021, driven by a decrease in product development related expenses.
Loss from operations for the second quarter of 2021 was $2.2 million as compared to an operating loss of 0.9 million in the second quarter of 2020.
Sequentially. This compares to a loss from operations of $2.3 million in the first quarter of 2021, a decrease of $100000.
Net loss for the second quarter of 2021 was $2.5 million or a negative 59 cents per basic and diluted share based on $4.2 million fully diluted shares compared with a loss of $4.3 million or a negative 1.36 cents loss per share.
Per basic and diluted share based on $3.2 million fully diluted shares in the second quarter of 2020.
On a sequential basis, we reported a net loss of $1.6 million or negative <unk> 45 per basic and diluted share of common stock in the first quarter of 2021, which was inclusive of an eight zero point $8 million noncash pretax gain resulted from the forgiveness of the PPP loan during.
The first quarter of 2021.
Adjusted EBITDA, a non-GAAP measure, which excludes depreciation and amortization interest expense stock based and other incentive compensation gain on forgiveness of PPP loan in the first quarter of <unk>.
2021, and changes in fair value of warrant liabilities and prior year periods was a loss of $2 million for the second quarter of 'twenty 'twenty, one compared with a loss of zero point $7 million in the second quarter of 2020, and a loss of $2 million in the first quarter of 2021.
The increased adjusted EBITDA loss from the second quarter of 2020 was primarily due to a combination of gross margin reductions from lower sales.
And higher operating expenses due to our investments for future growth primarily in the areas of sales and engineering personnel important to our UBC and sons cycle and focus efforts.
The increased adjusted EBITDA loss for the first quarter 2021 was primarily due to gross margin reductions.
Now I'd like to turn to the balance sheet.
As of June 30th 'twenty, 'twenty, one we had cash of $1.3 million.
This compares with a with $1.8 million as of December 31, 2020.
As of June 30th 'twenty, 'twenty, one and accompanying had total availability of $4.1 million, which consisted of $1.3 million of cash and $2.8 million of additional borrowing availability under our credit facilities.
This compares to total availability of $3.9 million as of June 32020, and a total availability of $1.2 billion as of.
At March 31.2021.
We also strengthened our balance sheet.
With our net proceeds of $4.5 million from an equity financing and net proceeds of $1.5 million from our bridge financing.
During the second quarter of 2021, while also increasing the inventory very sign of crowd.
Credit capacity by zero point $5 million.
Overall, increasing our liquidity.
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 much more relevant metrics and simply looking at cash balance or even not 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 borrower borrowings under the credit facilities.
The availability under our credit facilities was $2.8 million at the end of the second quarter 2021, $1.1 million at the end of the second quarter of 2020.
0.1 million.
End of the first quarter of 2021.
During the second quarter of 2021 cash used in operations was $3.3 million.
Of which $1.1 million was attributable to working capital investments cash used in operating activities was 102000, and we generated $4.2 million in cash from financing activities.
Our non inventory balance of $8.1 million as of June 30th 2021 increased $2.4 million over December 31st 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 both shortages of available components and longer lead times and obtaining components.
Our accounts payable balance as of June 32021 increased by zero point $4 million over December 31, 2020, primarily related to this inventory buildup.
With that we would like to open the call to questions.
Operator, we would now thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two and at this time, we will pause momentarily to assemble our roster.
Okay.
Yeah.
And the first question will come from Amit Dayal with H C. Wainwright. Please go ahead.
Thank you and good morning, everyone and money on it.
Yeah. So you know you said you saw some pickup in some orders from the commercial segment could you share which end markets you got some of those orders for them.
Yes indeed.
Indicating the school market seems to be the one that's recovering.
Oh, yeah. So.
We have seen those oh, those that were delayed in the past coming into third quarter, and which is why we all come to them that the third quarter will be better than this but in the second quarter and the first quarter.
The news coming from you know from the school side at least for the UV lighting offerings or something else that you Oh no no. The UV lighting have not have not started shipping yet that's why I said in the call earlier it was thought the September.
Later in September and going into October and we expect a more meaningful impact from the fourth quarter.
Hum.
It seems you know youre driving your push towards the commercial sector, you can get a little bit unlucky with the JV.
You do have a pretty strong lineup of offerings there.
Market.
Yes.
Outside of Europe pandemic related pressures as you know is there it'd be competitive reasons that you may not be getting the traction.
Dissipating any any color on you know what is preventing a little bit more stronger uptake or interest in the promotion of offerings you guys have right now.
Yeah, I mean, that's a great question, obviously as you know the whole market has been a very commoditized and that whole commoditization accelerated since.
Since covid hit the economy.
It'll be a lot of the.
Inventory in the market that are and then also when the end demand is soft.
People are looking for cheaper alternatives. So we definitely are.
<unk> also have that type of a competitive pressure.
But if you look at all of commercial sales over the past two quarters, it's been a kind of a flat. It's just not picking up and we are obviously also internally reorganizing how we can better differentiate ourselves in the market place wells, even though our patented products like a recap in focus.
A much more competitive and that is how we are reorienting, our sales force to focus on and in the meantime, I've. Even said you know Oh, we have to.
Diversify into leveraging our technologies diversifying into new markets are in this sort of new market paradigm are in the meantime, so we are doing both and we are very much looking forward to seeing the results of these efforts.
In the next few months.
Yeah. So you know so there's no sort of mutual cost cutting et cetera.
There are significant ways to manage through the current situation.
Yeah. We are we our cost structure is not high per say you know what public traded company. There are certain cost and obviously you know we have been working on really introducing these new products are getting ourselves the distribution in place.
And if we don't see the results we'd like obviously, we have to be very agile in adjusting our cost structure that's definitely.
As a you know something that we constantly look at on the other hand, we are preparing to to grow the company hopefully significantly with these new products coming on board in the next few months and in the market stabilize and for US to you know are you now.
You don't see the recovery in our traditional military and commercial markets in EMEA I'm I'm, just going to build on James' comments, a little bit with the pandemic last year I'm seeing the slowdown we were very proactive and unfortunately, and youre seeing some of that and to reduce costs and be more.
Discretionary areas did a number of strategic sourcing activities last year, which took out a pretty significant chunk of expenses. So where you do see expense increases as either in the area of growth, where its R&D or sales oriented or its fees related to product testing, which you have.
Have to do before you bring out new products. So we are we are very conscious of every penny we spend and I think we've done that's one area, where we've done a very good job of making sure. We're ahead of the curve.
Yeah. Thanks, Tom.
Yeah, I know I know you guys have done a lot of work on improving our cost structure and on continuing to bring out really interesting products will be the.
Mark institution turns around for you sooner than later yeah. Those are all my questions for now a bunch of Brexit you. Thank you so much.
Got it.
Again, if you have a question. Please press Star then one.
And this will conclude our question and answer session I would like to turn the conference back over to management for any closing remarks. Please go ahead excuse me there seems that there has been a question that recently came in and that will be from Robert Smith, what they send.
For performance.
Besting. Please go ahead Sir.
Yeah, Hi.
Good morning.
Hoffman.
Yep.
Do you guys use of any digital advertising or social media to get your new printer.
Potential island didn't cause them public conscious.
Uh huh.
Yes, that's definitely an airplane that you will be seeing a starting September was relaunched Brooke.
Right.
Okay.
And.
In order to kind of stay in business in the Permian.
No.
Environment would you.
Consider some kind of a.
A rollback in executive.
Compensation for them.
Relatively brief period of time, maybe six months or so to a.
More align the cost structure and.
It's just the bottom line and maybe share the pain of some oh it sounds its shareholders. Thanks.
Yeah, Rob as a part of I said, you know we have been very diligently managing all costs are we definitely don't have a bloated the organizational structure and as I said, we've been trying to really.
They've got a new businesses all of this very challenging period. If we are not seeing the results of that set up in the next call.
A month as we launch new products, we definitely will be adjusting our cost structure and it's it's not you know in Covid could compensation is just one of them you know they are going to be many aspects of the pot and a company that has to be readjusted, if the business model doesn't work.
We don't think that's the case, we are working on all these new products Oh, we have you know so well.
To strengthen our distribution capability.
So we are.
Cautiously optimistic that we could be start seeing growth from third quarter fourth quarter and beyond if things don't happen as fast as we like we definitely.
We'll be adjusting our cost structure I'm one of the largest shareholder myself on this company so I share the pain.
Oh well shareholders.
We are also in this very unprecedented.
So the environment that hit our core market, which is providing retrofit them pretty hard.
But as I said, you know I think our efforts that we've put in over the past 12 to 18 months shouldn't be paying off you know based on our you know.
Hum.
Research and then duration about the reception potential reception of our new products.
I will stay very agile I don't know anything to add.
Well said I think it's a fair ask if we're not seeing the results with respect and I'm also a large shareholder I'm one of the largest individual shareholders. So yeah, no not through grants, but both of those purchased our ship exactly.
Yeah, I think you front for that but yeah.
Well the new products really are quite interesting and have significant potential in my in my view I mean, you have to get over this CASM.
CASM so to speak of the liquidity and that was one of the possibilities.
Possibilities to to Chile.
No no doubt and I think that Todd and his team and our whole company and watch our liquidity very carefully and you have heard from parts of the speech that we have.
When working with multiple liquidity source providers and I think we're ready to grow and but you know if we don't see that we're hitting our targets on the top line.
Got to help us Hum.
Losses in the next quarter or two and then we have to make something that.
Make changes and and will be the first to to want to make those changes.
So stay in the company.
Yeah. Thanks again.
Thank you thank you Rob.
Yeah.
Again, if you have a question. Please press Star then one.
And the next question will come from Bill Hardy Investor. Please go ahead.
Hi, guys.
Hello, Good morning, good morning from Dallas.
It's a little warm down here, we'll get through it.
One of our biggest customers.
[laughter].
I sure hope so Oh my basic question is why.
What has been the holdup in getting these new products.
And to manufacture and.
Eventually into distribution to to the public.
And again a follow up on that is has had those problems have been solved.
Are you now.
Your fracturing mode, where you are.
Bringing these products into some type of inventory in anticipation of all of us.
All of Europe.
Yeah Bill good question, yes.
It's been a challenging engineering and it depends on process for us and the reason is that when we look at this you. Just told you is the market. It was almost nonexistent I mean, very very small niche market before the pandemic.
When we looked at when the pandemic hit and we look at the whole Air Purifier market for example, where the novel product line, it's gonna be competing in.
We believe that there are a lot of shortcomings that we could resolved all with technologies that focus.
Individuals and consumers and businesses that seek a stay of the majors in this whole pandemic landscape.
And so we put together the team to develop technologies.
Through multiple multiple iterations and I guess the product development and was delayed for a number of months and the reason was that we just were not happy enough to launch the product.
Yet and we continue to make changes to make it a better and better and and and I have to say that we're very very happy about where we are on your own products. You can always get better and I want to have more features but we're very happy where we are on the product design to Europe.
Questions will be resolved pretty much all of the problems and we are now ready to manufacture these products.
While we are at right now is really going through the safety certification process of these two products on a we're expecting to have it second half of September Oh, Yeah. Obviously, we cannot have precise timing. So it's just going through a third party agencies.
The products have been developed and ready to sail.
Finally to your point.
You know what.
So as you well approval or is it yeah.
Yeah its E T O N.
U L tender the agency called E. T O that is more popular for Pennsylvania electronics.
Okay. So in other words parts flow you do have access to our inventory.
Inventory. So you can make the products, it's just a matter yes.
We are expecting to start shipping the product the moment when we get the certification.
Okay. Okay, well. Thank you very much for your comments I appreciate it and good luck. Thank you.
Thank you. Thank you Bill with you [laughter] alright.
This will conclude our question and answer session I would like to turn the conference back over to management for any closing remarks. Please go ahead.
Thanks, everyone again for your participation in our quarterly earnings call. We look forward to speaking with you in our third quarter 2021 earnings call have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
[music].
Mhm.
[music].
Uh huh.
[music].
Uh huh.
[music].