Q3 2021 Energy Focus Inc Earnings Call
[music].
Greetings and welcome to the energy focus third quarter 2021 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. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded its now my pleasure to introduce your host Brett mass investor aisle Hayden IR. Thank you Bret you may begin.
Thank you operator, and good morning, everyone. Joining me on the call today is James to Executive Chairman and Chief Executive Officer, Tod Nester, Chief operating Officer Financial Officer.
We begin today's call I'd like to remind everyone that we will make certain forward looking statements. These statements are based upon information that represents the 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.
Recent 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 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.
The earnings release, which is posted on our corporate website energy focus dot com in the Investor Relations section of the site I'll now turn the call regimes James floor is yours.
Thank you Brad 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.
Well sales for the third quarter of 2021 shows a modest recovery from the previous quarter, our legacy lighting.
Lighting business continues to face ongoing challenges related to the pandemic.
Well all of the commercial business with offices facing new work conditions in a distributed work horse 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 all customers in the school and hospital sectors.
And they always need to mugging and remain intensely.
Kind of thing.
We continue to believe that our high quality fleet of three and 10 year warranty positioning offer the best long term value proposition for large mission critical facilities that seek to provide quality and reliable biding with minimal maintenance and product waste.
As well as reduced labor due to a product without a beat up too.
Looking forward, our upcoming sales cycles, lacanian lighting system, which marries our superior lighting products with our patented Infocus powerline control technology, we'll be able to offer an equal lighting experience with affordability.
And sustainability performance is that we believe will further differentiate energy focus and bring our commercial lighting business to the next level.
Our military business.
Quarter military sales continued to be impacted by that of a bunch of availability for military spending.
Several significant opportunities with the U S Navy and U S Army.
Waiting for funding approval.
Nonetheless, we expanded our product development effort during the quarter, while the Navy market.
Recently, completing the development of our high Bay lighting product.
And the need for our first unit to the Navy for their approval.
So I'll pause for up to 5 million balance of older for the product in the next five years.
We have also started exploring how to bring additional lighting and control it.
So our military customers.
Meanwhile, despite the headwinds we have been E. Commerce, we have stated over the past few quarters, but we have not sat back and waited for the commercial lighting market to improve.
We've doubled down on innovation, primarily surrounding our focus driving control technologies as well.
Perfection.
And the new products, we've been developing since the beginning of the pandemic.
I've already won several technical and industry Awards this year.
I'm not about to enter the market in the coming months.
Our upcoming Knowable air Disinfection devices represent the first innovations in this evolution.
We recently received.
Howdy validation of our disinfection performances, achieving 94.1% to 99, 9% pathogen reduction over a half an hour and a thousand cubic feet based upon the power and power hungry cubic feet space or Louisville traveler, respectively.
We have received independent safety.
Novo traveler and are in the final stage of the bedding product samples.
We also expect to receive safety certification a novel power shortly.
We believe that these certifications are an important milestone considering the powerful UV C land use in Louisville.
Combined with our efficacy result, it means that no vote and factors that are powerful and effective and safe.
Because then they can only reducing pathogen b mode.
Syria or virus, including the Colorado.
In personal and public spaces.
We expect these products, including the new more powerful larger spaces and a couple of those sites nimble shovel iPhone vehicles and other personal spaces to be available for sale.
<unk> got U S.
First energy home Dot com as well as our.
Existing channel partners, both commercial and military starting in the fourth quarter of 2021.
During the third quarter, we also continued to pay rent.
One of our patent pending award winning some cycle with ambient lighting system and expect to launch this product line for both residential and commercial markets. They are in the early part of 2022.
Our plan and Petco system composed of land fixture and controls power by hour Infocus technology will provide leak free dimmable Carla.
Color tunable and autonomous the Caribbean function that'll people's homes and offices without the operational complexity and cyber security concerns wireless lighting control it's present.
We believe that buying cycle by seamlessly.
<unk> high quality of lighting and Infocus powerline control represent.
True human centric lighting system for both commercial and consumer applications.
Both our human centric planning and you'll receive disinfection solutions present compelling opportunities for both for employers landlord.
At all.
They are kind of in at these schools.
And homes, where customers want a modern comfortable and healthy lighting solution that encourages productivity safety and wellbeing.
We believe that these solutions are also ideal for it.
The initial homes and for consumers, who seek to speak the medically enhanced environmental health and quality of life.
As we look to the coming months and quarters.
They need to navigate the unprecedented macro challenges.
The pandemic.
Well, our existing E filing 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 market.
Most of our customer base.
And provide exciting long term and potentially transformative growth opportunities.
And unlike the commercial and military market the consumer market has held up well during the pandemic. Many of US worked 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 2022 with the launch of novel and Simon cycle product.
With that I'll turn the call to Todd to review, our financial performance for the quarter.
Thank you James.
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 'twenty 'twenty driven exclusively by a decrease in military sales.
When compared to $2 1 billion in the second quarter of quantity 'twenty 'twenty 'twenty. One 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 nine months ended September 30th 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 and the health care education commercial and industrial sectors because of the continued.
Macro 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 30 of 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.
Sales of our commercial products for the third quarter of 2020, one increased 41, 2% compared to the second quarter of 2021 and that military product sales increased 23, 2% from the second quarter of Quant in 'twenty one.
The increases primarily reflect the timing of delayed orders from the second quarter of 2021 but 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.
Zero point $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 a zero point $4 million in the second quarter of 2021.
As a percent of revenue gross profit margin was 25% in the third quarter of 2021, reflecting lost leverage of our fixed costs due to the lower sales compared to $23 one per shot 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 a 0.1 million, partially offset by low sales, which impacted our gross profit rate.
Adjusting gross profit margins for excess and obsolete and transit and that realizable value inventory reserve resulted in a 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 <unk>.
<unk>, 6% in the second quarter of 2021.
As sales return to normalize and improve levels, we expect our overall gross margins to continue being in the mid twenty's in the near term.
Going forward, we anticipate will begin to approach the high twenty's 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 evaluations. However.
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 $200000 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 2020, one a lower loss of $400000.
Below the operating line, we had an $860000 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 <unk> 22 cents per basic and diluted share of common stock for the third quarter of 2021, compared with a net loss of $1 $2 million or a negative <unk> 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.
A negative 59 cents per basic and diluted share of common stock in the second quarter of 2021.
Adjusted EBITDA, a non-GAAP measure, which excludes depreciation and amortization interest expense stock based and other incentive compensation non routine charges through other income or expense and changes in fair value of warrant liability for prior year periods was a loss of $1 $7 million.
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 the lower sales.
Now I'd like to turn to the balance sheet.
As of September 30th 2021, we had cash of zero point $4 million.
This compares with $1 8 million as of December 31, 2020.
As of September 30th 2021 the company had total availability of $2 $1 million, which consisted of zero point $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 30th 2020, and total availability of $4 1 million as of June 32021.
As a reminder, total availability of the non-GAAP measurement of our access to cash at any given point in time and what we believe 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 $1 7 million at the end of the third quarter 2021, $2 3 million at the end of it.
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 are consisted of cash used in operations and another 0.4 million was attributed to working capital investments.
Our cash used in investment activities was $100000 and we access $1.1 million of cash from financing activities.
Our net inventory balance of $7 8 million as of September 30th 2021 increased $2 $1 million over December 30, <unk> 2020.
This increase primarily.
The 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 and 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 of 2021 increased by 0.2 million over December 30th 2020, primarily related to this inventory buildup.
We would like to open the call to questions.
Operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
Formation tone will indicate that your line is in the question queue you.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Yeah.
Thank you. Our first question is from Sameer Joshi with H C. Wainwright. Please proceed with your question.
Hey, James.
Thanks, Good morning Sameer.
How are you.
That's right.
So.
The new offering you mentioned it will be available on the website Scopola flip states Oh.
Did you see it starting to 'twenty one so it should be active right now is that right yes.
Yep.
As I mentioned, it's the promise of being evaluated the product samples.
We are still waiting for the tower Novo tower certifications, which we are expecting anytime you know now.
Now and so our goal is to launch as soon as we are.
Already.
It will be in Q4, and as I said it would be that's a nice weekend.
And.
What is the addressable market Oh acoustic targeted addressable market that you see for this abroad, it and say to one or two years from now how do you see.
Grabbing some market share of that.
What would I be use on that.
Sure.
This is a unique line of products.
You know, there's really nothing exactly the same in the market. They are your buyers that have used some UV, but.
This is a I think one of the first if not the first on product lines that are used very strong UV lamps, and with our patent pending blocking technology to be able to block the life for safety, but also steel.
To enable the airflow.
And so we are.
We are pretty excited about this product we have been testing the market and all along and our responses have been.
The positives are seeing our partner.
Our channel partners are very excited first energy home for them, both out getting ready as well.
So I think we were looking at the not necessary ramping anybody's market share because there's really no such a thing as a new category. Its a personal decision factor you can probably have.
And you probably have noticed that we aren't using pits and factory instead of air Purifier. Because this is not to have a pure.
This is to kill or the passage of as much as possible, which our independent study have shown we can.
So this goes anywhere there are you know people are mingling with other people so.
I would say that this is a new category of recreating a we are guiding in the consumer side, but also selling through our existing channel partners, we will be creating new channel partners I see this in.
In the future you know one year two years down the road in retail outlets and all of that I think the.
Very exciting facing the company when we're ready to launch these products and and we have to you know initially we only offer anything on our web site as far as energy home Dot com.
We are expecting to spend into others.
Third party channels like Amazon of the World.
So it's you know it's a little early to tell but we're very excited about the initial responses we have got so far.
Yes, and so I had sort of a similar question for sunset.
There too.
You are sort of creating the market for that.
Is that true.
Yeah, that's been cycled products, we are expecting our first.
Third quarter 2022.
Launch that's also the first time, we're taking our lighting products to the consumer sector.
And it's gonna be using very similar channels that we are creating now for it and they both are.
And so.
And that's again.
Consistent with what we have said in the past few quarters. We're also taking out technology in.
Into the consumer sector and that's.
Both expanding.
The impact of our technology, but also diversifying our customer base.
And.
SUNS cycle as you have seen it.
You'll be able to provide.
Kind of.
Opinion lighting.
For homes.
And the commercial.
Buildings nursing homes hospitals, and all of that so it's pretty wide application because you know what they are.
Our technology to reach out to people when they are indoor right people spend 90% of their time in door, so with applying our technologies, where they can be to make their environment safer.
Unhealthier.
Yeah, Yeah and in terms of the gross margin outlook and the high Twenty's that'd be it.
Takes into account the pricing.
And margins for these products is that right.
Oh God Yep Yep, so yes, the when I when I spoke to going into higher twenties. It does take into account the expectation on these new products are becoming a larger part of our mix and will evolve to that as they become a heavier portion of our mix, but yes.
Understood and then.
Todd.
Think about inventory is there any inventory associated with these accused of new world product.
That is reflected in that $7 8 million number.
So the the new products have a much faster turnover that are targeted at the consumer side. So we will we will be bringing those in and then they will turn the sales cycle is much shorter so our expectation is I 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 this consumer part of the market more.
Understood.
Just one last one from me.
I think you mentioned a navy bid.
So $5 million.
And you mentioned the time period, I am sorry, I missed that.
Say that again.
James do you want to handle that well I'm going to get it.
Yeah. So.
Yeah, that's okay I can't.
So he's alive.
Yes.
It's five years is $5 million up to $5 million in five years.
Okay and are there other similar bids that you're working on or are you see in your pipeline visibility.
Visibility from military.
We continue to win the Rfps in a pretty pretty healthy percentage.
Well I I think I don't think there is a significant change it and I don't think it's the competitive landscape.
As I mentioned in the script that the.
We're very excited to explore the applying the infocus central technologies to maybe 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 a that's an exciting initiative.
That was started.
Just you mentioned, the maybe sellers being indoor.
Are you able to provide security and lighting for them I think that's it.
And also.
The Navy ships, usually don't allow wireless communications.
Controls and info because there is a perfect fit for that.
Yeah that is good to be my last question actually that.
It sounds like are you going to be.
Good for some of the maybe or military kind of application.
Thanks for that and so that's one of them yeah sure.
Sure. Thank you think isn't me.
Thank you. Our next question comes from Amit Dayal with H C. Wainwright. Please proceed with your question.
Hey, good morning, guys.
Yep.
With respect to the disinfecting products or the product line.
Yeah.
What's the strategy going forward are you going to continue investing in this.
A broader claim developing sort of new new versions et cetera, or sort of is this.
Vietnam this effort.
Should we think about the future of this our strategy.
Sure. We believes though obviously, it's still too early to tell how big that market could be for us we.
We are excited about it.
Let's say you end up with some.
Internal market research and I think there's a.
Good amount event, there, but obviously nothing is for sure until you kind of selling it which we obviously hope to soon.
And the the plan right now is obviously to the extent that I can look at the company right now.
Major technological platforms that we are focusing on we have been focusing on over the past year or so one is obviously the infocus based control platform, but we are expanding into the sun cycled platform. Thus far are essential and kind of a shark location.
And many other applications such as the military.
And we believe that you know we have the patents there and we can oh.
A lot of possibilities and applications there that we'll continue to invest in it.
And.
The other platform is the UV disinfection platform.
And we have our patents.
Pending technology blockers that can enable us to bring very colorful physically infection type of therapies to people.
In their personal and public spaces.
We definitely think that that's a that's a pretty.
In pixel technology that we can continue to the extent we are studying with Louisville traveler, which is affordable one for a car and for personal use and also new horsepower, which is for meeting rooms in our living rooms, and all that.
There's always things like that you can imagine a lot of applications for these products.
But again, it's being being able to provide that powerful disinfection.
With.
Very little maintenance required because there's no filter into its chemical free so.
We're starting with these two product lines.
We have mentioned about above which is a lie.
Lighting.
Integrated.
You know like some cycle.
Lighting control.
And usually see things infection.
Troffer.
That is still under development and we are also very excited about that product.
Hopeful that that could be introduced in the first quarter as well. So we are definitely expanding and you heard about our move.
A robot Oh disinfection.
Robot that's.
You can pick that up as well so we believe that that's a that's a new market that we could take advantage of our feet.
And our sort of in Japan, Europe and.
You know innovative culture to be better very impactful products and move fast.
To create the the that you'd be brand.
In this new market. So that's not an area we are playing.
Planning to continue to invest and expand.
You can look at Novo product with nimble you can see additional variations from that Louisville family.
So yeah. So you know.
So.
But for now we definitely want to continue to invest in expanding that sector. They would be if you bring these two.
Major technology platforms that we're developing.
They are they are all feeding into the sun lining of what a lighting wellness.
Concept, where you know that's what we've been talking about human centric lighting, which is bringing lighting technologies to impact human biological performance right safety health and wellbeing.
That's the direction that this company is going after and investing and innovating.
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 these.
Bruce.
I mean, a pod nice to talk to you again.
Yeah, we have some insights that that'll actually it differs by channel.
And I'll say bye.
Motive transportation and how we bring it in but they are all the type of margins that help us get up into that high twenties range as they become a larger part of our mix clearly there.
Are there going to be favorable to help get us there, but they're they're a nice margin products that we feel can help on the gross margins quite a bit.
Okay.
And sequentially, I mean fourth quarter, or we should anticipate it to be an improvement over the third quarter rate.
Yeah.
Yeah, that's still too.
Surely propel we are definitely you know.
Hoping that we could do better and better from here, but.
As I said you know the timing of these contracts we have mentioned a few times now and you know the military contract approvals.
We have several pretty significant.
Opportunities that we have already won but just haven't got the phone thing and.
That's the timing we're looking at.
And obviously you know.
And beyond how much contribution we going to see from us.
The novel product line, it'll be launch most likely you'll be seeing impact in the last month of the of the year.
And that will also obviously sway the quarterly results and the Oems.
At least a few quarters ago, we are now in the quarterly projections, we're not giving up for conatus projections for now.
But I think once we have it'll be.
The sometime in the next few quarters, we could start doing that but when I in that position now.
Understood Jim Thank you so much.
Yep.
Amit.
Thank you. Our next question is from David Herdman Private Investor. Please proceed with your question.
Hi.
Good morning.
Good morning, a few questions actually if I can make sure. The first question is on the financing.
A cashier and.
I was just wondering if you can.
Yeah.
Give us some picture of how we're going to make it through the next quarters here.
Sure.
And the other question is as you mentioned something about it.
An army.
Possible Army Con.
Contract.
And I I didn't that's the first I've ever heard of the Army I know we've been dealing with the Navy.
Well, if you could give a little color on that.
That's basically my questions.
Sure.
You have a question on.
Again, it's based on talking to your first question about capital Yeah. We buy we have always been looking for capital to fund our operations things in the past two years.
And.
That's not going to change until we start getting into breakeven right.
And the amount of the capital we need depends on how much how much for example, this new world products contribute because these products are consumer oriented.
The payment terms are a lot better than the commercial market.
So we constantly evaluate different options Oh.
So oh.
Uh huh.
But on the grill.
The company's focus it's always been.
Year two years.
The Colgate stock.
To create a.
Stronger intrinsic value.
You know with the technologies and patents and products.
And and I think these products that we have the amount of one to two years that are being launch pretty soon.
It has created.
A lot of potential for the company and our goal is to make sure that you know when we when.
When we have to raise capital we were able to raise the capital at the end.
Right as a matter of valuation because of the intrinsic value we have created from these IP.
<unk> technology and products.
Your second question about.
The army.
These are you know.
We went and named him the opportunity per se, but these are.
<unk> basis are going to be using.
Our land our land technologies.
For the basis and the.
That's obviously an area that we could.
Also expand.
And again you know we have got the opportunities our partners they've got the opportunity, but we are still waiting for something.
Okay.
I appreciate that.
I'm, just still a little concerned about.
Obviously, you're expecting a more inflow from the sale of the new novel products to kind of tide you over is what I'm hearing.
Cause I mean your.
It just seems like you're you're extremely tight in this next quarter here.
That's what's got me Conservative do you think you can make it to the next quarter.
Sure and then and I think again that goes back to what I. Just said you know if we have created.
Because if they can potential what the company you know, which I think if you look at our product lines.
Knowledge with deep Red Oak.
It's.
Pretty southern place.
No.
The company.
Historically these are.
I T.
With products.
I'm going to be launched soon so we will if we need the capital we'll have to raise capital, but I think the key is being able to have the products that are ready to grow and and realize the potential. So he most of those are willing to fund the operations.
Well thank you.
Being patient but.
Sure.
Both of you.
Yeah.
Yep Yep.
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.
Okay. Thanks again for your participation for the conference call and we.
We look forward to.
Reporting on 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.