Energy Focus, Inc. (EFOI) Q1 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to Energy Focus First Quarter 2021 Earnings Conference Call. At this time all participations are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce Brett Maas a Hayden IR. Thank you. You may begin.

Thank you, operator, and good morning to everyone. Joining me today on the call is James Tu, Executive Chairman and Chief Executive Officer and Tod Nester, President and Chief Financial Officer. Before we begin today’s call, I would like to remind everyone that we will 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 discussion under the heading 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 required by law. Also, please note that during this call and in the company press releases any financial certain - financial metrics are presented on both GAAP and non-GAAP adjusted basis. Reconciliations of the adjusted results to 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 on the site. I will now turn the call over to James.

Thank you, Brett. Good morning, everyone, and thank you for joining our first quarter 2021 earnings conference call. As you have seen from our earnings release this morning, during the first quarter, our Q1 2021 financial results reflect the continuing significant impact of the pandemic underlining retrofit market, where budgets for such projects could be pulled or postponed immediately due to capital conservation or uncertainty on occupancy. In addition to the continuing industry headwind we experienced in our commercial sector, the quarter was also impacted by the fluctuations in the timing of military orders and government funding. The result was an approximate 30% decline in revenues compared to first quarter 2020, which predated the widespread impact of the pandemic. The lower sales volumes are driving reduced operating margins and significantly increasing our cash burn as we continue to aggressively invest in our new product development efforts. That being said, part of short-term operational and financial setbacks, our team has responded with amazing dedication, creativity and speed to this unprecedented industry challenge caused by COVID-19 by transforming the company in many ways. First of all, over the past 12-months, we have developed exciting new line of state of the art technologically advanced solutions in both our EnFocused lighting control platform and UVC disinfection product portfolios, which we believe will propel our growth starting the second half of the year. These new products will not only expand our addressable markets, but also diversify our sales into the consumer markets as well as the rapidly emerging UV disinfection market. Second, we have accelerated our efforts to weave together an encompassing distribution and partnership network that will help us take our products to the markets we target, especially in light of the new products we are launching in the next few months. Specifically, we partnered with Dalkia, a $5 billion building service company to provide our lighting products to their lighting retrofit projects. And we signed a distribution agreement with Batteries Plus, a 700-store retail chain that focuses on power and lighting products. We also established partnerships with two new sales agencies to expand our distribution in our covered territories, including Montana, Wyoming, Nevada, Georgia, Alabama and Florida. In addition, we continue to pursue additional significant channel partners that we hope to share with you as these partnerships materialize. We believe these additional channel engagements speak volumes to the unique, innovative and compelling offerings of our product portfolio that is drawing significant interest and endorsement from these sizable channel panels. These exciting existing and forthcoming partnerships will help us get our products to the end users; be it commercial or residential customers in a more timely and scalable manner. Third, we have also continued to strengthen our leadership and talent teams across the board. We believe that these hard times are the best times for real talents that fit our dynamic culture to shine and to bring the company to the next phase of growth. And I’m incredibly grateful and proud of our whole team for what we have accomplished to get us ready for sustainable growth ahead. So despite of the unbelievably challenging environment we have faced over the past year, I’m optimistic for the long-term potential for Energy Focus as I have ever been. And I believe the investment thesis for Energy Focus remains sound. In the meantime, over the past months or so, we have begun to see initial improvement in the commercial market with an uptick in bidding and pipeline activity. Capital improvement projects, which were frozen for most of the last year as people were from home are beginning to loosen up as businesses are starting to prepare for a return to work and to a new normalcy. Our advanced lighting technology solutions now more complete with unique products such as RedCap, EnFocus lighting control systems and incoming UV products could be a powerful part of the new building paradigm. In the field of UV disinfection, we just launched our pilot mUVeCrew robot disinfection service last week in Cleveland, and we look forward to reporting the progress of this pilot service in the coming months. In addition, we have also received an interest in also purchasing our new robot, which comes with superior performance and affordability at the same time; compared with competing disinfection robots in the marketplace. We also expect to begin shipments of our portfolio of UV-C disinfection products; including nUVo Tower, nUVo traveler and the above troffer to customers delaying the third quarter. These UV-C surface and air disinfection products constitute a comprehensive solution for both consumer and corporate markets and will enable homeowners and businesses to disinfect rooms or common areas effectively without chemicals or residues, developed through the combination of our expertise and experience in lighting technologies as well as additional new proprietary and present pending technologies from Energy Focus and our supply partners. This line of unique and powerful UV-C products are designed to inactivate 99.9% or more of various pathogens, including coronavirus and influenza. And we expect the UV-C product is to become a meaningful contributor to our results in the second half of the year, with a gradually improving macroeconomic environment for the lighting retrofit industry from our growing commercial sales pipeline. We are cautiously optimistic that first quarter might have marked the bottom of our quarterly sales for 2021. At this point, we expect the second quarter to start improving incrementally over the first quarter with strengthening growth momentum for the second half of the year as we start delivering our UV disinfection products and our second-generation EnFocused control systems. With that, I will turn the call to Tod to review our financial performance for the year and the quarter. Tod.

Thank you, James. Net sales of $2.6 million for the first quarter of 2021 decreased 30.3% compared to sales of $3.8 million in the first quarter of 2020, driven by decreases in both commercial and military sales. When compared to $3.7 million in the fourth quarter of 2020, net sales were down 29.6% on a sequential basis, due in large part to decreased sales in our military business due to fluctuations in the timing of military orders and funding. Sales of our commercial products decreased mainly due to delays in the healthcare, education, commercial and industrial sectors because of the continuing macroeconomic slowdown and purchasing decisions being put on hold 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. Sales of our military products decreased mainly due to availability of government funding for certain projects and the timing of orders. Sales to our top ten customers for the total company for the first quarter of 2021 decreased 25.1%, and sales to our top 20 customers decreased 29.3% compared to the first quarter of last year. From a mix perspective, military sales were $1.7 million for the first quarter of 2021, representing 65.4% of total net sales compared to $2 million or 54.1% of total net sales for the first quarter of 2020. Sales to commercial customers were $0.9 million in the first quarter of 2021, representing 34.6% of total net sales for the quarter, down from $1.7 million or 45.9% of total sales in the first quarter of 2020. The year-over-year decrease in commercial sales was mainly due to overall softness in the commercial market that began at the onset of the COVID-19 pandemic. Gross profit for the first quarter of 2021 was $600,000 compared with $1 million in the first quarter of 2020, a decrease of 46.4% year-over-year. On a sequential basis, gross profit declined compared to gross profit of $1.4 million in the fourth quarter of 2020. As a percentage of revenue, gross profit margin was 21% in the first quarter of 2021, reflecting less leverage of our fixed costs due to the lower sales compared to 27.3% in the first quarter of 2020. Adjusted gross profit margins for excess and obsolete, in transit and net realizable value inventory reserves resulted in the non-GAAP adjusted gross margins of 24.3% in the first quarter of 2021 compared to 25.2% in the first quarter of 2020 and 27.7% in the fourth quarter of 2020. We continue to expect our overall gross margins to be in the mid-20’s in the near-term and begin to approach the high 20’s percentage range as we introduce new products and make further improvements to our supply chain and negotiate better pricing to accompany our increased volumes. And depending upon sales mix and inventory valuations, we may see some fluctuations quarter-to-quarter. Operating expenses in the first quarter of 2021 were $2.9 million or 108.2% of sales compared to $2.3 million or 60.7% of sales in the first quarter of 2020, an increase of $557,000 or 24.3% year-over-year. The increase is mainly related to payroll expenses and R&D product testing associated with the development and launch of our UVCD products. Loss from operations in the first quarter of 2021 was $2.3 million compared to a loss from operations of $1.3 million in the first quarter of 2020, a year-over-year increase of $1 million. Sequentially, this compares to a loss from operations of $0.9 million in the fourth quarter of 2020; an increase of $1.4 million. Also, below the operating line, we had an $801,000 gain on the extinguishment of debt related to the forgiveness of our SBA PPP loan. The prior year quarter had an $873,000 gain related to the valuation of warrants. These warrants were reclassified to equity during the fourth quarter of 2020 and will not be subject to re-measurement in subsequent periods. Net loss for the first quarter of 2021 was $1.6 million or $0.45 per basic and diluted share-based on a 3.6 million fully diluted shares compared with a loss of $541,000 or $18 loss per basic and diluted share-based on 3.1 million fully diluted shares in the first quarter of 2020. On a sequential basis, we reported net income of $65,000 or $0.01 per basic and diluted share in the fourth quarter of 2020. Adjusted EBITDA, a non-GAAP measure, which excludes depreciation and amortization, interest expense, stock-based and other incentive comp was a loss of $2 million in the first quarter of 2021 compared with a loss of $1.1 million in the first quarter of 2020 and a loss of $800,000 in the fourth quarter of 2020. Now I would like to turn to the balance sheet. As of March 31, 2021, we had cash of $548,000 compared to $1.8 million at the end of 2020. Total debt as of March 31, 2021, was $3.4 million in short-term credit line borrowings. As a reminder, total availability is a measurement of our access to cash at a given point in time, and we believe this is a much more relevant metric than simply looking at cash balance or even net debt on the balance sheet. While excess borrowing availability on our credit facilities represents the difference between the maximum borrowing capacity and credit facilities and our actual borrowings under the credit facilities. As of March 31, 2021, we had total availability of $1.2 million, which was comprised of $548,000 of cash and $700,000 of excess borrowing availability under our credit facilities. Subsequent to the end of the quarter, we increased our total borrowing availability on our inventory line of credit by $500,000. In addition, at the end of April, we finalized a net $1.5 million bridge loan on favorable terms, increasing our liquidity as our core markets continue to rebound. During the first quarter of 2021, cash used in operations was $2.8 million, of which $700,000 was working capital. Cash used in investment activities was $109,000, and we generated $1.6 million in cash from financing activities. Once again, as we have mentioned previously, during our earnings calls, we would like to provide brief updates about the impact of the COVID-19 pandemic on our business. The company continues to operate under our customized COVID-19 contingency plan with employees that can alternately, primitively, work from in a plant or from their homes. James and I have already discussed the ongoing impact of the COVID-19 pandemic on our commercial business. The pandemic continues to impact our business, resulting in supply chain impacts, such as, first, increased wait times for products to arrive. Second, tremendously increased inbound and outbound freight and shipping costs; some of which can be passed along to customers. And now certain component shortages such as microprocessors, as well as other operational hurdles to overcome. Although we are launching our UVCD portfolio of products during the current pandemic as a good countervailing alternative to the pandemics impact on our commercial business, we very much see these products as fulfilling a permanent long-term market need for air and service disinfection in the workplace, consumer spaces and other social gathering locations. .:

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] One moment, please, while we poll for your questions. Our first question comes from the line of Amit Dayal with H.C. Wainwright.

James, just to begin with, with respect to the new partnerships, how long should we factor in terms of these relationships beginning to contribute to revenues, etc.?

Yes. It depends on what type of partnerships. But I think it usually takes a couple of months for the partners to familiarize with our products. And the other thing is that several of these partnerships are being created for the new products coming. So although it is hard to say exactly when they start contributing to our revenues. But I think once our product launched, meaning the EnFocus next-generation residential products, which we will talk about more in the coming months. And also the UV products are in the next few months. I think some of - then we will start contributing in different ways. And again, it depends on the nature of the partnership, some of them are retail. Some of them are very unconventional in different types of industries. [LPI] (Ph) is one of the sort of energy service companies. So those projects might take a little longer to be specifying our products into the projects. So it sort of varies. But I think the key is that as our new products will be launching in the next few months, these partnerships should start working on generating sales sort of in different pace.

Right. Understood. And with respect to sort of your liquidity and working capital needs, etc. I know Tod went through sort of the availability to cash on hand that you have now or increased some of those capabilities. But do you think this has been a little bit of a gating factor in moving your commercialization on the commercial products efforts?

Amit, I’m not exactly sure of the question you are asking. Can you rephrase that maybe and help a little bit? I want to make sure I address it directly.

Yes. I’m just trying to think whether the balance sheet has been preventing us from winning larger contracts on the commercial side?

No, I don’t believe that that issue has caused any concern in landing larger contracts. It is not any of the feedback we received. I think it is consistent with what we have said, which is just the general - across the industry, you will see that there has been a significant slowdown in retrofits. And that just has been the entire industry to experience that. So I don’t think the liquidity or the capital needs of the business are driving any of those decisions.

Okay. And just one last one for me, maybe. On the one hand, the product portfolio has expanded. But then on the macro level, the supply chain issues, concluding shortages, et cetera. Can you give us some sense of how you are managing sort of these two signs of the execution process?

That is a good question. I mean, there are a lot of uncertainties in terms of product - component availability and delivery times that we have been dealing with over the past probably good six months or so, I would say. And it hasn’t been improving. So in some more popular products, we are planning to increase inventory just to offset those potential risks. We are working with our suppliers in all the products that are forthcoming, make sure that we have the components and parts ready. We are experiencing some delivery delays for sure. And we are trying to manage that sort of with the alternative suppliers and products, it is a tough issue, as you know, across a lot of industries right now. And there is no magic bullet per se, because the component availability could change literally overnight from time to time. And so how we address those risks is to increase the inventory level for products that we know sells well like RedCap is a good example. And also plan well in advance for product launches, making sure that the components are there.

Then I will just add, Amit, as you have seen, we have done a really good job of managing working capital since we have arrived. But what we are doing to compensate, as James said, is building some of these safety stocks on the high turnover products because of this shortage. So there is a cash requirement to do that, and we are aware of that, but there is an opportunity cost of lost sales, we don’t want to experience. And we are just doing it, we think, intelligently by selecting high turnover products.

Okay. Understood. And just maybe I will sneak one last one in. With respect to the disinfection robots, are there any utilization metrics you can share, James?

What metrics?

Yes, utilization is.

Yes. We just started this whole service last week of a pilot in the Cleveland area. We have obviously got some interest, and we are doing a lot of media campaigns in this particular area, very hyper local marketing. And for the customers that have experienced our products that they love the product, and we are focusing on particular verticals such as medical offices, nursing homes, healthcare facilities first. We only have a couple of robots, in this part of services. So we would like to see these interests coming back and materialize in the next few weeks. And we definitely will share with investors about some potential customers as well. There is also a pretty good amount of interest in buying the robots, as I mentioned in the script that we are exploring as well. So I think it is still a little bit early, but we are pretty excited about this for robot line.

And James, I will just add on to that a little bit. When we modeled the pro forma around the service, I mean, we did do it in a manner that does it based on drivers and metrics. So as we learn more about the service and that, those are likely the metrics we will bring forward to utilization, number of shifts, those kind of things. So we will be forthcoming with that as we learn more too, but we are definitely contemplating those kind of metrics.

I appreciate that guys, thank you so much. That is all I have.

Okay. Thanks Amit.

[Operator Instructions] Our next question comes from the line of Robert Smith with Center for Performance Investing.

Do you have any access to government financing programs?

You mean, in terms of our product? Are you talking about specifically - particular products or as a company. We have the PPP loan that we announced before.

Right. Yes. Nothing further, possibilities? Either federal or state or whatever?

Well, not the company itself, but the products that we sell, for example, the lighting products, they have rebates. For the UV products that are coming, they have different ways, especially the government and federal and state entities. They have ways to get funding for this equipment. So that is one of the channel partners that we are pursuing in the whole government space for the UV products. They definitely are getting a lot of funding in different ways.

Do you feel that you would be a beneficiary of infrastructure funding?

Yes, we believe so because a big part of the stimulus plan focused on climate change and building efficiency is one of the top priorities. I think we should start seeing that type of funding coming in the second half of the year. And that sounds like a pretty significant commitment from the government. So we definitely look close to that. And actually, that is one of our business development initiatives is through expanding the government sector, engaging with the ESCO’s, the large energy service companies that provide these lighting retrofit services. So we are actually pretty excited about that prospect.

And James, I will just add to that. I think that the products we are developing are - have a cost advantage versus the competition and provide the kind of products that the government will be funding through those initiatives. So that is the link for us is we have that competitive advantage of better or equivalent quality in the product and then the more affordable installation.

Okay. Thank you very much. Good luck.

Okay.

Thanks.

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

Thanks, everyone, for your participation. We look forward to talking to you in the next earnings call. Have a great day.

Thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines at this time. Have a great day.