Energy Focus, Inc. (EFOI) Q2 2021 Earnings Report, Transcript and Summary

Good day, and welcome to the Energy Focus Second Quarter 2021 Earnings Conference Call. [Operator Instructions]. 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 Tu, Executive Chairman and Chief Executive Officer; and Tod Nestor, 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. The company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Also, please note that during this call and in the accompanying press releases, certain financial measures are presented on both GAAP and non-GAAP adjusted basis. Reconciliations of the adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at energyfocus.com, in the Investor Relations section of the site. I'll now turn the call over to James. James, the floor is yours.

Thank you, Brett. Good morning, everyone, and thank you for joining our second quarter 2021 earnings conference call. As we lay out in the earnings release, our second quarter results were impacted by the ongoing challenges for our 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 opportunities due to funding availability of the Navy, corresponding to the new defense budget and priority under the new administration. Last, but not least, conditions of the global logistics continued to be challenging during the quarter and caused not only shipment delays, but also significant increases in our freight cost. It has really been a perfect stone that undercut our sales and impacted our margins. That said, we believe we have not lost the key opportunities we have been pursuing. And since beginning of the third quarter, we have received a few commercial orders that were delayed from the first half of 2021. As vaccinations continue to expand and lockdowns become a thing of the past, we are cautiously optimistic that overall lighting retrofit demand, particularly in the education and health care markets, might start to stabilize and grow again. In the meantime, Energy Focus has continued to innovate in order to adapt to and grow under this new market paradigm. The pandemic has likely impacted occupancy level and 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 strategized and moved quickly and in both steps, to develop new innovative products, including primarily our UVC disinfection products and the upcoming sun cycle autonomous security and 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 partially, if not largely 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 are also converting parts of our 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 are all fueling the spending on home improvement, as we have already seen by the [indiscernible] sales of both online and off-line retailers. And we believe that our new lines of products surrounding human-centric filing that 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-focused potential and diversified sales growth opportunities. Expected to come into the market first, later in September and October, our nUVo traveler, a personal temporized UVC air disinfection device for car and personal use as well as nUVo Tower, a portable freestanding UVC air disinfection device designed for spaces up to 500 square feet. Both devices were designed to uniquely and powerfully intercept virus in real time and to destroy 99.9% plus of pathogens, including influenza and coronavirus and its variants patents through the devices. These products leverage the scientifically proven general fiber power of ultraviolet light or UVC, our proprietary aerodynamic designs and our patent-pending UV blocking technology and are designed to safely capture and eliminate many contagious pathogens. 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 advisers, through UV and our lighting distributors as well as directly to large businesses in industries such as ridesharing, hospitality, health care, financial service and retail franchises. In the meantime, we continue to improve the designs of our above human-centric lighting UVC troffer as well as move disinfection robots, and we expect to start selling these products later in the fourth quarter as well. In addition, our patented sun cycle lighting system based on our in-focused lighting control platform, won Product of the Year award from E&E, a prestigious and influential environment and energy technology publication due to its ease of installation, use and maintenance, in providing energy efficient, high-quality and autonomous circadian lighting capabilities. And we are planning to launch sun cycle products in the fourth quarter of 2021 or early 2022. Circadian Mining has proven to significantly improve fleet productivity and overall health through human level and color temperature controls that correspond to the 24-hour circadian risen cycle. It is, therefore, particularly powerful to help improve human well-being, experience and quality of life when people are staying at home throughout the whole day into the evening. With sun 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 that continues to impact on our overall business, we are not satisfied with the second quarter results we reported today. That said, we believe the new lines of UV and circadian lighting products that are slated to enter the market over the coming months, will enable us to both expand our offerings for the commercial markets, 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 and beyond. Due to continuing mired market uncertainties that we lay out in the earnings release, and that I described earlier, we are 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 as the UVC products gained sales traction, we expect sales for the second half of 2021 to be better than the first half. Schools, hospitals and government businesses are already leading the recovery of facility utilization, which should accelerate as daily life gradually resume to the new normal. And we believe that the climate change and building energy efficiency programs to be implemented starting the coming months and quarters by the current administration will also breathe new life to the overall lighting retrofit market. With that, I will turn the call to Tod to review our financial performance for the quarter. Tod?

Thank you, James. Net sales of $2.1 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 compared to $2.6 million for the first quarter of 2021, net sales were down 21.4% on a sequential basis. Sales of our commercial products decreased mainly due to project delays for our customers in health care, education, commercial and industrial sectors because of the continuing macroeconomic slowdown and our customers' purchasing decisions delayed 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 decreased 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 mix perspective, military sales were $1 million for the second quarter of 2021, 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 2021, representing 52% of total net sales for the quarter flat as compared to $1.1 million or 31.7% of total net sales in the second quarter of 2020. Gross profit for the second quarter of 2021 was $0.4 million compared with $1.3 million in the second quarter of 2020, a decrease of 70.7% year-over-year. On a sequential basis, gross profit declined compared to gross profit of $0.6 million in the first quarter of 2021. As a percentage of revenue, gross profit margin was 18.9% in the second quarter of 2021, reflecting lost leverage of our fixed costs due to the lower sales compared to 40.3% in the second quarter of 2020. Gross profit margin was down 21.3% in the second quarter of 2021 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 $0.7 million, driven by volume and $0.3 million, driven by product and business mix. Adjusting gross profit margins for the excess and obsolete in-transit and net realizable value inventory reserve, 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 costs at quarterly sales levels of $3.5 million or more, we continue to expect our overall gross margins to be in the mid-20s in the near term. As we move forward, we anticipate we will begin to approach the high 20s 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 were $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, $0.3 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 $100,000. Net loss for the second quarter of 2021 was $2.5 million or a negative $0.59 per basic and diluted share based on 4.2 million fully diluted shares compared with a loss of 4.3 million or a negative $0.136 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 $0.45 per basic and diluted share of common stock in the first quarter of 2021, which was inclusive of a $0.8 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 loans in the first quarter of 2021 and changes in fair value of warrant liabilities in prior year periods was a loss of $2 million for the second quarter of 2021 compared with a loss of $0.7 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 investment for future growth, primarily in the areas of sales and engineering personnel important to our EBC and sun cycle and focus efforts. The increased adjusted EBITDA loss for the first quarter of 2021 was primarily due to gross margin reductions. Now I'd like to turn to the balance sheet. As of June 30, 2021, we had cash of $1.3 million. This compares with $1.8 million as of December 31, 2020. As of June 30, 2021, the company 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 30, 2020, and a total availability of $1.2 million as of 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 a bridge financing during the second quarter of 2021, while also increasing the inventory rate line of credit capacity by $0.5 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 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 $2.8 million at the end of the second quarter 2021, $1.1 million at the end of the second quarter of 2020 and $0.1 million at the 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 $102,000, and we generated $4.2 million in cash from financing activities. Our noninventory balance of $8.1 million, as of June 30, 2021, increased $2.4 million over December 31, 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 in obtaining components. Our accounts payable balance as of June 30, 2021, increased by $0.4 million over December 31, 2020, primarily related to this inventory buildup. With that, we would like to open the call to questions. Operator?

[Operator Instructions]. And the first question will come from Amit Dayal with H.C. Wainwright.

So you said you saw some pickup in some orders from the commercial segment. Can you share which end markets you got some of those orders from?

Yes. As I indicated, the school market seems to be the one that's recovering earlier. So we have seen those orders that were delayed in the past coming into third quarter, which is why we are confident that the third quarter will be better than the second quarter and the first quarter.

And are this -- coming from the school side, are this for the UV lighting offering or something else that you are seeing?

No, no. The UV lighting have not started shipping yet, as I said in the call earlier. It would start in September -- later in September and going into October. And we expect a more meaningful impact from the fourth quarter.

It seems your timing, your push towards the commercial sector. You're a little bit unlucky with the timing. But at the same time, you do have a pretty strong lineup of offerings for that market? I mean, outside of pandemic-related pressures, is there any competitive reasons that you may not be getting the traction you -- and anticipating? Any color on what is preventing a little bit more stronger uptake or interest in the commercial lineup of offerings you guys have right now?

Yes, Amit, that's a great question. Obviously, as you know, the whole LED market has been very commoditized, and that whole commoditization accelerated since COVID hit the economy. There are a lot of inventory in the market that -- and also, when the end demand is soft, people are looking for cheap alternatives. So we definitely also have that type of competitive pressure. But if you look at our commercial sales over the past few quarters, it's been kind of flat. It's just not picking up. And we are obviously also internally reorganizing how we can better differentiate ourselves in the marketplace. As you know, our presented products like recap in focus will be much more competitive, and that is how we are reorienting our sales force to focus on. And in the meantime, as you said, we have to diversify into leveraging our technologies, diversifying into new markets in this sort of new market paradigm 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.

Okay. So there is no sort of need for cost cutting, et cetera, at least in a significant way to manage through the current situation?

Yes. We are -- our cost structure is not high per se. We're a public traded company. There are certain costs. And obviously, we have been working on really introducing these new products, getting our sales distribution in place. And if we don't see the results we like, obviously, we have to be very agile in adjusting our cost structure. That's definitely something that we constantly look at. On the other hand, we are preparing to grow the company, hopefully, significantly with these new products coming on board in the next few months and the market stabilized and for us to see the recovery in our traditional military and commercial markets.

And Amit, I'm just going to build on James' comments a little bit. With the pandemic last year and seeing the slowdown, we were very proactive and fortunately, and we're seeing some of that in the reduced cost of the 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 is either in the area of growth, whether it's R&D or sales oriented or is fees related to product testing, which you have to do before you bring out new products. So -- 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.

Yes, I know you guys have done a lot of work on improving our cost structure and on continuing to bring out really interesting products. Hopefully, the market situation turns around for you sooner rather than later.

Thank you, Amit.

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 with the Center for Performance Investing.

Do you guys use any digital advertising or social media to get your new product potential out into the public consciousness?

Yes, that's definitely in our plan that you will be seeing starting September as we launch the product.

Okay. And in order to kind of stay in business in the current environment, would you consider some kind of a roll back in executive compensation for a relatively brief period of time, maybe 6 months or so to more align the cost structure and assist the bottom line and maybe share the pain of some other shareholders.

Yes, Rob, Tod and I have been very diligent in managing our cost. We definitely don't have a broad organizational structure. And as I said, we've been trying to really developed new businesses out of this very challenging period. If we are not seeing the results, as I said, in the next couple of months, as we announce new products, we definitely will be adjusting our cost structure, and it's not -- and it is a compensation, just one of them. There are going to be many aspects of the cost in the 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. We are continuing to strengthen our distribution capability. So we are, as I said, 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 shareholders myself of this kind of company. So I share the pain for shareholders. We are also in this very unprecedented environment that hit our core market, which is finding retrofit pretty hard. But as I said, I think our efforts that we put in over the 12 to 18 months should be paying off based on our research and observation about the reception -- potential reception of our new products, but we'll stay very agile. I don't know if Tod has anything to add.

It's well said. I think it's a fair ask, if we're not seeing the results we expect. And I'm also a large shareholder, one of the largest individual shareholders. So not through grants, but both of us purchased our ship.

Yes. Exactly.

Yes. But while the new products really are quite interesting and have significant potential, in my view, I mean you have to get over this CASM, so to speak, of liquidity and -- that was one of the possibilities to achieve that.

No, no doubt. And I think Tod and his team and our whole company watch our liquidity very carefully, and you have heard from part of the speech that we have been working with multiple liquidity source providers. And I think we're ready to grow. And -- but if we don't see that we're hitting our targets on the top line to help us minimize losses in the next quarter or 2, then we have to make something -- make changes, and we'll be the first to want to make those changes to sustain the company.

[Operator Instruction] And the next question will come from Bill Hardy, investor.

My basic question is, what has been the holdup in getting these new products into manufacture and eventually into distribution to the public? And I guess, a follow-up on that is how have those problems been solved? And are you now in a manufacturing mode where you are bringing these products into some type of inventory in anticipation of selling them.

Good questions. Yes, it's been a challenging engineering and development process for us. And the reason is that -- when we -- if you look at this whole UVC market, it was almost 90% nonexistent. I mean, a very, very small niche market before the pandemic. When we look at -- when pandemic hit and we look at the whole air purifier market, for example, where the nUVo product line is going to be competing in. We believe that there are a lot of shortcomings that we could resolve with technologies that focus on individuals and consumers and businesses that seek more safety measures in this whole pandemic landscape. And so we put together the team to develop technologies through multiple, multiple iterations. And yes, the product development 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 better and better. And I have to say that we are very, very happy about where we are. I mean products can always get better, can always have more features, but we're very happy where we are on the product design. To your question, we resolved pretty much all the problems, and we are ready to manufacture these products. What we are at right now is really going through the safety certification process of these 2 products, and we're expecting to have it second half of September or obviously, we cannot have timing going through third-party agencies. But the products have been developed, and we are ready to sell, finally, to your point.

Okay. So what the holdup is UL approval? Or is it...

Yes. It's EPL is the same UL standard. It's an agency called EPL that is not popular for consumer electronics.

Okay. So in other words, parts flow, you do have access to inventory, so you can make the products. It's just a matter of making them...

Yes, we are expecting to start shipping the product at the moment we get the certification.

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.