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spk01: Greetings and welcome to the Energy Focus 3rd 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. It is now my pleasure to introduce your host, Brett Mass, Investor Hayden IR. Thank you, Brett. You may begin.
spk02: Thank you, Operator, and good morning, everyone. Joining me on the call today is James Tu, Executive Chairman and Chief Executive Officer, and Todd Nestor, Chief Operating Officer and 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 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 File 10Q at the SEC. The company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except required by law. Also, please note that during this call and in the accompanying press release, certain financial metrics are present on both GAAP and non-GAAP-adjusted basis. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on the corporate website, energyfocus.com, in the Investor Relations section of the site. I'll now turn the call over to James. James, the floor is yours.
spk06: 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. While sales for the third quarter 2021 show some modest recoveries from the previous quarter, our legacy LED lighting business continues to face ongoing challenges related to the pandemic. For our commercial business, with offices facing new work conditions and a distributed workforce, retrofitting lighting systems continue to be a lower priority for facility managers. We also continue to see some of our customers' retrofit projects being delayed with our customers in the school and hospital sectors. And the OED tube market remains intensely competitive. We continue to believe that our high-quality, flicker-free, and 10-year warranty positioning offers the best long-term value proposition for large mission-critical facilities that seek to provide quality and reliable lighting with minimal maintenance and product waste, as well as reduced labor due to our product reliability. Looking forward, our upcoming SunCycle circadian lighting system, which marries our superior Lighting products with our patented InFocus power line control technology will be able to offer an equal lighting experience with affordability and sustainability performances that we believe will further differentiate energy focus and bring our commercial lighting business to the next level. For our military business, third quarter military sales continue to be impacted by federal budget availability for military spending. but several significant opportunities with the U.S. Navy and U.S. Army are still waiting for funding approval. Nonetheless, we expanded our product development efforts during the quarter for the Navy market, recently completing the development of the High Bay LED lighting product and delivered our first unit to the Navy for their approval, a potential opportunity for up to $5 million of orders for the product in the next five years. We have also started exploring how to bring additional lighting and control innovations to our military customers. Meanwhile, despite of the headwinds we have been encountering, we have stated over the past few quarters that we have not sat back and waited for the commercial lighting markets to improve. We've doubled down on innovation, primarily surrounding our in-focus lighting control technologies, as well as UVC disinfection. And the new products we've been developing since the beginning of the pandemic have already won several technical and industry awards this year and are about to enter the market in the coming months. Our upcoming Nuvo Air disinfection devices represent the first innovations in this evolution. We recently received a third hearty validation of our disinfection performances, achieving 94.1% to 99.9% pathogen reduction over a half an hour in 1,000 cubic feet space for Nouveau Tower and 100 cubic feet space for Nouveau Traveler, respectively. We have received independent safety certification on Nouveau Traveler and are in the final stage of evaluating product samples. We also expect to receive safety certifications on Nouveau Tower shortly. We believe that these certifications are an important milestone considering the powerful UVC lens used in the Nouveau product. Combined with our efficacy results, it means that Nouveau disinfectors are powerful, effective, and safe in significantly reducing pathogens, be it mold, bacteria, or virus, including the coronavirus, in personal and public spaces. We expect these products, including the Nuvo Tower for larger spaces and the cup holder-sized Nuvo Traveler for vehicles and other personal spaces, to be available for sale on nuvo.us, firstenergyhome.com, as well as throughout our existing channel partners for commercial and military, starting in the fourth quarter of 2021. During the third quarter, we also continue to develop the development of our patent-pending, award-winning SunCycle circadian lighting system and expect to launch this product line to both residential and commercial markets during the earlier part of 2022. Our planned SunCycle system, composed of lamps, fixtures, and controls powered by our InFocus technology, will provide flicker-free, dimmable, color-tunable, and autonomous lighting circadian functionality for both homes and offices without the operational complexity and cybersecurity concerns wireless lighting controls present. We believe that SunCycle, by seamlessly integrating high-quality lighting and in-focus power line control, represents a true human-centric lighting system for both commercial and consumer applications. Both our human-centric lighting and UVC disinfection solutions present compelling opportunities for employers, landlords, hospitals, elder care communities, schools, and homes, where customers want a modern, comfortable, and healthy lighting solution that encourages productivity, safety, and well-being. We believe that these solutions are also ideal for residential homes, and for consumers who seek to significantly enhance environmental health and quality of life. As we look through the coming months and quarters, as we continue to navigate the unprecedented macro challenges of the pandemic for our existing LED lighting business, we believe our new products will position us for a 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 markets and diversify our customer base and provide exciting long-term and potentially transformative growth opportunities. And unlike the commercial and military markets, the consumer market has held up well during the pandemic, and many of us work from home and are looking to improve our home environment. We expect this new market to meaningfully contribute to our top and bottom lines starting 2022 with the launch of Nuvo and ScienceCycle products. With that, I'll turn the call to Todd to review our financial performance for the quarter. Todd?
spk03: Thank you, James. Net sales of $2.7 million for the third quarter of 2021 decreased 53.9% compared to sales of $6 million in the third quarter of 2020. driven exclusively by a decrease in military sales. When compared to 2.1 million in the second quarter of 2021, net sales were up 32.5% on a sequential basis, reflecting the timing of orders that slipped from second to third quarter. Sales of our commercial products for the 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 in the healthcare, education, commercial, and industrial sectors because of the continuing macroeconomic 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 30th, 2021 decreased 55.3%, mainly due to availability of government funding for certain projects and the continued delayed timing of orders, as well as our fulfillment of a significant contract in the third quarter of 2020. Sequentially, sales of our commercial products for the third quarter of 2021 increased 41.2% compared to the second quarter of 2021. And that military product sales increased 23.2% from the second quarter of 2021. The increases primarily reflect the timing of delayed orders from the second quarter of 2021 that were pushed into the third quarter of 2021. Sales to our top 10 customers for the total company for the third quarter of 2021 decreased 59.8% and sales to our top 20 customers decreased 57.7% compared to the third quarter of last year. From a mixed 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. Growth profit for the third quarter of 2021 was $0.6 million compared with 1.4 million in the third quarter of 2020. a decrease of 59.1% year over year. On a sequential basis, gross profit increased by $0.2 million, or 43.3%, compared to gross profit of $0.4 million in the second quarter of 2021. As a percent of revenue, gross profit margin was 20.5% in the third quarter of 2021, reflecting less leverage of our fixed costs due to the lower sales. compared to 23.1% in the third quarter of 2020. Gross margin for the third quarter of 2021 was positively impacted by favorable price and usage variances for material and labor of $0.1 million and inventory reserves recorded of $0.1 million, partially offset by low sales, which impacted our gross profit rate. Adjusting gross profit margins for excess and obsolete in transit and net realizable value inventory reserve resulted in 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 17.6% 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-20s in the near term. Going forward, we anticipate we will begin to approach the high 20s percent as we introduce new products and negotiate better pricing to accompany our increased sales volume. And depending on our product and channel mix, as well as inventory valuations. However, we may see fluctuations quarter to quarter. Operating expenses in the third quarter of 2021 were $2.4 million compared to the same $2.4 million in the third quarter of 2020. Sequentially, operating expenses declined approximately $200,000 from the $2.6 million in the second quarter of 2021, reflecting belt tightening efforts and a decrease in professional fees and stock compensation related expenses. Loss from operations for the third quarter of 2021 was $1.8 million as compared to an operating loss of $1 million in the third quarter of 2020. Sequentially, this compares to a loss from operations of $2.2 million in the second quarter of 2021, a lower loss of $400,000. Below the operating line, we had an $860,000 gain on the payroll credits related to the employee retention tax credit program. This resulted in a net loss of $1.1 million or negative 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 negative 35 per basic and diluted share of common stock in the third quarter of 2020. Sequentially, this compares with a net loss of $2.5 million or and 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 base and other incentive compensation, non-routine charges to other income or expense, and changes in fair value of warrant liability for prior year periods, was a loss of $1.7 million in the third quarter of 2021, compared with a loss of $0.9 million in the third quarter of 2020 and a loss of $2 million in the second quarter of 2021. The higher adjusted EBITDA loss from the third quarter of 2020 was primarily due to a combination of gross margin reductions due to lower sales. Now I'd like to turn to the balance sheet. As of September 30, 2021, we had cash of $0.4 million. This compares with $1.8 million as of December 31, 2020. As of September 30, 2021, the company had total availability of $2.1 million, which consisted of $0.4 million of cash and $1.7 million of additional borrowing availability under our credit facilities. This compares to total availability of $4.9 million as of September 30, 2020, and total availability of $4.1 million as of June 30, 2021. As a reminder, total availability is a non-GAAP measurement of our access to cash at any given point in time, and we believe is a much more relevant metric than simply looking at cash balance or even net debt on the balance sheet. Access 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. Access availability under our credit facilities was $1.7 million at the end of the third quarter of 2021, $2.3 million at the end of the third quarter of 2020, and $2.8 million at the end of the second quarter of 2021. During the third quarter of 2021, cash used in operations was $2.3 million, of which the majority consisted of cash used in operations, and another $0.4 million was attributed to working capital investments. Our cash used in investment activities was $100,000, and we accessed $1.1 million of cash from financing activities. Our net inventory balance of $7.8 million as of September 30, 2021, increased $2.1 million over December 30, 2020. This increase primarily relates to global supply chain challenges, which are impacting our inventory purchasing strategy, leading to a buildup of inventory and inventory components in an effort to manage both shortages of available components and longer lead times in obtaining components and finished goods, as well as reduced sales, leading to longer hold times for inventory. Our accounts payable balance as of September 30th, 2021, increased by $0.2 million over December 30th of 2020, primarily related to this inventory buildup. With that, we would like to open the call to questions. Operator.
spk01: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 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. Thank you. Our first question is from Sameer Joshi with HC Wainwright. Please proceed with your question.
spk07: Hey, James. Hey, Todd. Thanks for taking the time. Hey, good morning, Sameer.
spk05: How are you? Good. Thanks. So the new offering, you mentioned it will be available on the website, a couple of websites. Did you say starting 4-2-21? So it should be active right now? Is that right? Yep.
spk06: As we mentioned, the products are being evaluated, the product samples. We are still waiting for the Nuvo Tower certification, which we are expecting anytime now. And so our goal is to launch as soon as we are ready. It will be in Q4, and as I said, it will be as soon as we can.
spk05: And what is the addressable market or at least the targeted addressable market that you see for this product? And say one or two years from now, how do you see grabbing some market share of that? What are your views on that? Sure.
spk06: This is a unique line of products. There's really nothing exactly the same in the market. There are purifiers that have used some UV, but this is, I think, one of the first, if not the first, product line that use very strong UVC lamps and with our patent-pending blocking technology to be able to block the light for safety, but also still enable the airflow. And so we are pretty excited about this product. We have been testing the market on our own and responses have been pretty positive. I think our channel partners are very excited. First Energy Home, for example, they are getting ready as well. I think we are looking at not necessarily grabbing anybody's market share because there's really no such a thing as a new category. It's a personal disinfector. You probably have noticed that we are using disinfector instead of air purifier because this is not to be an air purifier. This is to kill all the pathogens as much as possible, which our independent study has shown we can't. So this goes anywhere there are people mingling with other people. So I would say that this is a new category we're creating. We are starting in the consumer side, but also selling through our existing channel partners. We will be creating new channel partners. I see this in the future, one year, two years down the road, in retail outlets and all that. I think the... It's a very exciting phase in the company when we're ready to launch these products. And we have to, you know, initially we are only offering on our website at firstenergyhome.com. We are expecting to expand into other third-party channels like Amazon of the world. So, you know, it's a little bit detailed, but we're very excited about the initial responses we have got so far.
spk05: Yes, and so I had sort of a similar question for SunCycle, but there too, you are sort of creating the market for that. Is that true?
spk06: Yeah, the SunCycle products we are expecting, you know, first quarter 2022 launch. That's also the first time we're taking our lining products to the consumer sector. And it's going to be using very similar channels that we are creating now for Nubo. And so that's, again, you know, consistent with what we have said in the past few quarters. We're also taking our technology into the consumer sector, and that's both expanding the impact of our technology but also diversifying our customer base. SunCycle, as you have seen, it will be able to provide autonomous circadian lighting for homes and other commercial buildings, nursing homes, hospitals, and all that. So it's a pretty wide application. Because in the end of the day, our technology is to reach out to people when they are indoors. People spend 90% of their time indoors. We're applying our technologies wherever they can be to make the environment safer and healthier.
spk05: Yeah, yeah. And in terms of the gross margin outlook in the high 20s, that takes into account the pricing and margins for these products. Is that right?
spk03: This is Todd. Yep, yep. So, yes, when I spoke to going into higher 20s, it does take into account the expectation of these new products becoming a larger part of our mix. And we'll evolve to that as they become a heavier portion of our mix, but yes.
spk05: Understood. And, Todd, speaking about inventory, is there any inventory associated with these, at least the newer products, that is reflected in that $7.8 million number?
spk03: So the new products have a much faster turnover that are targeted at the consumer side. So we will be bringing those in, and then the sales cycle is much shorter. So our expectation is, our hope, I should say, is that we can actually get a good source of cash based on the terms we have as we enter into this consumer part of the market more. I understand.
spk05: Just one last one from me. I think you mentioned a Navy bid for $5 million, and you mentioned the time period. I'm sorry I missed that. Can you say that again?
spk03: James, do you want to handle that, or do you want me to get it?
spk06: Yeah, so, yeah, that's okay. I can speak. So it's five years. It's five years. It's $5 million, up to $5 million in five years. Okay, okay.
spk05: And are there other similar bids that you're working on or you see in your pipeline or visibility from military?
spk06: We continue to win the RFPs in a pretty healthy percentage. I don't think there is significant change in the competitive landscape. As I mentioned in the script, we're very excited to explore applying the InFocus control technologies to the Navy's lighting as well. We are in the initial stage of doing that, and we're very excited about that prospect down the road. We don't have much to update right now, but that's an exciting initiative that was started. Just imagine the Navy sailors being indoor and we're able to provide the KVN lighting to them. I think that's a... And also, the Navy ships usually don't allow wireless communication for controls, and InFocus is a perfect fit for that.
spk05: Yeah, that was going to be my last question, actually, that is SunCycle going to be targeted for some of the Navy or military kind of applications. Thanks for that, though.
spk07: That's all from me. Yeah, sure. Thank you. Thank you, Samir.
spk01: Thank you. Our next question comes from Amit Dayal with HC Wainwright. Please proceed with your question.
spk08: Hey, good morning, guys. Thank you for taking the question. Hey, good morning, Amit. Yep. Hey, Jim. With respect to the disinfectant products or the product line, what's the strategy going forward? Are you going to continue investing in this product line, developing new versions, etc.? Or is this the end of this effort? How should we think about the future of this strategy? Sure.
spk06: We believe so. Obviously, still too early to tell how big that market could be for us. We are excited about it. We, as I said, you know, with some, you know, our internal market research, and I think there's a good amount of demand there. But obviously, nothing is for sure until you start selling it, which we obviously hope soon. And The plan right now is obviously to continue to expand that. If you look at the company right now, there are two major technological platforms that we are focusing on. We have been focusing on over the past year also. One is obviously the in-focus-based control platform that we are expanding into the SunCycle platform that's for residential and commercial applications and many other applications such as militaries. We believe that we have the patents there, and there's a lot of possibilities and applications there that we're going to continue to invest and expand. The other platform is the UVC disinfection platform, and we have our patent-pending technology, the blockers that can enable us to bring very powerful disinfection capabilities to people, you know, in their personal and public spaces. We definitely think that that's a pretty impactful technology that we can continue to expand. We are starting with Nuvo Traveler, which is a portable one for car and for personal use, and also Nuvo Tower, which is for meeting rooms and living rooms and all that. you know, doctor's office, things like that. You can imagine a lot of applications for these products. But again, it's being able to provide that powerful disinfection with very little maintenance required because there's no filter in it. It's chemical free. So we're starting with these two product lines. We have mentioned about above, which is the lighting integrated sun cycle. lighting control and UVC disinfection troffer. That is still under development and we are also very excited about that product. We are hopeful that it could be introduced in the first quarter as well. So we are definitely expanding and you heard about our MOVE robot disinfection robot that's being developed as well. So we believe that that's a new market that we could take advantage of our speed and our sort of entrepreneurial and innovative culture to develop very impactful products and move fast to create the UV brand in this new market. So that's another area we are planning to continue to invest and expand. You can look at Nuvo product, for example, you can see additional variations from the Nuvo family, right? So, you know, for now, we definitely want to continue to invest and expand in that sector. If you bring these two major technology platforms that we're developing, they are all feeding into this lighting wellness concept where that's what we've been talking about, human-centric lighting, which is bringing lighting technologies to impact human biological performances, safety, health, well-being. That's the direction that this company is going after and investing and innovating on.
spk08: 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 products?
spk03: Hey, it's Todd. Nice to talk to you again. Yeah, we have some insights. That'll actually, it differs by channel, and I'll say by mode of transportation and how we bring it in, but they are all the type of margins that help us get up into that high 20s range as they become a larger part of our mix. You know, clearly they're going to be favorable to help get us there. But there are nice margin products that we feel can help the gross margins quite a bit.
spk08: Okay. And sequentially, I mean, fourth quarter, we should anticipate it to be an improvement over the third quarter, right?
spk07: Yeah, that's still early to tell.
spk06: We are definitely, you know, uh, uh, hoping that we could do better and better from here. But, um, as I said, you know, the timing of these contracts, uh, we have mentioned a few times now, you know, the military contract approvals, uh, we have several pretty significant, um, opportunities that we have already won, but just, uh, haven't got the funding. And, um, That's the timing we're looking at. And obviously, you know, depending on how much contribution we're going to see from the new product line, it will be launched, you know, most likely you'll be seeing impact in the last month of the year. And that will also obviously sway the quarterly results. And we are, as I said a few quarters ago, we are not in the quarterly projections. We're not giving up quality projections for now. But I think once we have a better visibility sometime in the next few quarters, we could start doing that. But we're not in that position now.
spk07: Okay. Understood, James. Thank you so much. Yep. Thank you, Amit.
spk01: Thank you. Our next question is from David Herdman, private investor. Please proceed with your question.
spk04: Hi.
spk01: Good morning.
spk04: Actually, good morning. A few questions, actually, if I can make.
spk00: Sure.
spk04: The first question is on the financing. We're running out of cash here, and I was just wondering if you could give us a picture of how we're going to make it through the next quarters here. Sure. And the other question is, you mentioned something about an Army – a possible Army contract. And I didn't, that's the first I've ever heard of the Army. I know we've been dealing with the Navy. So if you could give a little color on that. And that's basically my question.
spk06: Sure. Your question, I can explain talking about your first question about capital. Yeah, we might, you know, we have always been looking for capital to fund our operations things in the past two years. And, you know, that's not going to change until we start getting into break-even. And the amount of the capital we need depends on how much, for example, these new products are going to contribute because these products are consumer-oriented. The payment terms are a lot better than the commercial market. So we constantly evaluate different options of capital to offer the capital to growth. The company's focus has always been, you know, in the past year, two years since the COVID started to create the stronger intrinsic value, you know, with the technologies and patents and products. And I think these products that we have developed over the past two years that are being launched pretty soon has created technology you know, a lot of potential for the company. And our goal is to, you know, make sure that, you know, when we have to raise capital, we are able to raise the capital at the right, at a better valuation because of the intrinsic value we have created from these IP and technology and products. Your second question about, you know, The Army, these are, you know, we wouldn't name the opportunity per se, but these are Army bases that are going to be using our land, our land technology for the bases. And that's obviously an area that we could also expand. And again, you know, we have got the opportunities, our partners have got the opportunities, but we are still waiting for the funding.
spk04: Okay, I appreciate that. I'm just still a little concerned about, obviously, you're expecting more inflow from the sale of the Nuvo products to kind of tide you over is what I'm hearing. Because, I mean, it just seems like you're extremely tight in this next quarter here. And that's what's got me concerned is, do you think you can make it to the next quarter?
spk06: Sure, and I think, again, that goes back to what I just said. You know, if we have created significant potential for the company, you know, which I think if you look at our product line today, the technology we have developed, it's a pretty exciting phase of, you know, the company historically. These are very unique IPs. with products that are going to be launched soon. So if we need the capital, we'll have to raise the capital. But I think the key is being able to have the products that are ready to grow and realize the potential so investors are willing to fund the operation.
spk04: Well, thank you. And being patient, but it's hard. Sure.
spk07: I'm with you. Thank you.
spk01: 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.
spk06: Okay. Thanks again for your participation for the conference call, and we look forward to reporting our progress for the 2021 earnings later in the first quarter.
spk07: Thank you. Have a good day.
spk01: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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