Energy Focus, Inc.
Q3 2020 Earnings Call Transcript

Published: 12 Nov 2020

[Operator:]

Greetings, and welcome to the Energy Focus Third Quarter Fiscal Year 2020 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brett Maas, with Hayden IR. Thank you. Bret, you may begin.

[Brett Maas:]

Thank you, operator, and good morning, everyone. Joining me on the call today is James Tu, Executive Chairman and Chief Executive Officer; and Tod Nester, President and Chief Financial Officer. Before 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 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 on our most recent 10-K, as well as 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.

[James Tu:]

Thank you, Brett. Good morning, everyone, and thank you for joining our third quarter 2020 earnings conference call. During the third quarter, we continued to execute our strategic growth and operational plans besides the business and economic challenges we are all facing as a result of the global pandemic. Aided by our strong military sales, our revenue came in within the forecasted range even as we continued to experience COVID-related challenges in the commercial lighting retrofit market, where most facility managers and building owners were withholding or postponing capital spending decisions and upgrading the lighting of existing buildings due to extreme uncertainty on occupancy and budget outlook. The pandemic also continued to cause disruption and delays on our supply chain logistics for select components and revenues to be deferred. That said, despite of the unprecedented challenges in our commercial lighting business since March of this year, our sales for the first nine months of 2020, sales grew 42.6% from the same period a year ago before, while we reduced our operating loss from $5.8 million to $3.2 million. The significant financial performance improvement was primarily due to our strengthened positioning and increased contract wins in our Military and Maritime business as we develop more competitive products. And the financial progress was made despite the once in a century pandemic that emptied most buildings since March of this year, and on top of our strong R&D and engineering accomplishments by successfully developing and launching the groundbreaking award winning in-focus lighting control platform in the second quarter of this year. Furthermore, since the beginning of this year, we devoted significant amount of engineering and product management resources to develop a whole new portfolio of UV disinfection products, now we just announced in October. Clearly our restructuring and re-launch plans that were put in place in the second quarter of 2019 have transformed the company into a high performing entrepreneurial, innovative and fast-moving organization that can achieve exciting growth, despite of an extremely challenging external environment.

[Tod Nestor:]

Thank you, James. Net sales for the third quarter of 2020 were $6 million compared with 2019 third quarter net sales and $2.9 million, an increase the 104.6% year-over-year. The year-over-year increase in net sales was primarily driven by an increase in military sales, which included both higher volumes and a shift in the timing of a portion of a certain Military Order shipment from the second quarter to the third quarter of 2020, which we discussed during our second quarter earnings call. When compared to 3.3 million in the second quarter of 2020, net sales were up 78.8% on a sequential basis, due in large part to timing between the second and third quarters. To provide clear context on the timing impact, second and third 2020 aggregate military sales were $6.8 million, compared to $2.1 million for the combined second and third quarters of 2019, a 218.1% increase. So, you can see the third quarter increase is a military sales are not solely the result of timing. Sales to our Top 10 customers for the total company increased 128.6% and sales to our Top 20 customers increased 117.2% each, compared to the third quarter last year. From the mix perspective, in the third quarter, military sales were 4.5 million, representing 75.6% of total net sales, compared to 1.2 million, or 40.5% of total net sales for the third quarter of 2019. The year-over-year increase in military sales is primarily due to increased sales to four of our top 10 customers, compared to the third quarter of last year and with one particular customer and military supplier representing most of the increase. Sales to commercial customers were 1.5 million in the third quarter representing 24.4% of total net sales for the quarter, down from 1.7 million or 59% of total net sales during the third quarter of 2019. 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 crisis.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question comes from Amit Dayal with H.C. Wainwright. Please proceed with your question.

[Amit Dayal:]

Thank you. Good morning, everyone. Appreciate you taking my question.

[Tod Nester:]

Hi, Amit. How are you?

[James Tu:]

Hey, good morning. Good. Thank you.

[Amit Dayal:]

Good morning. Good morning. Just, you know, understandable that you are sort of removing guidance for now, but underneath that, James, you know, can you talk a little bit about how your commercial sales pipeline is shaping up? You know, the products and the technology behind it is very promising. I'm just trying to get a sense of, you know, what sort of catalysts are preventing larger order from materializing for some of these products?

[James Tu:]

Yes, I think, as we mentioned, the commercial lighting retrofit market is especially hard hit, because that's where, you know, a project could be called or delayed, as opposed to say new construction, where, you know, if you already have a very large project on going, you probably want to push to finish it anyway. But I think the new construction market will probably be hit the next, right. But most immediately, people can – you know, people don't have to upgrade their lighting right, not an emergency. It’s not an urgent item, especially when they are handling truly urgent matters, such as, you know, facility safety and also very unpredictable occupancy level. So, I think our overall commercial lighting business is just impacted by this very, very soft and unpredictable event right at this point. And it is true that EnFocus is very well received and we continue to be more and more optimistic that it will be the next generation lighting control platform for – you know, definitely for retrofit market, but potentially also for the new construction market because it's just so much simpler and environmental friendly. But remember, this is a new product. It needs to be introduced in the market. People are, you know, our agencies, distributors, they're excited about the product. They are specifying our product into new projects. The issue is new projects are not necessarily there, right, to be, you know, in terms of having a clear timeline. I think that's the challenge being a new product and especially knowing that, you know, most people are working remotely now, it's very hard to actually introduce the product face-to-face. This is a very product. You see how the product works by really looking and feeling it. And we've been trying to do that through, obviously, you know, Zoom calls and all that. But for people to make decisions moving forward, it’s particularly challenging for new products. But this is why we said that, you know, the UV product is important for us to fill the gap on a temporary basis when the lighting retrofit market is still pretty uncertain, pretty cloudy at the moment. So, we are definitely seeing the demand there. And as we said, you know, our first, you know, the orders of EnFocus have been shipped and we continue to receive really good feedback about the product and it all depends on when the commercial lighting retrofit market could really start coming back, we're hoping in the next, say, three months to six months when people are starting to return back to more normal activity. And this is part of the reason why we are suspending the because all these pipelines we have seen today, there's just not enough certainty for us to say, yes, this is going to come this quarter. That's the kind of risk we're running, right. We – you know, going into the third quarter, we would expect that we definitely hit the range of $6 million to $7 million, even at the higher end. But in the end, we come in at the low-end of the guidance, right. And we don't want to repeat that. You know, and we say that pretty clearly, you know, with the combination of the order uncertainty in terms of timing and the supply chain logistics, those are the two factors that are still overhanging today.

[Amit Dayal:]

Understood. And I know you started sort of sales with the UV products very recently. Any color ?

[James Tu:]

We didn’t start selling. We just – we only introduced them. We haven't started selling. We’re starting delivery in the first quarter. Yes, and only in the first quarter. We obviously – I mean, we obviously started marketing it, right. We started talking to our customers; we're not taking orders yet.

[Amit Dayal:]

Understood. Understood. Thank you for that. And then, you know, the military sales continues to be sort of a backbone of your revenues.

[James Tu:]

Yes.

[Amit Dayal:]

Looking sort of a little further out into 2021, are you anticipating sort of year-over-year growth for the military sales in 2021, you know, with the visibility you have? I know, you're not providing guidance but just .

[James Tu:]

Sure, sure, sure. Yes, right. Obviously, still is 2021. This is the first quarter of the, you know, fiscal year, right. But what we can say is that, given the order rate and the contract wins we have been experiencing, and, you know, throughout this year, we – you know there's no reason for us to expect the military sales not being strong next year. Now, if your question is going to be growing from this year, this year is poised to grow what 200% over last year. So, I want but based on the overlays and consequences we’ve been experiencing, I will say that it will be a strong year next year. And as I mentioned in the – earlier in the earnings call, you know, the defense spending seems to be increasing and the huge modernization plan by the Navy is going to bring pretty large opportunities in the coming years. And so, from the market demand side and from our competitiveness side, I think both are on the positive side, so…

[Amit Dayal:]

Right. Understood. Yeah James, that's all I have. Thank you so much.

[James Tu:]

Thank you, Amit.

[Operator:]

Thank you. Our next question comes from Aaron Martin with AIGH Investment Partners. Please proceed with your question.

[Aaron Martin:]

Hi. Good morning, James. Good morning, Tod.

[Tod Nester:]

Hey, good morning, Aaron. How are you?

[James Tu:]

Good morning, Aaron.

[Aaron Martin:]

Doing well. Can you talk a little bit about, obviously, the UV launches and the strategies there? And I sort of want to differentiate between the commercial side of it and the consumer side of it because it's really two different products. And then, you know, what can you tell us about since the launch? And obviously, you do have a pre-order capability, which is nice on the working capital side. Like, what have you seen there from the pre-order side of things?

[James Tu:]

Yes, the – yes, we decided that the pre-order might not be, you know, the way to go because we are not delivering until January. And so, we actually are not focusing on the pre-ordering of the product. On the other hand, we have started selling to basically, you know, our customers – we’re introducing the products to our customers, channel partners and we are organizing – we've been organizing the – I would say, you know, for the company, major marketing campaign, starting in December for the consumer product. The consumer products so far has got pretty good responses based on our, you know, own surveys of, you know, context and all that. So – and we believe that, as we start launching in December, we'll get more concrete indication of the interest. This is why we have the soft launch in October just so that as a public traded company, we can start talking publicly about these products and we’ve got, so far, we’ve had pretty good feedback on the product. Obviously, people want to see the product and we're going to start shipping our samples in December, before the delivery in January. So, I would say in December, we'll get more concrete indication about the actual . So far, based on our feedback we received, it’s shaping to be an exciting product. And the other thing to say is that you're talking about the difference between the commercial product and the residential product, so mUVe is the product – is the UV disinfection power. That product was designed for commercial use for small offices, right, conference rooms, and all that and individual personal use at home, residential uses. The impact to our sales could be faster on the residential side, as you can imagine, right? You know we can reach out to the individual customers directly these days through social media and marketing campaigns, while the institutions will usually take a bit more time to make the decision. So, there's a chance that the product mUVe will have, you know, faster contributions to our sales than the other two products. And, obviously, we are so excited about the other two products and we will be production samples in other two products in December. And our goal is to continue to expand our marketing efforts and expand our channel partnership networks. We realized that UV product while our existing lighting agencies and distributors and actual distributors are sure to sell that product, there are also specialty distributors that could carry the UV products that we’re expanding into.

[Aaron Martin:]

Okay, thanks for that. I guess, when it comes to December, given number of like, you know, prototype units that you think you're going to be able to get on the hands of your customers in terms of number of distributors and stuff like that I can get at least the commercial units to get their hands on?

[Tod Nester:]

Yes. Well, we’re going to have a couple hundred samples that we can send out. You know, so that's the plan. We're going to have a couple of robots that we're going to be, not necessarily sending out samples, but testing and piloting in some facilities, that’ll be going to be happening in December.

[Aaron Martin:]

No, I mean, in terms of the robots, is that a third kind of distribution channel just because it's a different kind of sales, the high ticket price item?

[Tod Nester:]

Yes.

[Aaron Martin:]

facility?

[Tod Nester:]

Right, good question. So, the robot is a high priced item and we believe – we're actually very excited about that product. And for large facilities, they could definitely own the robot, but the robot economist, obviously, if you want to have people, an operator that goes with it. If they're upset, the robot will be able to remember, you know, the last thing and do the cleaning disinfecting on its own, but somebody to watch, right. So, we – for large facilities, we probably – it's probably worthwhile for you to buy the robot. For a lot of smaller facilities, we are claiming a robot disinfection services and that kind of being – that's being planned and they'll be piloted in the first quarter and we'll have more to share when – you know, once the piloting services.

[Aaron Martin:]

And then, on the commercial UV, it's a replacement in the . And question is, is it targeted at single small offices, you know 200 square foot offices based on the specs or does it additive? Where if you've got a large room with multiple, large number of light fixtures, you know, you're replacing 20 for the room. And that's how you secure the entire room, what’s the there?

[James Tu:]

Yeah, with all the above, right. The lighting, the lighting, right? You are talking about both, or you talking about ?

[Aaron Martin:]

I’m talking about – on the lightning of commercial with lightning?

[James Tu:]

Can I go ? Yeah, that will be relatively placed to replace all the other 2x2, 2x4, or written or .

[Aaron Martin:]

That gives square feet. My question is, is it additive? If you're in a larger room, it's larger than that?

[James Tu:]

Oh, yeah. So usually the 2x4 fixtures covers about 100 square feet. So – and that's how we got the – we expect that you change every one of your lighting fixture. That’s how you don't have to design how you would want the disinfection device to work. Because it's designed to have two air changes per hour per fixture for that hundred square foot.

[Aaron Martin:]

Okay. Then moving on to were there any warrant exercises in the quarter?

[Tod Nestor:]

Yeah, they were around – the Omni-cash flow statement from financing for a portion of that, but there were exercises done in the third quarter.

[Aaron Martin:]

Okay, and then any in the subsequent events? You know, since the end of the quarter, did you report any subsequent events on that?

[Tod Nestor:]

Not on that. No.

[Aaron Martin:]

Okay. Thanks a lot. Appreciate it.

[James Tu:]

Thank you.

[Operator:]

Thank you. Thank you. Our next question comes from , Private Investor. Please proceed with your question.

[Unidentified Analyst:]

Hi. I was wondering if you could give some color to the addition of sales and R&D staff in this last quarter.

[James Tu:]

Yeah. So, on the R&D side, we spend it people we had to hire for additional engineers in the quarter. And we're pretty much we're good there for the time being. Salespeople we have actually been hiring people during the quarter. We still have two or three positions to fill, but we’re getting to where we need to be for the time being.

[Unidentified Analyst:]

Okay, thank you.

[James Tu:]

Yep.

[Operator:]

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

[James Tu:]

Okay, thank you very much. Thank you, everyone, again, for your time and interest in Energy Focus. We look forward to speaking with you in our next earnings call. Have a good day.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.