Energy Focus, Inc.

Greetings and welcome to Energy Focus' first quarter fiscal year 2020 earnings conference call. At this time, all participants are in a listen-only mode. A 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. Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Brett Musk of Hayden IR. Thank you. You may begin.

Thank you, Operator, and good morning, everyone. Joining me on the call today are James Tu, Chairman, Chief Executive Officer, and Todd Nestor, President and Chief Financial Officer. Before we begin today's call, I'd like to remind you that we will be making 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 the 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 the 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 metrics are presented on both a 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 our corporate website at energyfocus.com in the investor relations section of the site. Now I'd like to turn the call over to James. James, the floor is yours.

Thank you, Brett. Good morning, everyone, and thank you for joining our first quarter 2020 earnings conference call. First of all, I hope all of you and your family continue to stay safe and healthy in this challenging social and economic environment due to the COVID-19 pandemic. Like everyone participating in this call, we have been watching the development of the pandemic and following our coronavirus contingency plan very closely and responding to changes as timely as possible. We are fortunate that our employees remain healthy and that our factory has remained open throughout the pandemic. In addition, I have to say that despite of the ongoing macroeconomic challenges and stay-at-home orders, our progress towards building NH Focus into the next generation lighting industry leader had not stalled at all. Our employees, either at our factory or from home, have been working very hard and very smart. And I believe that the pandemic has challenged our team to be more creative, more efficient, more passionate, and more collaborative to accomplish our short-term and long-term goals. So for you as an investor of NH Focus, As both Todd and I and our board directors are, I'd like to say that the future of image focus is not only much brighter than a year ago when we started the restructuring and relaunch programs, but also better than three months ago. As you have seen from our Q1 earnings release that came out this morning, our sales growth momentum continues to pick up in the first quarter. in spite of the unprecedented economic challenges posed by the pandemic. As consistent over the past year since the management change in April 2019, we continue to make incremental but collectively significant progress, month after month, quarter after quarter, towards stabilizing and economizing our operating infrastructure, as well as rebuilding and expanding our engineering, sales, and marketing capabilities. all the while reigniting our growth and delivering improving financial results, regardless of the macro environment. Equally important, within the past 12 months, we have successfully transformed energy focus from an energy efficiency-centric LED lighting company to a broader sustainability enabling force. With the introduction of InFocus, our patent-pending lighting control platform to bring human-centric lighting specifically to existing buildings. Despite of all the buzz we might have heard about LED being everywhere and getting cheaper by the day, an overwhelming majority of the country's and the world's existing commercial buildings today are still lit by fluorescent lighting. DOE's latest estimate was that in 2017, only 11% of the country's more than 1.1 billion linear lighting fixtures were lit with LEDs. Today, the penetration rate is likely to still be well below 20%. And the percentage of lighting fixtures with controls are even lower. That represents tens of billions of dollars of opportunities in the coming years to upgrade these fixtures to LEDs. and connected lighting, just in the United States. And since Insocus is designed for universal electrical settings to replace fluorescent lamps and switches, it is also well-positioned to enter the international markets that are several times larger than the U.S. markets. We are confident that building owners and occupants worldwide will be much more motivated to convert to LED lighting if significant human benefits such as steaming and circadian rhythm outside of energy efficiency are available and affordable. Within FOCUS, we aim to maximize the financial, environmental, and human or triple bottom-line benefits from LED lighting and capture a meaningful share of the coming retrofit opportunities as LED lighting moves on to the next phase of accelerating adoption, driven by human-centric lighting. Turning to the results for the first quarter of 2020, our net sales of $3.8 million exceeded the high end of our revenue guidance of $3.5 to $3.6 million and grew 19% year-over-year and 7% sequentially. The increases over prior periods were primarily driven by our expanding number of wins of military contracts over the past six months. We also continue to grow our commercial customer network that added several new colleges and school districts as customers. And sales of our patented emergency backup LED tube, RECAP, continue to grow and register the best quarter sales ever as well. As we mentioned in our 2019 annual earnings call, our military wins over the past six months, including over $2.5 million of gold blinds, $3.4 million of military intelligence tubes, and $1.7 million new ship lighting fixtures for a foreign airline navy, as well as several other smaller ones. We're particularly encouraging as we were able to compete favorably through engineering innovation to reduce our product costs while maintaining our superior product quality against competitors. When we have a combination of better products and better costs, we should win most, if not all the time. In the meantime, our Navy ships benefit from our continuing innovation. Due to these significant wins, we expect military sales to remain strong throughout 2020, and we look forward to winning more new Navy opportunities and contracts when they emerge. For our commercial business, as we warned in our last warning call, due to COVID-19 and the continuing shutdown of non-essential equipment, economic activities across most of the country. We have clearly seen sales fall starting in March, not unlike most businesses have been experiencing. As we mentioned in the earnings release this morning, at this point, barring an extreme economic freeze that lasts beyond the next few months, we do not expect such softness and stagnation to remain for a prolonged period of time. as facilities of our target customers in the government, healthcare, and education industrial sectors are still going to be mostly occupied. Meanwhile, we have been taking this time to introduce the InFocus lighting control platform, which we officially launched this past Monday to existing and new customers. We have received an overwhelmingly positive reception on InFocus so far, And interest and inquiries about this product family are literally growing by the day. We continue to believe that InFocus is not just a better lighting control platform, but also a unique offering for the retrofit market where affordable, simple, and secure lighting controls have not been available before. And we expect it will take us to a much broader network of distribution channel partners that we have not tapped into before. Accordingly, we recently took two important steps to strengthen our organizational readiness to propel InFocus into our most significant growth engine over the next three quarters. First, now with three expanding business development teams that reach out to national distributors, FGOs, regional contractors and distributors, and small to medium-sized customers that could buy directly from our inside sales team as well as our online e-commerce website. Second, In conjunction with the InFocus launch, we roll out a new multi-tier pricing system for our products to both reinforce our brand image of high quality at a great value, but also to ensure fair pricing, protect our channel partners' margins, and avoid potential channel conflicts. As we start engaging with multiple layers of distribution partners. We believe that with a broader distribution strategy, InFocus will be taking energy focus to another level of industry leadership, not only on product innovation, but also in market presence in a timeless manner. As part of our official launch of InFocus, we have started to provide demos and initiate discussions about project opportunities with our customers for InFocus over the past few weeks. And we plan to start providing production samples later this month and shipping in-focus products to customers in early Q3. If the broader economy reopens and commercial activities start to recover over the past few months, as expected, we look forward to having meaningful sales contributions from in-focus from Q4 on. Now I'd like to provide some highlights on our engineering efforts and initiatives. One of the most important initiatives we have laid out in the 2019 company relaunch is developing impactful and differentiated products based on LED lighting technology. InFocus was born and developed under such overarching goals. During the last quarter, in addition to finalizing InFocus design and bolstering our patents surrounding this control platform, we have also started to move on to the next generation in-focus platform that will expand to provide autonomous and wireless lighting control capabilities that further improve energy efficiency, optimize circadian rhythm lighting, and provide a whole new suite of functionalities surrounding building automation and building management. Equally important and probably an even more urgent priority for us since the beginning of the year is our initiatives. to develop UV disinfection applications built upon the InFocus platform. We believe that demand for disinfection technologies and products, which in the past have been a niche market mostly for hospital users, is emerging very rapidly and broadly. Literally all indoor spaces today are opening up addressable market opportunities for effective and affordable disinfection products. In addition to the fact that coronavirus is still impacting countries across the world and might not be going away anytime soon. The world's sudden awareness and realization that the risk of a pandemic is here to stay will likely push demand for air and surface disinfection products to unprecedented heights and stay permanent and universal to a large extent going forward. The UV disinfection technologies and products we use have been developing follow our consistent philosophy of making innovative, high-quality, and impactful lighting products. And we believe that our UV disinfection lighting fixture that is designed to provide both general lighting and UV disinfection capabilities based on the InFocus lighting control platform will be a powerful and timely offering for organizations across all enterprise sectors that seek to minimize virus infection risk. I'm pleased to announce that we have achieved several design milestones, and we have also filed provisional patents surrounding our UV disinfection technology over the past month. Currently, we are on schedule to finalize our prototype design within the next month or so and launch the first UV products by early Q4. We are very excited about the timely and significant impact we could make on our customers' daily lives with our UV disinfection technologies and products. And we plan to continue to build and expand our intellectual property, core competencies, and operations surrounding the UV disinfection thing. I'm sure we'll have much more to share with you on our progress in the UV disinfection market in the coming months. Now I'd like to turn to the impact of COVID-19 on our business. As we mentioned from the last earnings call and the beginning of this call, we move rapidly to protect employees, and ensure business continuity. To minimize the infection risks of our employees and their social and professional contact, we activated our COVID-19 Contingency Plan, or CCP, that allows our employees that could work remotely to do so while implementing strict sanitary and disinfection measures and procedures for our production facility in Solon, Ohio. We're designated as an essential business, so with proper safeguards, our team members at the production facility are allowed to continue working. And we expect that our factory will continue to operate in full capacity under COVID-19. Meanwhile, our commercial sales across nearly all the target verticals are being impacted due to facility closures and slow economic activities. On the other hand, although we are seeing writing retrofit projects being put on hold or postponed, we have not seen opportunities lost due to COVID-19. Again, while economic reopening remains a challenging and somewhat unpredictable exercise, we do believe that the slowdown will be temporary, and we are also hopeful that some organizations might actually start to take on retrofit projects during this period when buildings are much less occupied. With regards to our business outlook, although we have started to grow from Q4 2019, we are still early in our long-term growth trajectory. And large accounts and opportunities could still sway our financials significantly. The newfound layer of economic uncertainty resulting from COVID-19 makes it even harder to project our business several quarters out, especially on our commercial business. Therefore, we are still not in a position to provide annual outlook at this point. However, we will continue to provide quarterly forecasts in the best way we can. Regarding our second quarter 2020, as we stated in the press release, we expect the net sales to be in the range of $4.5 million to $4.8 million, representing sequential growth of 18% to 26% compared with the first quarter of 2020. And... a 46% to 56% growth over the second quarter of 2019. Now, midway through the second quarter, we have already broke more than 70% of the forecasted sales, mostly from our military business. And therefore, we are relatively confident of our Q2 sales hitting this target range. As we stated in the fourth quarter and full year 2019 earnings goal, two months back, we believe that After the restructuring and relaunch effort during 2019, we had turned the corner and started growing in Q4. We continued to grow from Q4 2019 into Q1 2020. And despite of the myriad challenges posed by the pandemic, we expect to continue to grow from Q1 to Q2, build upon the first arrow of our rejuvenated growth from our military business, where we now are more competitive than ever before. With the recent launch of InFocus, we look forward to having this second era of growth to prepare our commercial business as well as our overall sales from the second half and especially fourth quarter. With that, I'll turn the call to Todd to review our financial performance during the quarter. Todd?