Energy Focus, Inc.

Greetings and welcome to the Energy Focus second 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. 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. I'd now like to turn the conference over to your host, Mr. Brett Moss with Hayden IR. Thank you. You may begin.

Thank you, operator, and good morning, everyone. Joining me on the call today are James Tu, Executive Chairman and Chief Executive Officer, and Todd Nestor, President and Chief Financial Officer. Before we begin today's call, I would like to remind everyone 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 discussion of the risks that could affect our results, please refer to the discussion under the heading Risk Factors on our most recent 10Q, as well as our 10-K, and most recently filed 10-Q, sorry, 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 accepted as required by law. Also, please note that during this call and in the accompanying press releases, certain financial metrics 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, energyfocus.com in the investor relations section of the site. I'll now turn the call over to James. James, please go ahead.

Thank you, Brad. Good morning, everyone, and thank you for joining our second quarter 2020 earnings conference call. First of all, I hope you all stay safe and healthy as COVID-19 pandemic continues to rage across the country over the past few months. It seems as a essential business, we had continued our operations during the second quarter as normal and implemented a coronavirus contingency plan, or CCP, that mandates temperature taking, mask wearing, and social distancing in our manufacturing facility and our corporate office. We're fortunate that none of our employees so far have contracted COVID-19. We appreciate the hard work from all of our employees, the business from our customers, and the support of our suppliers in this unprecedented time. And we are continuing to enforce CCP until we believe that COVID-19 is no longer a clear public health risk. Now turning to the review of our second quarter 2020 performance. It was both a challenging and encouraging quarter for energy focus. While our financial results were impacted by the previously announced shift of revenues from the second quarter into the third quarter, we continue to make exciting progress towards positioning our business for sustainable, profitable growth. Despite a significant amount of sales being shifted from Q2 to Q3 and a notable slowdown of commercial activities due to COVID-19, our net sales of $3.3 million in Q2 still grew 8.2% year-over-year over the second quarter of 2019. Growth margins also continue to improve, while our loss from operations decreased significantly from $2.2 million to $1 million, excluding quarterly warranted fair value adjustments. Our continuing growth during the second quarter was supported by a more resilient military business, which grew 11% from last quarter and 139% from the same quarter a year ago. As we mentioned in the last earnings call, through agile and continuous innovation, over the past year we have dramatically improved our competitiveness in the Navy market. which also had not been impacted by COVID-19, like the commercial market. In the foreseeable future, as well as on a long-term basis, we remain excited and optimistic about our ability to capture the LED lighting opportunities from the U.S. Navy, be it for retrofit or for new ship construction. On the commercial side, as we communicated over the past few months, The COVID-19 pandemic certainly impacted our results in the second quarter. Many lighting upgrade projects were delayed as facility managers remained extremely cautious on making significant capital investment decisions due to uncertainty on occupancy levels on both long-term and short-term basis. That said, judging from the countries that had suffered from COVID-19 a few months before the U.S., and that has seen the pandemic largely subside, general commercial activities mostly recovered close to pre-COVID-19 levels, outside of the hardest hit sectors such as travel, entertainment, and brick and mortar retail. Therefore, we are cautiously optimistic that most organizations will gradually resume their planned lighting upgrade projects over the coming months and quarters, once COVID-19 subsides. Meanwhile, we're very pleased to report that our in-focus lighting control platform continues to receive positive and enthusiastic responses from the market across literally our entire customer ecosystem, be it lighting distributors, energy service companies, or large end users in government healthcare and education industries. In addition, in June, InFocus received the Top Product of the Year Award from Energy and Environment Leaders for its outstanding ease, affordability, and sustainability to facilitate circadian and human-centric lighting for buildings of all kinds with a simple change of the lamps and switches. Such recognition by a globally influential organization in energy sustainability reflects a true accomplishment, ingenuity, and hard work from our engineering team, led by our chief scientist, John Davenport, VP of product management, Simon Chang, and director of engineering, Greg Fleese. It also clearly affirms and exemplifies the superior environmental sustainability of land-based LED lighting systems versus integrated fixtures. which has risen in popularity over the past decade, but could generate a substantial amount of environmental waste. The whole fixtures need to be replaced when the LEDs go out or simply become outdated. In fact, regulatory agencies in both the UK and EU are about to pass laws in the coming months to mandate manufacturers to change lighting system design so that the light sources can be replaced, effectively banning integrated fixtures and endorsing lamp-based modular systems. The rise, or rather the revival, of LED lamps will only accelerate from here as regulations and investments in sustainability continue to grow rapidly across the world in the face of worsening climate change impacts. We believe that energy focus, with years of dedicated innovation and proven leadership on LED lamps and now lamp-based lighting control technologies centered around InFocus, is well positioned to capitalize on this seismic change that will encompass the tens of billions of lamps and fixtures in the world over the coming years. In addition to environmental sustainability, Bringing the Italian lighting to the mass market globally is what InFocus is uniquely capable of. By using the existing power line, InFocus is able to provide digital communication between the switch and the lamp, enabling flicker-free, dimmable, and color-tunable lighting without changing the fixtures or introducing wireless communication protocol or requiring complex commissioning and system integration. Therefore, it costs only about a third to a sixth of what other lighting control systems cost, and only takes a fraction of time required to install. And it's completely safe from hacking or cybersecurity threats. Over the past decade, numerous studies have proven that circadian lighting, a term that represents artificial lighting with optimal lumen intensity and color temperatures, based on circadian rhythm, our internal 24-hour biological clock. It dramatically improves human comfort, productivity, learning, sleep, as well as physiological, emotional, and emotional well-being. InFocus now has the potential to bring such immensely positive human impacts to buildings of all kinds and all over the world. Because InFocus is such a unique, powerful, and highly demanded product line, over the past two months since we launched, we have been focusing on rapidly expanding our distribution network by signing up and engaging with new channel partners that include national and regional distributors, ESCOs, and lighting agencies across the U.S. Over the past few weeks, we've also been installing product samples in numerous customer pilot sites and we are seeing InFocus being specified into more and more new lighting projects by our customers. We've also just received our first significant order for InFocus products from a state government agency, and we expect this initial order to lead to additional orders to eventually cover the agency's nearly 4 million square feet of facilities in the state. All of this progress is bolstering our confidence that we will be in focus about generating meaningful sales once the current overhang on lighting upgrades from the COVID-19 impact subsides and business in general normalizes. And we believe that InFocus has strong potential to become the leading lighting control and human-centric lighting technology for existing buildings, not only in the U.S., but also across the world. Additionally, we have made very exciting progress over the past few months surrounding our deployment of the UV germicidal irradiation or UVGI product. The first product we'll be launching in Q4 this year in this new category we're entering is an in-focus powered UV troffer that will provide both flicker-free, dimmable, and tunable lighting as well as UVGI air disinfection capabilities. Numerous recent studies have shown that COVID-19 can be spread through respiratory micro droplets that could travel far distances and stay in the air for hours. In addition, the risk of transmission and infection is far greater in the indoor environment than outdoors. Yet most UVGI products today either take a long time and significant cost to design and commission or could not disinfect the air when people are present. By simply replacing existing 2x2 or 2x4 fluorescent or LED fixtures and the wall switch with in-focus products, facilities such as hospitals, nursing homes, schools, offices, retail stores, and prisons could offer the best quality human-centric lighting while constantly disinfecting the air against airborne pathogens such as bacteria, influenza, and most notably viruses such as SARS and COVID-19. Because the retrofit process is so simple and fast, without the need to have any equipment, specifier, system integrator, or specialty technician involved, we believe that InFocus UV troffer is going to be one of the most affordable and effective disinfection products in the marketplace today. And because there are currently billions of standard 2x2 and 2x4 fluorescent fixtures installed worldwide, InFocus UV troffer is also ideal for rapid deployment and adoption, with no or minimal customization needed across different countries. to help organizations of all sizes everywhere in the world reduce virus and flu infection risk in the most timely manner. We have filed provisional patents surrounding InFocus UV trophic technologies in May 2020, and over the past few months, we have achieved critical technical breakthroughs required to facilitate the functionality and feature of the product. and started fine-tuning the prototype. At this point, we aim to formally launch and start selling the product in the fourth quarter of 2020. So we look forward to sharing with you more details about the InFocus UV troffer, as well as other UVGI-related products under development in the near future. With regard to our business outlook, as noted in the pre-announcement of our results in July, we expect third quarter sales in the range of $6 to $7 million. This range includes the $1.7 million in dollars in shipments, which were shifted from the second quarter into third quarter. Eliminating the timing factor of these shipments, our combined Q2 and Q3 sales in 2020 would be coming in between $9.3 to $10.3 million, compared with $6 million during the same period of 2019. and represents 55% to 72% year-over-year growth. Last but not least, we are pleased to have obtained our new credit facilities that together immediately provide us over $3 million of additional growth capital in this crucial time as we are developing and launching a series of highly impactful and potential products. And we appreciate the hard work from our finance team. We believe that this additional credit availability will be sufficient to support our growth plan for the foreseeable future without unnecessarily diluting our stock at a valuation that we believe does not reflect the true potential of what's to come for the company. With that, I'll turn the call to Todd to review our financial performance during the quarter.