Energy Focus, Inc.

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 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 Moss of Hayden, Iowa. Thank you, Brett. You may begin.

Thank you, operator, and good morning, everyone. Joining me on call today is James Tu, Executive Chairman and 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 make certain forward-looking statements. These statements are based on 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 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 at the SEC. The company undertakes no obligation to publicly update or revise any forwarding 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 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. I'll now turn the call over to James. James, the floor is yours.

Thank you, Brad. Good morning, everyone, and thank you for joining our third quarter 2020 earnings conference call. During the third quarter, we continue to execute our strategic growth and operational plan despite the business and economic challenges we are all facing as a result of the global pandemic. Aided by our strong military sales, our revenue growth, came in within the forecasted range, even as we continue 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 on upgrading the lighting of existing buildings due to extreme uncertainty on occupancy and budget outlooks. The pandemic also continued to cause disruption and delays on supply chain logistics for select components and caused some revenue to be deferred. That said, despite of the unprecedented challenges in our commercial lighting business since March this year, our sales for the first nine months of 2020 still grew 42.6% from the same period a year 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 developed more competitive products. And the financial progress was made despite difficulties the once-in-a-century pandemic that emptied most buildings since March 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 a significant amount of engineering and product management resources to develop a whole new portfolio of UV disinfection products that we just announced in October. Clearly, our restructuring and relaunch plans that were put in place since 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 an extremely challenging external environment. More specifically on the third quarter, our sales, which grew 104.6% from a year ago, were driven by continuing growth of our military sales, including the military intensive shipment from the $3.4 million contract award we received at the beginning of the year. Our positioning in the Navy lighting market continues to strengthen, and sales and quoting activities remain much stronger than a year ago. With nine months' year-to-date military sales up 165.5% over the prior period. Well, on a short-term basis, we expect normal seasonal patterns in the military sales to persist, with our fourth quarter's military sales declining sequentially after the high-water mark third quarter, aligning with the end of the federal fiscal year. We continue to make progress in growing our military sales and increasing our market share. During the quarter, as we announced in the press release dated September 15, we were awarded another exclusive U.S. Navy contract valued at up to $4.8 million over five years to supply the Navy our large LED globe lights, which use approximately 80% less energy than the legacy incandescent lights that the ships have been using. In addition, we received an initial contract to supply our lightning product to new landing craft for a new U.S. Army ship platform. And in October, we won the first award of a new IDIQ contract to supply our birthlight product to the Navy, valued at more than $800,000. These significant wins in the new ship construction markets demonstrate that energy focus is becoming the go-to LED lighting supplier for the broader U.S. military ecosystem. Notably, the DoD announced in September its aggressive modernization plan to grow the naval fleet by more than 20% from 290 ships today to approximately 1,000. 355 ships in the next 10 to 15 years. And we look forward to being a key LED lighting partner for the Navy in this major military initiative. Outside of the military market, we also made progress in the government space by moving forward with tapping into the government market with our GSA contract that we received in September. We're expecting our products to be available online on the GSA website in December for federal agencies, which together occupy over 361,000 buildings to view and purchase. We believe that these incremental yet significant opportunities, coupled with our growing line of Buy American products, will continue to expand our reach, contribute to our growth, and establish our leadership in the lighting market, in the broader government sector. It is also important to note that despite of the short-term headwind we encounter in our commercial business, the company continues to move forward in laying the foundation for long-term growth through our expanding R&D effort. During the quarter, we continue to expand our human-centric lighting product portfolio that we expect to be the core engine of our growth in the years to come. of lighting technologies, many of which Energy Focus is dedicated to developing, are poised to make significant and growing impacts on human safety, health, and productivity, in addition to environmental sustainability. In addition to continuing development efforts on expanding our InFocus platform capabilities and product offerings, Subsequent to quarter end, we launched our advanced ultraviolet or UVC disinfection portfolio products, which are designed to destroy 99.9% or more of various pathogens, including influenza and coronavirus in the air or on services to improve indoor hygiene and sanitation. The initial product includes three complementary products. First, Above, an integrated circadian lighting and UV air disinfection troffer. Second, MUVO, an air disinfection tower. And third, MOVE, an autonomous disinfection robot. These products meet the various needs of air and surface disinfection for commercial, industrial, and residential indoor environments. We are working on other offerings in the portfolio as well, that will follow and further strengthen what we believe is one of the most compelling UBCD solution offerings on the market. This portfolio of products, which we believe are highly competitive and affordable, with the potential to help facilities of all kinds establish its infection routine in the post-COVID world. exemplifies our ability to innovate and move quickly to address rapidly emerging needs for impactful, reliable, and affordable disinfection products for businesses and homes. Since the product launch, we have received enthusiastic feedback from both our existing and new channel partners, and we are working aggressively to build and expand our distribution network for the UVCD product. which are scheduled to start deliveries in the first quarter of 2021. Importantly, we believe that the UVCP product line opens up a whole new disinfection market for us, which Credit Suisse recently estimated at $35 billion in the U.S. alone, based on an average of $70,000 of addressable opportunities per commercial building. While it's still a little early to make predictions on the magnitude of potential revenues from the UVCD product line. We believe it could be a meaningful revenue booster in offsetting the temporary demand weakness from the lighting retrofit market and a key contributor to our growth and enhanced profitability in 2021. And strategically speaking, with these products, we have expanded from general lighting to address the broad healthy building markets. building additional needs for our customers, significantly increasing our total addressable market, and positioning energy focus at the front of what is likely to be a secular wave of demand on quality and affordable space and surface disinfection. In the commercial lighting market space, as we mentioned in both our second and third quarter earnings releases, demand weakness persists, primarily due to unprecedented low occupancy in commercial buildings, schools, and universities due to COVID-19, and the overall slowdown in what might be considered non-essential building improvements, upgrades, and retrofits during a global pandemic. However, we remain cautiously optimistic that once the return to commercial spaces accelerates and capital spending resumes, particularly when effective vaccines are widely available. We are well positioned with a portfolio of innovative and compelling products that will enable us to capture a meaningful share of that pent-up spend led by our in-focus platform. We continue to receive positive feedback as well as early orders on our in-focus lighting control products. though the immediate demand obviously isn't at the level we would like to see due to the generally muted activities in lighting retrofits, and new lighting product adoption is particularly challenging with remote working. As economic activity resumes in the coming months with InFocus and UVCB products, we now can bring broader financial, environmental, and human impacts to the company and become a more substantial partner for our customers. by providing both cutting edge LED lighting and UV lighting disinfection solutions. Looking ahead in the near term, there is a significant amount of uncertainty and volatility on all the flows as well as supply chain logistics. Therefore, as we lay out in the earnings release this morning, while we are still expecting to grow, continue to grow year over year for the fourth quarter of 2020, we are suspending our quarterly financial guidance for now, and we will resume forecasting once these external factors are more stable and predictable. As the visibility improves, we will review and potentially resume specific financial guidance. We understand that not being able to provide short-term financial visibility could be frustrating from investors' perspective. That said, it's simply impossible would not be prudent for us to provide specific guidance on our top-line sales when they are still subject to multiple significant and uncontrollable forces. I do hope that if you are like me, as a long-term investor in Energy Focus, you will be more optimistic and excited than ever about the company's prospects. Given the stabilization, transformation, and renewed growth the company has demonstrated so far over the past 12 months, as well as the exciting groundbreaking new products we launched this year alone. That will significantly expand our addressable U.S. and global markets and elevate our growth momentum in the quarters and years to come. With that, I will turn the call to Todd to review our financial performance during the quarter. Todd?