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?

Thank you, James. Net sales for the third quarter of 2020 were $6 million, compared with 2019 third quarter net sales of $2.9 million, an increase of 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 clearer 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 increases in 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 a mixed 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 was primarily due to increased sales to four of our top ten customers compared to the third quarter of last year, and with one particular customer, a 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. And as James mentioned previously, we believe being deferred to a future date for when occupants return to buildings. Sequentially, net sales to commercial customers increased 37.6%, up from 1.1 million in the second quarter of 2020. This increase was primarily driven by sales from three of our top 10 customers. Overall, sales to our top 10 commercial customers increased 5% year-over-year, and sales to our top 20 commercial customers increased 9.6%. Likewise, sales to our top 10 military customers increased 276.2%, and sales to our top 20 military customers increased 251.7% on a sequential basis for the second to third quarter of 2020. Gross profit for the third quarter of 2020 was $1.4 million, compared with $1 million in the year-ago quarter, an increase of 33.9% year-over-year. That was driven by favorable pricing and usage variances for material and labor and changes in inventory reserves, which was more than offset by supply chain challenges that led to unexpected additional manufacturing costs related primarily to our military and maritime products and higher outbound freight costs. On a sequential basis, gross profit was up marginally by $33,000 compared to $1.3 million in the second quarter of 2020. As a percentage of revenue, gross profit margin was 23.1% in the third quarter of 2020 compared to 35.3% in the third quarter of 2019 and 40.3% in the second quarter of 2020. The declines were primarily due to supply chain challenges I just mentioned, which degraded our gross margin by approximately 410 basis points in the quarter, in the current quarter, as well as product sales mix. Adjusting gross profit margins for excess and obsolete in transit and net realizable value inventory reserve resulted in a non-gap adjusted gross margins of 24.6% for the third quarter of 2020 compared to 23.6% in the third quarter of 2019 and 33% in the second quarter of 2020. We continue to expect our gross margins to be in the mid-20s in the near term and begin to approach the high 20s percentage range as we introduce new products and make further improvements to our supply chain, and depending on our sales mix and inventory valuations, we may see some fluctuations quarter to quarter. Operating expenses in the aggregate in the third quarter of 2020 were $2.4 million, or 40% of sales, compared to $1.9 million, or 63.8% of sales in the year-ago quarter, an increase of $520,000 or 28.3% growth year-over-year, which was more than offset by higher MET sales. The increase was primarily driven by increased payroll for headcount to support our growth initiatives and the sales and R&D functions. As we discussed last quarter, we have shifted to a targeted approach to reducing expenses within our SG&A line, focused on various strategic sourcing initiatives. One of the first was our legal expense, and we have added a new in-house general counsel to our executive team, which we announced during the third quarter and more recently completed a strategic sourcing project for legal services, which over the next year should help us reduce and better manage our legal expenses. Loss from operations during the third quarter of 2020 was $1 million compared to a loss from operations of $833,000 in the third quarter of 2019, and a loss from operations of $929,000 in the second quarter of 2020. The increase in the operating loss in the third quarter of 2020 was primarily the result of supply chain challenges that James and I discussed earlier, as well as additional headcount. Aside from these temporary supply chain challenges, our core operating business continues to improve, and we expect this improvement to be more apparent in our operating results moving forward. Below the operating line, interest expense was $124,000 compared with $67,000 in the year-ago quarter and $80,000 in the second quarter of 2020. This increase was the result of an increase in borrowings under our new increased short-term credit facilities that substantially increased the company's borrowing capacity and reduced its blended interest expense rate. Also, below the operating line, we had non-recurring expenses of $159,000 for the extinguishment of our formal revolving line of credit, which included a $100,000 cash termination fee and the write-offs of the remaining related non-cash debt acquisition cost of $59,000. These expenses were essentially offset by a positive non-cash adjustment to the fair value of outstanding warrants of $153,000. Net loss for the third quarter of 2020 was $1.2 million, or a 35% per share loss per basic and diluted share, compared with a loss of $946,000, or a 38% loss per basic and diluted share in the year-ago quarter. Adjusted EBITDA, which excludes depreciation and amortization, interest expense, stock-based and other incentive compensations, A loss of $150,000 related to extinguishment of debt and a gain of $150,000 related to fair value warrants was a loss of $918,000 for the third quarter of 2020 compared with a loss of $780,000 in the third quarter of 2019 and a loss of $746,000 in the second quarter of 2020. Now I'd like to turn to the balance sheet. As of September 30, 2020, we had cash of $2.6 million compared to $350,000 at the end of 2019. The increase in cash was primarily due to the issuance of new capital through the sale of equity in the first quarter as well as increased borrowing. Total debt excluding the warranty liability as of September 30, 2020, included short-term credit line borrowings of $2 million, outstanding notes payable of $192,000, and the PPP loan for $795,000 for a total debt outstanding of $3 million. We had cash of $2.6 million as of September 30, 2020, resolving a net debt of approximately $400,000 at the end of the third quarter. This compares to $3.4 million in total debt as of December 30, 2019, which was comprised of short-term credit line borrowings of $715,000 convertible notes outstanding of $1.7 million, and notes payable of $1 million. Vetted against cash of $350,000, we had a net debt position of $3.1 million at the end of the year 2019. As a reminder, total availability is a 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 a cash balance or even net debt on the balance sheet. while excess borrowing availability under our credit facility represents the difference between the maximum borrowing capacity of the credit facility and our actual borrowings under the credit facility. We increased our total availability from the third quarter of 2019 to the end of the third quarter of 2020 from $1.8 million to $4.9 million, respectively, primarily as a result of additional capacity gained through our new credit facilities, the PPE loan we obtained, and the equity offerings. As of September 30, 2020, we had total availability of $4.9 million, which consisted of $2.6 million of cash and $2.3 million of excess borrowing availability on our credit facilities. Subsequent to the end of the third quarter, we submitted the required application documents to request loan forgiveness for the PPP loan of $795,000.00. On October 20th, we submitted the loan forgiveness application to our corporate bank, which forwarded to the SBA for small business administration for approval. The SBA has a 90-day review period, and we are now waiting on the SBA's decision. During the third quarter, we closed two new credit facilities with new lenders. The facilities consisted of a two-year inventory financing facility for up to $3 million and a two-year receivable facility for up to $2.5 million. then that resolves a significant increase in our current borrowing capacity with access to additional capital as we continue to grow our business. Importantly, we secured this added capacity while simultaneously improving our credit terms and lowering our all-in blended borrowing costs. In addition, one of the key benefits of refinancing our credit agreements is increasing the total availability under the new lines of credit. Total availability for energy-focused as of September 30, 2020, was $4.9 million versus $3.9 million at Q2 fiscal 2020 and $1.9 million at the end of fiscal 2019. This increased borrowing capacity is critical to funding our future growth for our new as well as popular high-turnover products and inventories such as unfocused tubes and switches, our popular REDCap products, and the UV disinfection products we will start selling in the first quarter of 2021. Accounts receivable were $3.4 million at the end of the third quarter of 2020 compared to $2.3 million at the end of 2019, an increase of more than $1 million on higher net sales, reflecting large shipments that occurred during September. Net inventories declined to $5.3 million as of September 30, 2020, compared to $6.2 million at the end of 2019. The decrease was due to our continued efforts to reducing slow-moving inventory, as well as prudence in ordering inventory needed for future sales and the conversion of components to finished and shipped goods for the military. Accounts payable increased to $3.1 million as of September 30, 2020, up from $1.3 million as of the end of 2019. This increase was driven in large part to buying inventory to support the sales growth. Cash used in operations was $1.6 million for the first nine months of 2020. The net loss was $6 million inclusive of non-cash items such as depreciation, stock-based comp, and a $2.3 million charge change in fair value of wants. We generated cash from working capital of $4.5 million. $1.8 million was generated from accounts payable and $1.1 million from inventories. both driven by timing of inventory receipts. Cash used in investing was $171,000, as our capital spending requirements are not significant overall. Net cash provided by the financing activities was $4 million, primarily driven by the equity raised in January. Our product warranty liability continues to remain manageable and not material. The combination of low failure rates of our tubes has allowed us to continue to experience minimal costs for our warranties and still be able to afford to offer valuable 10-year and 5-year warranties to our customers. As mentioned in previous quarters, energy-focused Hallmark quality remains a strong selling point for our products and is reflected in our ability to offer these warranties. In the current environment, I would like to provide updates of the impact on COVID-19 on our business. We continue to operate under our customized COVID-19 contingency plan at the company with employees that can alternatively work from plant or from their homes. James and I have already discussed the impact of COVID-19 on our commercial business, which we continue to experience. Importantly, we have developed solutions and workarounds for the challenges posed by the pandemic that impact our supply chain. However, as we outlined during the quarter, Energy focuses entrepreneurial spirit and ability to act quickly has allowed us to develop and offer compelling UVCD portfolio products with more to come, which will result in what we expect to be growth with new customers and an emerging sector of the human-centric lighting market. The combination of our unfocused platform and UVCD portfolio is a compelling value proposition for any commercial and industrial healthcare and education provider in the United States, and frankly, for that matter, the world. While there is no doubt that COVID-19 presents a lot of uncertainty for many businesses right now, Energy Focus's DNA continues to be entrepreneurial, and we continue to innovate quickly and offer affordable, effective, and easy-to-install and used products that customers demand. Human health and safety are two key objectives we are very focused on delivering our customers in the short, medium, and long term, despite the challenges of COVID-19. With that, we would like to open the call to questions.

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 key. One moment, please, while we poll for questions. Thank you. Our first question comes from Amit Dayal with H.D. Wainwright. Please proceed with your question. Thank you.

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

Yeah, I think as we mentioned, the commercial lighting retrofit market is especially hard hit because that's where the project could be called or delayed, as opposed to, say, new construction where if you already have a very large project ongoing, 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 don't have to upgrade their lighting. It's not an emergency. It's not an urgent item, especially when they are handling truly urgent matters such as facility safety and also a very unpredictable occupancy level. So I think our overall commercial lighting business is just impacted by this very, very soft and unpredictable demand right at this point. And it is true that InFocus is very well received, and we continue to be more and more optimistic that it will be the next generation lighting control platform, definitely for the 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 to the market. People are, you know, our agency distributors are 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 in confronting being a new product and especially knowing that most people are working remotely now. It's very hard to actually introduce the product face-to-face. This is a very exciting product. You see how the product works by really looking and feeling it. And we've been trying to do that through, obviously, Zoom calls and all that. But for people to make decisions, move forward, it's particularly challenging for a new product. But this is why we said that 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, our first orders in focus 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 are hoping in the next, say, three to six months when people are starting to resume back to normal activity. And this is part of the reason why we are sustaining the financial guidance 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 are running. Going into the third quarter, we would expect that we definitely hit the range of six to seven million dollars even at the higher end but in the end we we come in at the lower end of the guidance right um and and we don't want to repeat that and you know you know and and we say that pretty clearly you know the combination of of the older uncertainty in terms of timing and and the supply chain logistics that those are two factors that are still overhanging today understood um

And I know you started sort of sales of the UV products very recently. Any color? We haven't started selling.

We only introduced them. We haven't started selling. We're starting in the first quarter. Yeah, only in the first quarter. We obviously started marketing it, right? We started talking to our customers. We're not taking orders yet. Understood. Understood. Right. Thank you for that.

And then, you know, the military sales continue to be sort of a backbone of your revenues.

Yeah.

Looking sort of a little further out into 21, are you anticipating sort of year-over-year growth for the military sales in 21, you know, with the visibility you have? I know you're not providing guidance, but just let me know. Sure, sure, sure.

Yeah. Right. Obviously, it's still hard to tell if 2021 is the first quarter of the government fiscal year, right? But what we can say is that given the order rate and the contract wins we have been experiencing throughout this year, there's no reason for us to expect the military sales not being strong next year. Now, If your question is, is it going to be growing from this year? This year, it's supposed to grow, what, 200% over last year. So, it's too early to tell. But based on the order rate and contact links we've been experiencing, I would say that it will be a strong year next year. And as I mentioned in the earlier earnings call, it's the defense spending seems to be increasing. And this 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.

All right.

Yeah.

Interesting. James, that's all I have. Thank you so much.

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

Hi. Good morning, James. Good morning, Todd. Hey, good morning, Aaron. How are you? Good morning, Aaron. Doing well. Can we talk a little bit about, obviously, the new 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. What have you seen there from the pre-order side of things?

Yeah, the... Yeah, we decided that the pre-order might not be 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 our customers. We're introducing the products to our customers, channel partners, Um, and we are organizing, we've been organizing, uh, uh, I would say, you know, uh, for the company, um, uh, major marketing campaigns starting December, uh, for the consumer product. Um, the consumer product so far has got, uh, pretty good responses based on our own surveys of, you know, context and all that. So, uh, and, and the, uh, um, We believe that as we start launching in December, we'll get more concrete indication of the interest. This is why we had the soft launch in October, just so that as a public traded company, we can start talking publicly about all these products. And we've got, so far, I would say, 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 interest. So far, based on our feedback we received, it's shaping to be an exciting product. And the other thing I have to say is that you're talking about the difference between the commercial products and the residential products. So MUVO is the product, it's the using disinfection power. That product was designed for both commercial use for small offices, like conference rooms and all that, and individual, especially personal use at home, residential uses. The impact to our sales could be faster on the residential side, as you can imagine. You can reach out to uh, these individual customers, uh, directly these days through social media and marketing campaigns. Well, the institutions will usually take a bit more time to make the decision. So, uh, there's a chance that the product removal will, will have, you know, faster contribution to our sales, um, than the other two products. Um, and, but obviously we are still excited about the other two products, um, and, uh, we will start getting samples in production samples in all the three products in December and our goal is to continue to expand our marketing efforts and expand our channel partnership networks. We realize that UV products, while our existing lighting agencies and distributors and electrical distributors for sure could sell that product, there are also specialty distributors that

could carry the UV product that we're expanding into. Okay, thanks for that. I guess when it comes December, do you have a number of, like, you know, prototype units that you think you're going to be able to get in the hands of your customers in terms of number of distributors and stuff like that that you're targeting to get at least the commercial units get their hands on?

Yeah, well, we are going to have a couple hunger samples so we can send out. 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 the use in some facilities. That's all going to be happening in December and

Now, I mean, in terms of the robots, is that a third kind of distribution channel just because it's a different kind of sale? It's a high-ticket price item? Yeah. It's going to a very specific facility?

Right. Good question. So the robot is a high-price item, and we believe and we're actually very excited about that product. And, yeah. So for large facilities, they could definitely own a robot, but the robot, although it's autonomous, obviously if you want to have people, an operator that goes with it, the robot will be able to remember the maps and do the cleaning, the disinfecting on its own, but you still need somebody to watch it, right? So for large facilities, it's probably worthwhile for you to buy the robot. For a lot of smaller facilities, we are planning a robot disinfection services, and that's being planned and will be piloted in the first quarter. And we'll have more to share when we start the piloting services.

And then on the commercial UV, it's a replacement on the fluorescent. The question is, do... Is it targeted at single small offices, you know, 200-square-foot offices based on the specs, or does it add it where if you've got a large room with multiple, you know, 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 target there?

Yeah, you're talking about the above, right, the lighting chopper, right? You're talking about above, or you're talking about move-over?

I was talking about on the lighting, the commercial lighting.

The commercial lighting chopper, yes. That we designed to replace all the 2x2, 2x4, and all LED choppers. I mean, in fiction.

I mean, the spec is for 200 square feet. My question is, is it additive? If you're in a large room, it's larger than that. Oh, yeah, yeah, yeah. So you're just replacing all of them?

So usually the... The 2x4 fixture covers about 100 square feet. And that's how we get the... We expect that you change every one of your lighting fixtures. 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 100 square feet. Okay.

Okay. And then moving over to the balance sheet, were there any warrant exercises in the quarter?

Yeah, there were, and they're on the cash flow statement from financing. There were a portion of that, but there were exercises done in the third quarter.

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

No, no, no, no.

Okay. Thanks a lot. Appreciate the update.

Thank you.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. The 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. One moment while we poll for questions. Thank you. Our next question comes from Charles Lee, private investor. Please proceed with your question.

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

Yeah, so on the R&D side, we spent it a few people. We have hired four additional engineers during the quarter. And we're pretty much good there for the time being. Sales people, we have actually been hiring people during the quarter. We still have a two, three positions to fill, but we're getting to where we need to be for the time being.

Okay, thank you. Yep.

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

Okay. 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.

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