Greetings, and welcome to the Energy Focus Third Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I'll now turn the conference over to your host, Tod Nestor, President and CFO. Mr. Nestor, you may begin.

Thank you, operator. Good morning, everyone. Joining me today for our prepared remarks is James Tu, Chairman and Chief Executive Officer at Energy Focus. Before we begin today's call, I need to remind you 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 actually 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 in our most recent Form 10-K filed 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 any accompanying press releases, certain financial metrics are presented on both a GAAP and a 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 www.energyfocus.com in the Investor Relations section. And now I'd like to turn the call over to James.

Good morning, everyone and thank you for your participation in our third quarter 2019 earnings call. Since our call, we continue to work diligently based on our relaunch plan to transform Energy Focus into a leading LED lighting company, with sustainable and strong growth. Characterized by superior product quality, impactful innovation and brand trust. During our last call, I briefly talked about the company's history and the reasons why I returned to Energy Focus as CEO and about the team and the culture we are building. During this call, I will focus on the progress we have made over the last quarter and the steps we have taken towards achieving our long-term goals as I have summarized just now. Let me start by brief highlights of our financial results. Tod Nestor, our President and CFO will go into more details with you later on the call. On the top line recorded $2.9 million in revenue which was slightly less than but close to our expectation of approximately $3 million. Revenues during the quarter were negatively impacted by the timing at the fulfillment of military sales to the Navy which had me to say we are well on our way to fulfilling during the current quarter. As we mentioned in the last call, the US Navy budget for the last two quarters of the 2019 fiscal year which ended in September were particularly constrained, mainly due to the unexpected relocations towards building the border wall. We expect a new fiscal year to return to more normal budget levels and for our navy business to start recovering from the third quarter low. In fact, as we announced in the earnings released this morning, we just received a $2.5 million exclusive contract from the US Navy to supply our nano fleet with our…

Thank you James. As James mentioned, we made substantial progress during the third quarter of 2018. I will now summarize the financial results. Third quarter sales were $2.9 million compared with last year's third quarter sales of $5.2 million and slightly down compared with second quarter of 2019 which was $3.1 million. Part of the decrease in sales from prior year was a result of the postponement of military sales in to some degree and decline in commercial sales. As James mentioned, we have already captured some of that shift in military revenue and of course that will be captured in the fourth quarter. But for now let me break down third quarter fiscal 2019 sales which declined by 2.2 million or 43.5% versus that same period in 2018. However, I do want to mention on a sequential basis comparing the third quarter to the second quarter of fiscal 2019, the sales decline was only $167,000 or 5.4%. Back to our year-over-year quarterly sales comparison, by comparing the ratio of military to commercial sales between the third quarters of 2019 at approximately 0.7 to 1 and the third quarter of 2018 at approximately 1.25 to 1, the change in this ratio from period to period is demonstrative of the relative percentage declines experienced in the third quarter of 2019 when compared to the third quarter of 2018, with military sales decreasing approximately 59% year-over-year for the quarter, and commercial sales decreasing approximately 24% year-over-year for the quarter. In addition, when evaluating sales changes due to price mix and volume causes of change on a year-over-year basis for the third quarter of 2019 versus third quarter of 2018, the results were as follows. Sales increases due to prices for new product introductions during the third quarter of 2019 contributed about $111,000…

[Operator Instructions] Our first question is from Amit Dayal, H.C. Wainwright. Please proceed with your question.

Thank you for taking my questions. Good morning, James. Good morning, Tod. Just focusing on the gross margins, so just to clarify and I apologize if I got this wrong, but are we going to be closer to the normalized levels of 25% or to the levels in the third quarter of around mid 30% going forward.

I think like what we mentioned, if you look at the quarter is probably around 23%, 24%. We continue to see room to improve from here on. I will say that 25% is the first target then we'd like to get higher close to 30% over the next quarters. And now with our long term basis as we introduce new products, we love the margin to be higher than that. I think that's our goal.

Understood. And thank you for that. And it looks like these lighting control offerings are going to be an important catalyst for next year. Just to clarify again, are you expecting to launch this at some point in the first quarter or is this more sort of a first-half type of launch timeframe?

Yes. We are expecting to launch this first quarter, delivery should happen towards the end of first quarter. So we already have initial pre-orders I would say because we haven't really formally launched it, is being UL, going through UL and sampling partners. So we would expect the first sale to be recorded in the first quarter. It might not be that material, but as we mentioned it, we have seen a lot of interest, I would say that second quarter, third quarter should -- we should definitely pick up sales for this product. But we do expect to again we are launching in the first quarter, so we do expect sales to happen in the first quarter.

Understood. And the sequential revenue improvement you are expecting in the fourth quarter from your guidance, are these coming from new customers, are these coming from or are this coming from existing customers primarily?

Yes. It's a combination of military sales improving from the low in the third quarter and also our new customers, as I mentioned a few colleges, very large colleges and also the existing commercial customers continue to order more, but I mentioned it's our strategy is in terms of increasing sales, I say it pretty straightforward, you have to have more customers and your customers have to more-- order more from you, that's very simple. So we are --we have really small number of customers before and we're adding the customers and each customer will try to sell more to each customers and again these customers could be end customers, it could be large institution. They could also be large contractors as those -- that will buy more from us. I mentioned about RedCap being specified as they sent a product. We make a press release about the patent that we were awarded on RedCap, that company to be a very big product we believe that will continue to help our sales is being specified schools, colleges and again this is only in our momentum to re-growth that business. That's the previous management didn't really optimize its potential. So we are seeing a lot of that fortuity picking as well.

Yes. So in that context, James, sort of the history of Energy Focus has been the initial growth was driven by a strong military business and then we were trying to make inroads in the commercial side. And that kind of didn't plan out the way maybe everybody was expecting. So going into 2020 and beyond, how should we look at your efforts for keeping some of the military business, as well as growing the commercial side of things? Where could we come out in by the end of say 2020 in terms of mix from these two segments?

I think you will see improvement on the military sale and as you know, it's a niche market. It's little --it's not --is the magnitude of market size is very different from between commercial and military. So but we are doing a lot of things to increase the sales in navy channel as well military bases, that's a very sizable market for us there about 800 hundred military bases that we just haven't tapped into , and we actually have just buy distributor to about 20 bases. So there's still a lot of room for growth. So we should be continuing growth on the military, maritime business but even as the -- and then we're targeting significant sales growth from the commercial side, as we all --unlike pretty extensively in the press release and just in the script, we have now four teams working on different channels. So I would say that the commercial sales will see the majority of the growth in the next few years.

Got it. And this may be the last one again on the military side, I know you kind of were probably one of the only qualified providers to that segment few years ago and then some new entrants came in. And then with the changes in the competitive landscape and relation to some of these new entrants, are you now also the only qualified provider in the military space or are there other competitors you are facing?

Yes. As I regularly mentioned in the retrofit lamp based market, we do have competitors but we believe that our quality is just so much better than the competitors. And one thing we've been doing over the past few months is to lower cost, reengineered the product and I believe that we could be more competitive in the market. Well regardless we still have about 70% of market share today. So we are not winning every opportunity in the retrofit side, but we are winning a lot. By the way and I believe that based on what we know about competitor product, I'd say that we couldn't really lose any socket because products just not very good. And for some reasons they got qualified and we compete with them and they have low price. I know that but I believe that eventually we can own the bucket with the product. And I think what we hear from the Navy ship and they really like our product. The recent order that we announced, the contract we announced is actually for new deal. The navy is building a few ships in a year and these are -- we are -- this contract is above the small globe light. Navy has specified exclusively kind of [local product]. So it also depends on which product you are talking about and if this product, for example, we are the exclusive provider.

Our next question is from Robert Smith, Center for Performance Investing. Please proceed with your question.

Good morning. Thanks for taking my question. So my keen interest is in the new product and the temperature control feature. So can you tell me about the IT protection around this, is this something exclusive to you or what's this all about it, [Indiscernible] fun but may be you can provide some more color?

Yes. Like the fun by the way.

With five or few patents as I mentioned, that's about we can say now and obviously there will be patented product. And we intent to have global patent on the technology.

Yes. But James is this something that no one else has at the present moment?

That's what we believe based on our research as the base. On patent and attorney confirmation.

Okay. So let me reference that what is the possibility of addressing this to the residential market eventually.

I am glad you mentioned that is our product enrollment. Actually it has probably more application to the residential market than the commercial market. Although, either market is quite large. But as our product enrollment and we expect to launch that product.

We will comment in future.

Yes. Later in the Q. End of Q&A

We have reached the end of the question-and-answer session. Now I will turn the call back over to James Tu for closing remarks.

Thank you again for your time, to listen to our earnings call. We look forward to talking to you again soon in March for our 2019 fourth quarter and annual earnings call. Have a good rest of the week. Thank you.

This concludes today's conference. You may disconnect your line at this time. Thank you for your participation.