Energy Focus, Inc. (EFOI) Q3 2019 Earnings Report, Transcript and Summary

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 explosion-proof LED globe light. We look forward to more such wins as we continue to strive to be Navy's most trusted LED partner as we have always been since 2007 when we installed our first LED light in the US navy ship. The drop in sales from the same period last year of about $2.2 million resulting primarily from a drop in sales to our largest customer and military business into a large commercial company. It is relevant to note that the agency distribution models at the previous management implemented and that we no longer rely upon contributed basically zero sales to this over the last third quarter period. All of our current significant customers were acquired before 2017, when the previous management took over. Therefore in essence the year-over-year sales drop was caused by lack of new customers, couple with volatile sales parameter to a smaller list of significant existing customers. This conclusion gives a confidence that our reinitiated customer centric sales and R&D strategy that the company has before 2017 was and will continue to be a key factor in retaining all loyal customers. As we revert back to our unique strategy within the lighting industry of educating and selling directly to our customers, we are confident that we can grow strong relationships again, especially as Energy Focus is now more than ever the most reliable innovative LED light company today for the LED lighting retrofit market. Growth profit for the quarter increased to 35.3% of sales compared with 24.8% from last year's third quarter and minus 3% from the last quarter. The large swing in the margin quarter-to- quarter was mainly due to changes in the inventory reserves which Tod will provide details later. Without counting for inventory reserves in the period, gross margin improved to 23.6% % in the third quarter of 2019, up from 21.6% in the third quarter of 2018. We believe that as we continue to consolidate our supply chain and launch different differentiated products, barring potential one-time inventory clearance events margins should continue to improve in the quarters ahead. Net loss for the quarter was $0.9 million or $0.08per share, compared with the net loss of $1.9 million or $0.16 per share in a year ago quarter and $2.2 million or $0.18 per share in the second quarter of 2019. The improvement on bottom line was largely the result of gross margin improvement as well as our continuing cost control efforts. Now I will share some of other operational highlights, as well as the progress was made during the quarter. As I mentioned in our last earnings calls, we set out four goals for our relaunch and transformation plan initiated in April this year. Our first goal is to achieve and maintain streamline, sustainable and agile operation. Q3 operating expenses were the lowest from Q2 and were about 40% lower than the same period in 2018, as well as the first quarter of 2019 before our restructuring. As part of our reorganization in the second quarter, we reduced debt by about 30%. During the third quarter, we continue to execute on a tight budget and streamline our processes to weed out redundancies and waste. We did start hiring again during the quarter and will continue to expand our staff as we start focused on growing the company. But we remain committed to manage our cost in every way we can. Meanwhile as I mentioned earlier, we also continue to consolidate and strengthen our supply chain by paying better buying power and lower our future product cost which we expect will start reflecting our higher gross margins as we write down our current inventory. Our second goal is winning business by effectively and constantly enlightening and educating our customers. Since April, when we reoriented our sales approach from relying on alpha agents to focusing on directly learning and educating our customers, we have to rebuild our salesforce literally from scratch. During the quarter first and foremost as we expanded our sales organization, we reorganized it into four business operations, each led by an experienced and highly motivated sales leader and each dedicated to a particular sales channel. They are first military and maritime which focused on Navy's military bases and commercial marine high market. Take it commercial strategic attack which focuses on large national and regional government and commercial company. Third, channel partnership which focuses on leveraging the nationwide customer networks of our channel partners in various industries such as manufacturing, commercial properties and utility. And fourth, SME which is focused --which focused on reaching out to small and medium sized enterprise customers directly by our inside sales team, as well as a new e-commerce platform to be launched shortly. We are aggressively building up all these four teams so we can bring our quality and differentiate the product. So as many market channels and enterprise customers as possible. While these teams each pursue different channels, they all adhere t our company's mission is to enlighten and inspire our customers with the highest level of human touch, service and education so that customers are armed with knowledge and confidence to choose the most effective product from Energy Focus. So in addition to having our expanded and realized sales team in place, we also hired a new director of training to expand our training curriculum and operation for all our stakeholders, including employees, customers and contracting and channel partners. We also recruited an experienced VP of Product Management to oversee the processing product line that we are developing and introducing to the market. Working with our PR agency, PGI, we also have started publishing white papers, case study and have had articles appear in targeted verticals that clearly outline the benefits of our products and solutions. In addition, our sales teams have expanded our presence in targeted industry conferences which has resulted in increased exposure, and some very exciting things. We encourage you to follow our expanding publications events and activities on our website or social media platforms. Meanwhile on the new business front in addition to more school district and hospital, we recently added a few large institutions as our customers, including Penn State University, Michigan State University and Vanderbilt University since we just completely restructuring our salesforce over the past few months, the speed with which we brought in these new marquee customers is particularly encouraging because it shows that the lead times for us to acquire new customers in now much --is now much shorter than ever, even just a few years ago. This is not only because organizations are now ready to a stop LED lighting, but also perhaps more importantly because Energy Focus now spends along in industry as one of the very few high quality LED lighting brand, with a proven product reliability history. And a long list of positive and favorable customer references. Our third goal is to develop impactful and differentiated products and solutions based on LED lighting technology. Energy Focus position as the premier LED light brand, a key to our sustainable growth in the years to come in addition to the successful business development is being able to continually distance ourselves from the commoditized landscape through impactful product innovation and differentiation. I'm really happy and excited to let you know that we have made tremendous progress in this area in the past quarter. As many of you might know in addition to being the leading LED light supplier to the US Navy ever since introducing the industry's first type D LED tube to replace for [Indiscernible] in 2010. Energy Focus has been on the forefront of invention and innovation for LED lighting, particularly in the commercial retrofit market. We pioneered a flicker-free bender with UL and VCAN, the first UL certified low flicker manufacturer in 2019. Then in 2016, we introduced our patented data battery, integrated LED 2, for record, and eliminate, not eliminate the needs of several emergency back up battery. We believe that our next major product introduction, a high quality and simple lighting control solution build upon our patented control platform and LED lamp will be the most disruptive technology we have ever introduced. And will further differentiate us from others in the global lighting market. This new technology will be available during the first quarter of 2020. As we mentioned in the previous press release, this whole new product family built upon our new control platform will enable existing buildings to provide dimmable and dimmable LED lighting in a fraction of the cost of any other control technology on the market today, particularly for the retrofit market. The new product for which we file several provisional patents will replace existing wall switches and fluorescent or tabular LEDs with our control package that includes switches and LED lamps that are dimmable and color durable, without requiring additional wiring and the electrical labor. In the past for most retrofit projects this option has been far outreach confines to incorporate such control capabilities. But now things that controls are applied through the power line. There won't be cybersecurity issues which are used by wireless communication. An important consideration for organizations with mission-critical facilities such as government, military, healthcare and higher ed, this new lighting system with an upgraded option that also provides a defense strategy will also maintain high power quality, as well as a phase flicker free throughout the theming and current dimming ranges. Over the past few months, we started introducing this family of products to some of our larger strategic town. And also showcases in several recent trade shows. I'm happy to report the initial reception to it has been overwhelmingly positive and we believe there will be significant demand for it in our key target market. Many educational vertical where it is particularly impactful to classroom, healthcare facilities including hospital patients room and nursing homes, as well as government in other commercial and industrial purposes. In particular, the sign of circadian Rhythm which is a natural biological process that regulates the sleep/wake cycle throughout the day has long been selling different light color temperatures to induce different mood, mental ability, and melatonin levels that are crucial to human performance and health. As I mentioned, the Polomex will mass adoption for such human venture lending technology and so far been the prohibitive cost required for rewiring for the control system, as well as a special the lighting fiction especially for retrofit applications. With our new product family, everyone can start experiencing higher level of productivity and quality of life at the appropriate color human level, and color temperatures. As an example, hospital patients may be able to recover faster with higher color temperatures and higher light output during the day, while achieving better sleep quality with lower temperature, low lighting set at lower color temperatures and lower lumen output before resting. We believe the human benefit this product family will create for our customers are going to be impressive and far outweigh the [Indiscernible]. As I mentioned, we expect to launch this product family during the first quarter of 2020. In addition to ramping up our internal sales organization, we have entering to discussions with several large national lighting as well as non lighting channel partner to market and distribute these products. And we also expect to recall our first sales by the end of first quarter of 2020 based upon the strong pre-order interest and demand we have already generated. Our fourth transformational goal is building the most talented and passionate work force in LED lighting energy. As I stated earlier, after the initial restructuring, we start expanding our staff again to position a company for strong and sustainable growth. During the quarter, we recruited several outstanding leaders and business development managers whom we believe we'll continue to strengthen our culture and accountability, trust, extraordinariness, firm openness and integrity, as well as center of excellence. We will continue to apply rigorous hiring as well as continuous education practice to ensure we are building the most capable workforce in LED lighting industry to execute our growth plan. Last but not least as the company continues to invest in expanding our organization and therefore experiencing other loss at the moment we believe would be additional capital to continue our initiatives. Our set of straight equity issuance which we'll try to avoid before our stocks start to reflect anywhere close to the company's real value and potential. We do have other alternatives to fund the gap in cash flows including selling our excess inventory, expanding our credit facility, growing our sales to reduce our loss and issue that available to us. We are confident that we will be able to fund operations in the next few months before we reach further specific milestones that create clear and substantial values for the company. And Tod we'll go into further details later. For as for near-term business outlook, as we mentioned in earnings release at this point, we expect fourth-quarter sales to be the in range of $3.1 million to $3.4 million representing 7% to 70% growth from the third quarter. We do caution you that as you are aware of because we have literally small number of large accounts at this point that drives the majority of our sales. Our quarterly sales are highly subject to the timing of orders and deliveries to leave the cap. That said as part of our transformation plan, as we -- we as new management team would like to be a transparent as forthcoming and as timely as we can in our communication with shareholders, as well as all stakeholders. Energy Focus has long, strong and sustainable trust of the institutions with mission-critical facility by being open and by being delivering exceptional values. This philosophy applied to our customers and we believe it will apply to our investors as well. In summary now with our much more economized and strengthened organizational processes, energized and focused sales team and breaks those control lighting products to be launch shortly, the company's ongoing transformation is well underway. I believe we are now positioned to achieve incrementally stronger and no return sustainable growth from the fourth quarter now. With that I will turn the call to Tod to review our financial performances during the quarter. Tod?

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 or a 5% sales increase. In addition, the impact of prices on products sold only in the third quarter of 2019 that were not sold in the third quarter of 2018 increased sales by approximately $585,000 or 26% year-over-year. Finally, for those products offered during both the third quarter of 2019 and 2018, true price increases had very little impact on sales only increasing sales by about $22,000 or 1% for the quarter. From a mixed perspective, items sold in both third quarter of 2019 in a third quarter of 2018, sales declined approximately $186,000 or 8%. In addition, mixed was also impacted by items that were sold during the third quarter of 2018 but not sold during the third quarter of 2019, decreasing sales on a year-over-year basis by about $611,000 or 27%. Finally from a volume perspective, for items sold during the third quarter of 2019 and the third quarter of 2018, the impacts on sales was a decline of $1.7 million or 77%, mostly from the military area. Finally, the impact of the volume on those items sold in 2018 third quarter not sold in the third quarter of 2019 lowered sales by $440,000 or 20%. Reported gross profit for quarter three, 2019 was $1 million with gross profit margins improving to 35.3% compared with gross profit in the third quarter of 2018 of $1.3 million or 24.8% gross profit margins. And second quarter of 2019 of $109,000 at negative 3.5%. Third quarter 2019 gross profit included impacts from changes and the excess and obsolete reserves, which included a $394,000 decrease and the excess and obsolete reserves that improve gross profit margins by 13.5 percentage points. Conversely, increases in the excess and obsolete reserves adversely impacted the second quarter of 2019 and the third quarter of 2018 gross profit margins by 14.7% and 3.2% of net sales respectively. The increase in gross profit in the third quarter of 2019 from the second quarter of 2018 resulted mainly from favorable changes in inventory reserves in the third quarter. In addition to some incremental gross margin improvement from lower material cost and reduced warranty and repairs in the third quarter of 2019. If you normalize margins for the three quarters and adjust for the reserve movements previously described which should have less movement going forward, the normalized margins for the third quarter of 2019 would be approximately 23.6% as James mentioned. For the third quarter of 2018, the normalized margins would be approximately 22.5% and finally for the second quarter of 2019 the normalized margins would be approximately 23.4%. We expect gross margins to remain steadier and gradually improve as we continue to make improvements to our supply chain and launch new products barring any potential one-time unexpected inventory write-down event. As James mentioned in his discussion, we continue to focus on maintaining streamline, sustainable and agile operations. As a results of these efforts, third quarter 2019 operating expenses were significantly reduced by $1.3 million or 45% to $1.9 million compared with $3.2 million in the year ago quarter. And $2.2 million in the second quarter of 2019. Contributing to the decline were reductions in salaries and benefits related to the closure of our San Jose and Taiwan offices this past April in May, totaling approximately $325,000. Another $290,000 related to reduced severance cost and $210,000 related to staff reductions plus $190,000 related to reduced stock based compensation. So when sequentially compared with the second quarter of 2019, operating expenses decreased by $180,000. Loss from operations during the third quarter of 2019 was $833,000, an improvement of $1.1 million from the third quarter of 2018 when it was a $1.1 million loss. And a $1.3 million improvement compared to the last quarter when we reported a $2.1 million operating loss. Net loss for the third quarter of 2019 improved to $946,000 or $0.08 per share, compared with the loss of $1.9 million or $0.16 per share in a year ago third quarter. And net losses of $2.2 million or $0.18 per share in the second quarter of 2019. On a year-to-date basis for the nine months in 2019, net sales were $9.2 million compared with $15 million in the year ago nine-month period. Loss from operations was $5.8 million in 2019, compared with an operating loss of $6.1 million in 2018 and net loss was $6.1 million or $0.49 per share in 2019 compared with a net loss of $6.1 million or $0.51 per share in the year ago nine-month period. As you can see, we've worked very hard to mitigate the losses despite the decline in sales and are working even harder to rebuild the sales going forward as James mentioned previously. Now turning to the balance sheet. As I mentioned to you on a previous call, we are very focused on keeping cash balances low since we view cash as negative debt. We believe it is most important that Energy Focus placed importance on its debt capacity and ability to access cash rather than maintain a lot of unused cash on its balance sheet. Having said all of this, as of September 30th, 2019, we had $634,000 of cash and cash equivalents on our balance sheet with approximately $1,323,000 in credit line borrowings and our $1.7 million of convertible notes. For total net debt as of September 30th, 2019, $2,389,000. This compares to net debt of approximately $1.145 million on June 30th, 2019. With the increase in net debt pretty much reflecting our operating cash burn of approximately $1.2 million for the third quarter. Accounts receivable were $1.8 million at the end of the third quarter 2019 versus $2.2 million at the end of the fourth quarter of 2018, a $400,000 decline reflecting the decline in sales, as well as a continued effective accounts receivable collections. Inventory balances declined to $7.4 million as of September 30th, 2019 compared to $8.1 million at the end of the fourth quarter, reflecting the gradual depletion to meet existing sales of the excess inventory on hand and a lack of need to purchase new inventory for a period of time due to the existing high levels of inventory. However, please note that as Energy Focus launches new products and depletes popular product inventory, the company will begin purchasing more inventory during late fourth quarter of 2019 and then the first quarter of 2020. Accounts payable declined significantly to $1.2 million as of September 30th from $3.6 million as of December 31st, 2018, which reflects the large buildup in inventory done by the prior manager team during fiscal 2018 and the subsequent need to pay those vendors during the first nine months of 2019. As well as the lack of need to purchase additional new inventory at this time therefore not incurring additional vendor credit. Most other significant balance sheet changes from period to period you see on our earnings releases are because of our adoption and the new standard for lease accounting. James mentioned earlier that we believe there is value in our strategic plans and ability to generate future free cash flow that are yet to be reflected in Energy Focus' stock price. While we explore all types of financing that makes sense for the business, at this time we are most focused on exploring more traditional bridge financing to fund our growth and the company's interim needs while the stock price has an opportunity to better reflect what we believe is more accurate and fair price of the intrinsic value of our stock. Not only will we explore traditional financing approaches such as expanding our credit facility, issuing debt is available to us but in addition we've also explore every possible operation opportunity generate additional cash flow to fund the business such as using our access to inventory effectively and efficiently, increasing sales to reduce our losses and create profits et cetera. We are optimistic that we would be successful in finding our operations in the next few months as we reach our anticipated milestones that we expect to enhance the value of our company. And lastly, I wanted to update you on tariffs. Tariffs continue to be manageable for Energy Focus with no material impact on our business. We are working with our vendors on price reductions to mitigate the need to increase prices and are also evaluating alternative sourcing locations and sources as necessary. Currently, we have no need to pass along the minimum level of tariffs. We have incurred from the products we source out of China at this time, but we'll continue to monitor the situation and we'll respond accordingly. Also given the very low failure rates of our tubes, we continue to be able to offer our 10 year and five year warranties and we can financially afford to continue offering the significant benefit to our customers. With that we would like to open up the call to questions.

[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.