Greetings, and welcome to the Energy Focus 2019 Fourth Quarter and Year-End 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] As a reminder this conference is being recorded. I would now like to turn the conference over to your host, Brett Maas with Hayden IR. Thank you. You may begin.

Thank you, operator and good morning, everyone. Joining me on the today to discuss prepared remarks is James Tu, Chairman and Chief Executive Officer; and Tod Nestor President and Chief Financial Officer at Energy Focus. Before we begin today's call, I'd like 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 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 on our most recent 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 in the accompanying press releases, certain financial metrics are presented on both a 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 www.energyfocus.com in the Investor Relations section of the site. Now I'd like to turn the call over to James. James the floor is yours.

Thanks Brett. Good morning, everyone and thank you for joining our fourth quarter and full year 2019 earnings conference call. Before I start discussing our 2019 full year and fourth quarter results, on behalf of Energy Focus staff and Board of Directors, I'd like to wish you the best in coping with the ongoing outbreak of Coronavirus or COVID-19. It's an unprecedented time for all of us and maintaining safety and health is the foundation of prosperity. Throughout this call, I will also touch upon what we are doing and what we are expecting at the moment as an organization in response to COVID-19 outbreak. As you have heard over the past few quarterly earnings call, during 2019, we spent the greater portion of the year transforming a number of key elements in our businesses, as part of a broader program to relaunch Energy Focus with superior sales and operating infrastructure that will drive innovative and competitive performances and achieve sustainable long-term growth. With less than a year into our relaunch plan significant progress has been made. And I'm encouraged by the momentum we are building and the opportunities we are pursuing in the enterprise LED lighting market that are now seeing accelerating adoption and poised to grow substantially, as LED lighting technologies extend beyond energy savings into human and in health impact. For the fourth quarter 2019, we came in right above the high-end of our revenue expectation with $3.5 million in sales, which are up 21% from $2.9 million in the third quarter of 2019. The sequential improvement was due to increased net sales in both our commercial, military and maritime business, and a lesser extent military sales that would have been recognized in Q3, but came in Q4. On the commercial side of our business, net sales…

Thank you, James. Net sales for the full year 2019 were $12.7 million compared with $18.1 million in 2018, a year-over-year decrease of 29.8%. This decrease was driven by lower sales of our military globe LED light fixture and intelligent product lines and was mostly due to a one-time large order in 2018 as well as a decrease in sales of our commercial products reflecting fluctuations in the timing, pace and size of projects in that market. 2019's full year net loss was $7.4 million or $0.60 loss per basic diluted share, compared with a full year loss of $9.1 million, or $0.76 loss per base diluted share in 2018. However, most importantly, and very relevantly, we believe it is important for investors to look closely at the steady and meaningful improvements we made from the second through fourth quarters of 2019 to reinvigorate sales, reduce costs and create a substantial platform for growth and improve financial results in the future, while mitigating the bottom line losses experienced in 2019 in total. Sales for the fourth quarter of 2019, were $3.5 million compared with 2018 fourth quarter sales of $3.1 million, an increase of 13.2% year-over-year. When compared to $2.9 million in the third quarter of 2019, sales were up 21.7% on a sequential basis. The sequential increases can be attributed primarily to traction we're gaining from the introduction of new products, an increase in our direct sales team, a shift in our sales mix, which was weighted more heavily towards to the commercial market, the timing of military sales, which had been delayed from prior quarters due to budgetary constraints with Defense Logistics Agency, and an increased value proposition, primarily from our commercial products. These increases were partially offset by decline in sales to a major Northeast Ohio Hospital…

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Amit Dayal with H.C. Wainwright. Please proceed with your question.

Thank you. Good morning, Jim. Hi, Tod. Pretty good guidance given at least in first quarter given what the market environment is looking like? What would be the mix, James roughly for this 3.6 to 3.7 for the first quarter? Is it similar to what you saw maybe in the fourth quarter you think?

Yes, I would say that probably a little bit higher on the military side, but pretty similar. Yes.

Okay. Got it.

And obviously. So I was just going to say that you can see from our military contract wins in the past few months. So obviously, we're going to see military business start picking-up throughout the year. And the commercial business obviously depends on if there are impact from COVID-19. Obviously, we were looking to have a very strong year. Now, because of the COVID-19, we have to see how that impacts our end customers.

Yes, that was what I was going to touch on, James. Specially in the context of hospitals and schools being, a core part of that commercial opportunity for you right now, what are you seeing in terms of your discussions with these types of customers? Are they pushing out some of these plans? Are they still sort of sticking to previous deployment sort of timelines?

Yes so I think if you look at that -- as I said, earlier, we started to see some not significant, some project being held up, especially from schools, the school shut down, has just started happening this week and some last week, but mostly this week. And we are starting to see some of the schools they are trying to basically scramble and see what's going on and put everything on hold and just come back. On the other hand, you can imagine that most schools during the year, it's -- outside of summer, it's hard to do lighting retrofits, because there are always students and teachers and all that. And now you might be opening up a few months of time that the facility managers can actually get to the retrofit project. So it's a little bit too early to see how, if this is actually going to help us expedite the project. We see both sides of that, we see that right away right now, some schools are putting projects on hold because they just they just want to make sure that this whole new reality they are prepared for that. On the other hand, if you're looking at this school closures lasting at this point, obviously everybody is expecting a few weeks, but it might go longer. If it goes longer obviously it opens up the facility for retrofits. So it might actually generate more near term opportunity. So I think it's a little bit too early to say. We're watching it very closely obviously. On the hospital side, obviously hospitals are going to be very busy. And I do think that hospital remains an opportunity. Some -- again, some hospital might be putting the retrofit projects on hold. Because of the active experience activities now in hospital and increasingly so. But they are still using lamps. LED actually has much longer life that can reduce the maintenance staff time to replace fluorescent. And hospital today is still very thinly penetrated by LED. By our estimate, it's just 10% to 15%. So, the LED actually can help them free up the time for maintenance staff. So I see that as an opportunity that should continue. So, the bottom line is it is probably a little bit early to tell the exact impact. Right now we have we run different scenarios we're preparing for worst case scenarios, but we are watching it literally day by day and see how things could settle down start moving again.

Right. And you had some interesting product launches planned. How is that now being sort of executed with all this going on the -- [indiscernible] was an important new product for you, maybe those things are canceled now. So your product launch plans and how are you thinking about some of those things?

Yeah, yeah, I most trade shows have been cancelled in the next few months, cancelled or postponed. So that obviously impacts how we reach out to customers. And we are still launching, by the end of this month, basically, we will start doing early sales and demos starting next week. Obviously a lot of meetings will now be virtual. But we are continuing to introduce this product, the facilities will come back and people will come back to the facilities. And I think you see the downside, which is obviously the [indiscernible] of all economic activities. You also see the upside where the facility managers now have more time to evaluate this technology. So we're going to continue our campaigns, email campaigns and marketing programs, sales outreach. That's my best stuff. The only thing I think that's impacted is the physical tradeshows that just are not happening in the next few months.

And James, I'll just -- I'll add to that we've actually placed POs to start bringing the product in so the supply chain as mentioned on our call is able to supply the new product where we see those discounts [ph].

Just one final one for me, in terms of your own manufacturing operation I mean, are you seeing people not being able to come in this work from home situation? How are you dealing with that type of equation?

One second. Could you repeat that one? I'm sorry.

Yeah, just, in terms of manufacturing and assembling at your facilities, people or employees who can't come in, how are you managing through sort of those changes in terms of your normal operations? Are people coming in right now, sort of being, people unable to come in.

So we have put in place a plan that we implemented beginning of this week. We continue to refine it as we learn new best practices. People are coming in each day. We're following CDC guideline as far as social distance. Some examples of best practices is we're taking temperatures every day and logging them to ensure that people don't have fevers. If people don't feel well, we're asking them to stay home and not return without having them tested first. So we are taking great precautions. We have ultraviolet -- for our tools, we have a vault, a UV vault, where we're sanitizing equipment. So we are doing everything possible to ensure we keep the operation going, keep people safe and listen to people. We have daily calls to go through this. I speak to the plant manager every day frequently to ensure that we're protecting our employees to the greatest extent possible and continuing the operation. So that's our current plan absent government mandates, our intentions are to continue to adopt best practices, employ them, keep our employees safe and keep the operation going.

Thank you for that, Tod. That's all I have, guys. Thank you, and good luck with navigating this environment. Appreciate it. Thank you.

Thank you.

Thank you, Amit.

Thank you. Our next question comes from line of [Indiscernible] with Jio Investing [ph]. Please proceed with your question.

Hello, guys, thanks for taking the question. I have two questions for you James, I just wanted a clarification now and earlier, I didn't hear it quite clearly. It seemed like it said maybe you might have to raise some money in 2020. I wasn't quite sure I heard that right. Maybe clarify, what are your capital needs 2020 above what you kind of have it now on your balance sheet. And if you were to raise when you have to finance growth in 2020 how would you may be looking to do that now?

Yeah, I'll answer and then Tod can add on. So our plan, we don't have a plan to raise equity capital. What we are working on now, as Tom mentioned, is to expand our credit facility which we have been working on over the past few months. Our current credit facility is pretty low against our receivables and inventory. So we believe that there's a much more capital accessible for us from the credit facility standpoint. We, as I mentioned the $2.7 million that we raised in the equity capital, give us a lot of room to maneuver this challenging time. I also emphasize that as I said in the earnings script that we stay on top of what's going on. And if we see dramatic changes around the sales patterns and forecasts, we will have to make some operating expenses adjustment as well. So just staying on top of what's going on. And we'll make sure that we take action in a timely manner. Tod?

Yeah. I'll add on to that, I think, to build on what James said we're -- that metric of capacity, we're making great efforts to increase that. So it isn't really raising capital per se, it's increasing our access to capital. And then to build on his points about the other source of capital is what we view and how we operate the business, and James and I and the team are working very much on contingency planning given this Corona virus and specific action plans and different ways or how it might impact our business and different actions that we will take.

Okay, great. And before I my next question, I guess I know you can't give guidance, but if you -- could you give us an idea, like where your breakeven revenue point might be, the level might be with the new equity [ph] cost structuring.

Yeah, obviously, March as we know, it's a dynamic question, right. What we expect the sales to be and we feel that the upgrading infrastructure to meet that demand of growth which again before COVID-19 we have pretty aggressive growth plan. You've already seen that we are really taking the lead on military side and we'd like to do that in the commercial side this year, especially with the new family of product launch. So, I would say that if you look at our current overhead, you're probably going to be looking at say anywhere between $7 million to $8 million on quarterly basis for profitability. On the other hand, if we see that we are not getting there very quickly, we will have to adjust our offerings. Right? So it's a dynamic situation. But if we can see that we have pretty aggressive growth plans and obviously, this COVID-19 is a --throws a monkey wrench. So we need to be dynamic. Our plan is not to raise equity capital in 2020.

And my last question then, based on the competitive landscape, I know there's been a lot of changes in the current landscape during the last five, six years and it kind of hurts you then you kind of may lose your advantage now. Are you -- do you see this COVID and even that situation continue to affect the landscape maybe naturally to your favor potentially, the direct competitors and they will also what does it mean for some of your distribution channel distributors being able to continue to function orderly?

Yes. The obviously the lighting industry landscape is changing very fast. As we've always positioned as a high quality, LED lighting, innovator. Again this whole new family of EnFocus is another breakthrough from our point of view. So I believe that the overall market has been settling down. There are always people that will go for commodity products, but there are always institutions that want higher quality product. And the most important thing I think, right now happening over the coming years, quarters and years is, is this expansion of the benefits of LED lighting on our facilities and I would say that -- I would argue that for the first decade since 2010, when commerce have a [ph] delay, but it'll happen, it's always been focusing on energy savings. And I think what we're going to see going forward is these non-energy benefits where like EnFocus to give people more convenience, comfort for dimming, auto tuning, circadian rhythm, type of capabilities that impact the human performances. And then you can expand in focus into a more broader building IoT platform that could include occupancy sensing, traffic monitoring and things like that, you're going start seeing that. Really, that's the exciting next chapter in LED lighting and we are positioned to tap into that market as it started to emerge. So again, despite of the COVID-19 situation, we are pushing for EnFocus lounge, and we believe that it will unlock a pretty large market and which is why we have a very growth plan internally. I don't know if that answer all your question, but it's a pretty complex landscape and we are positioning ourselves as the next generation lead there, from foundry, from lighting to lighting technology. I think that's probably combined with what's going on.

Thanks a lot, that was great. What I was really also want to know, too that we use visual to basically build a strong company over the last, [indiscernible] in there and you put yourself in a stronger position to compete. Do you foresee some weaker competitors, maybe not being able to defeat right now our leading position because the disruption the COVID-19 is going through?

Yes, I think that's the that's the point, I think. I think if you look at the lighting landscape the COVID-19 impact my last multiple months and obviously, I would say that the companies that focus more on new construction probably will take the first hit right because all these activities will be put on hold and the economic activities will recover slowly, right, gradually. I don't think it's going to happen suddenly. So and they are all obviously -- they're all different kind of hypothesis now, it might take 12 to 18 months for effective testing to come out and to really start putting this virus back. So if that's the case, then you're looking at pretty prolonged economic softness. And I think that will impact of new construction business a lot more than the retrofit side. On the retrofit side obviously people will still being impacted, right. But if you look at our current focus, which is the government, military, schools, or hospitals, for the most part, they should not be impacted, right, because they're functional and your budget, and all that. So our hope is not -- our end market is not obviously in the next few weeks, I think they will settle down, but we hope that our end customers continue to need lightning and they might take this as an opportunity to actually upgrade their facilities. That's our hope and that's what we're looking right now. So we're probably less impacted by other lighting companies that really address a commercial property market, new construction market, which is never our focus so far. That is our current assessment.

So and in terms of I know previously, you would rely heavily on distributors, to help you push your customers, and then you I guess, change the thrust, trying to get more of a direct kind of line to customers. Now, I think back to doing a little bit of both now. In terms of your distributors, and how much of -- a little bit of the disruption there in terms of their ability to go out there and maybe to get new accounts for you. And I guess that's another question.

I think Energy Focus, when I was with Energy Focus distributor was never a focus for the company, the previous management did put a lot of focus on that, and that didn't really work out. And when I came back last year, we really start focusing on going back to the end customer engagements, the end customers and the customers are not just the end users, right? A lot of the contracting panels, the ESCO, energy service companies, we love to work with them, because they have the project, they don't really sort of guaranteeing the performance of the project. So as long as we can be more price competitive, we -- there's no reason why our better quality products are not welcome. And that's the size of the company today. We're just scratching the surface of this whole bucket. The good thing is that as I mentioned earlier, the industry commoditization has finally been settling down. And I think there's going to be organizations, that want better quality product. And our goal over pretty much the same, as be more competitive pricing and which we have been doing. And this launch of EnFocus is another step up of our technology platform that can be pretty unique in the marketplace. And that's when I think some of the distributors might want to distribute this product. And we won't stop people distributing our products, right? We have clear pricing discipline. And some distributors are willing to distribute this product and see the uniqueness of it. And then we don't mind working with distributors. But the key is that we want to protect every step of our customers. They were busy protecting by the value that they are buying from us, right? Other than that, it's about pretty much how you buy your iPhone, where you can buy online, you can buy a distributor wholesaler. I mean, it's everywhere. But there are pricing disciplines based on how much volume you buy. In the end of the day, the end customer education is critical. That's what the distributors have not been able to do. And I have no idea, if they're going to be able to do this. But technologically we will always help. We are open for business to work with all channels. Our focus right now is still getting to the schools, the hospitals, government agency, and those lighting contractors, those are our bread and butter.

Great. Thank you, James. I have no more questions. Good luck.

Thanks again.

Thank you. [Operator Instructions] Our next question comes from line of Edward Gilmore with Little Grapevine. Please proceed with your question.

Hey, James, thanks for taking my call today. I have four questions quickly if I can. So are you planning to decrease your operating cash burn even further than the $464,000 or so from the previous quarter?

$460,000, yeah, so that was largely due -- that was our operating cash from operations. And as I mentioned, that was largely a function of our working capital management. So I would call that a bit of an anomaly for the quarter. It will be a function of our ability to reduce the loss from operations and working capital management. As we mentioned, we will be reinvesting in some inventory. So I wouldn't look for that number to go down in the near term. As we mentioned, we are investing back in inventory on the new product and to rebuild and replenish some popular products? So I wouldn't count on that going down at this point.

Okay, thank you. And then the next question is actually on inventory, can you give a sense of what is an optimal inventory level for you to have? And then also what was the sell through for Q4 versus Q3?

So we optimized -- I would kind of put that in layers. We have a long lead time on our supply chain. We import a lot of components and finished goods from foreign countries. We do have some come from the U.S. but a lot also comes from outside the U.S. I would say the majority comes from outside the U.S. So we have a long lead time because it comes mostly on ocean freight. So it's ocean cargo primarily. So that has a long transportation time and then we also we have to pay for it once it's put on the carriers [ph]. So it's on our books effectively when it hits the docks overseas. So we have a longer lead time than most. And then we have components where we have to have them on, basically stored [ph] or one built for the military. We primarily only build products for military customers. There are some products we build for commercial customers but most commercial products come in finished. So for commercial products that will turn more quickly. We will tend to only order products that we have high probability of sale for. So if you look at the commercial products, we will probably have a supply on that that will optimally target let's say no more than trying to have some safety supply, we'll have, let's say 90 to 120 days. On the military side, it will be longer because we'll have components. Right now, our total inventory is higher, because we're still whittling down excess inventory that James and I inherited. We do still have some of that on hand. So I would say in general, we expect it to still come down. And we will finalize that. We're still working on that with EnFocus coming in. But I do expect based on what we've seen of interest that products return pretty quickly, based on the interest we've seen very quickly, I think.

Thank you. That's helpful. Just two more quick questions, but next on the pipeline, it seems like there's a cadence to onetime large orders and you guys seem to do a good job with that. And I'm just curious is that just happening ad hoc, or is there a pipeline of these kind of larger orders that you think have a reasonable chance to close over the next 12 months?

I think, so if you look at the main sales today, there are still some customers that account for big part of it. As an example military is still a significant part of our business the U.S.A. So, so you're going to continue to have those larger customers probably, I would say, four or five of them that exert some significant impact on a particular quarter. And obviously our goal over the past pretty much six months while we are rebuilding the sales force and all that is to diversify and get more new customer which we have been, you look at the number of university we're getting now, the school districts and obviously that those are obviously being diversified. I would say that you have to be until we get to say, double where we are on the revenue, because the much less quality fluctuations by these large opportunities. I also want to mention again, that we have not seen large uptick. We have not lost opportunity for this way, right. So I think that risk now is projects being put on hold.

Okay, good. Thank you. And James, just one last question, that we have spoken before on the e-com site. Can you just comment on how the e commerce sales are going and then I'm just curious, is there any increase though through from e-com, like in this month of March because of the Coronavirus?

We haven't really, we've been working on the e commerce platform. We haven't formally launched it yet. We are planning to launch that in the early part of next quarter which is second quarter. We are -- I do think that could become a more increasingly significant channel for us, especially as EnFocus launch. But I wouldn't -- because just because the nature of our business is B2B. I think it's a very effective it should be a very effective channel for small orders for large orders people still prefer obviously people contact. The human touch is very important just because the large orders usually are involved with projects that are a little more complex. The e-commerce is great for small orders or low to medium sized business that are doing it on an ad hoc basis or retrofit uses. And that's how we are positioning it. So we obviously we’ll have news to share once we formally launch that in the early part of second quarter.

Okay, thanks for the update and thanks for taking the call today.

Thanks, Ed.

Thank you. At this time I'd like to turn the floor back over to Mr. Tu for any final comments.

Thank you again for your time to listen to our conference call. We look forward to updating with you more progress in the coming quarter. Have a good day.

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