Energy Focus, Inc. (EFOI) Q4 2019 Earnings Report, Transcript and Summary

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 were $2 million, up 18% sequentially from $1.7 million in the third quarter of 2019. This increase was due primarily to new sales to several colleges and K-12 district where our proven retrofit [ph] 10-year warranty solutions are clear differentiators. As we repositioned ourselves focus on serving end users and contracting partners, we increase sales of our RedCap emergency backup product, which has been adopted as the standard emergency lighting solution by a leading national energy service company. Sales of our Fluorescent T5 replacement LED tube products which are now in the early stage of being rolled out by a premium national retailer chain with more than 800 stores also started to pick up. Our military business also started to grow again during the fourth quarter of 2019. Since our corporate relaunch in April 2019 we have been focusing on enhancing our overall competitiveness in the Navy business, by strengthening our engineering design, improving supply chain efficiency and lowering production costs. The result is simple and powerful. We started winning more contracts. As we stated in the earnings release, we received over $7.6 million of new contract from the U.S. Navy and a foreign allied navy over the past six months, which represents our highest order rate for our military and maritime business since 2016, and which demonstrates our strengthening leadership and competitiveness in the navy ecosystem. Since 2007 Energy Focus has always been a trusted LED lighting [ph] suppliers to the U.S. Navy and the Navy's shipbuilding defense contractors. As the market continued to evolve over the past two years we did not [ph]. Now we are confident that Energy Focus is back on track to be an all-around leader to supply U.S. and allied navies advance LED lighting system, and we are excited about the continuing recovery and renewed growth in our military business. Overall on business development, we continue to execute our strategy of providing high quality and most trusted LED lighting products in the marketplace. And we continue to expand our sales team internally through adding new regional sales managers and externally through new end customers and contracting distribution partners. Meanwhile, we've also been expanding our brand outreach with increasing media exposure through industry publications, to showcase our industry expertise and leadership and educate our target customers about the value and importance of sustainable LED lighting. Another exciting and expanding area of Energy Focus during the quarter is our R&D operation. As a premier LED lighting brand, one of the key to our sustainable growth is distancing ourselves from the commoditized landscape of light. Energy Focus has always been focused on developing high quality, high value added and customer centric LED lighting products and solutions that differentiate us from the competition. As we mentioned in the last earnings call, we're very excited about our upcoming wireline streaming and quality control product portfolio that we plan to launch by the end of this month and start to deliver later in Q2. Over the past few months, we continue to strengthen our product designs and expand our patent portfolio surrounding this control platform, which we call EnFocus. And our initial pilot installations continue to generate very positive feedback from customers. You can replace existing wall switch and fluorescent vertical LED with our control package, that include switches and LED lamp without requiring additional wiring and electrical operator. We have filed several provisional patents around EnFocus, which is slated to be launched by the end of this month with first product expected by the second, end of second quarter. As we mentioned previously, we believe Energy -- EnFocus will be the most disruptive technology we have ever introduced and will further differentiate us from the competition by bringing to end users significant human health, safety and productivity benefits. The responses we have been getting from our large strategic account that we have showcased to have been overwhelmingly positive, indicating significant demand across multiple verticals, including the educational space, whereas the installations can be important to classrooms and healthcare facilities, government and other commercial industrial businesses. In the meantime, we continue to make significant improvements to our supply chain, consolidating it where appropriate and focusing on developing and launching differentiated products to stay away from commoditized market that could lead to excessive inventory buildup and cause quarter-to-quarter swings in our gross margin due to inventory reserve accounting. Although we believe that gross margin dollars mean a lot more to us than gross margin percentage at this point, and our overhead is significant, our goal is to achieve and maintain gross margins in the 25% to 30% range over the long-term through continuing optimization of our product design, and supply chain network, as well as introducing new higher margin product such as those from the EnFocus family. Moving on to our operating expenses, the key initiative in our relaunch program is the streamlining of our operations with a focus on reducing our delivery and overhead costs. As you might recall, we took drastic measures in the second and third quarter last year to eliminate operational redundancies and inefficiency and to implement rigorous spending approval processes. As a result, we've reduced our expenses by nearly 30% from the first quarter to the second quarter and another 9% from the second quarter to third quarter of 2019, by cleaning up and clearing out some of the noise and excess in our infrastructure we are now better able to identify the resources needed for higher functioning higher performance organization. In the third quarter, we started opening hiring for specific needs and positions that will drive growth, most notably engineering and sales spend and other key financial and operational positions that will support our growth. As a result our operating expenses increased 14% sequentially to $2.1 million for the fourth quarter of 2019. However this remains significantly lower than a year ago when operating expenses was $3 million for the fourth quarter of 2018 and lower net sales. As a result, we narrowed our year-over-year loss from operations by 60% from $3 million in the fourth quarter of 2018 to $1.2 million in the fourth quarter of 2019. We now filled most of non-sales positions and looking ahead we only expect continuing and mostly hiring our sales related staff that could further boost our sales. And our operating loss should shrink from here as we grow our sales in the coming quarters. Obviously, we are actively following the development of the COVID-19 outbreak and will make further cost adjustments as timely as possible to balance our growth initiative with the need to preserve our capital. Last but not least, earlier in the first quarter of 2020 we issue approximately 3.4 million shares of common stock in a direct offering priced at the market for gross proceeds of approximately $2.75 million. We also issued an equal number of warrants that could be exercised in the future at $0.67 per share to provide additional capital in future when our stock price rises above that level. The equity capital proved to be a timely support of our balance sheet, to prepare us to meet with the challenges and impact we might experience from COVID-19 in the coming months. Regarding our first quarter of 2020, as we stated in the press release we expect net sales to be in the range of $3.6 million to $3.7 million, representing a 13% to 16% growth over the first quarter of 2019. As a reminder at this point of time, our business is comprised of readily more number of large accounts that drive the majority of our sales and the ongoing coronavirus outbreak could still impact our remaining part of the first quarter. Before closing my remarks, I like to summarize our perspective on the ongoing COVID-19 pandemic which clearly poses unprecedented uncertainty for the global economy and business. Although our military sales have not been impacted yet, we have started seeing commercial projects being put on hold as well as minor supply chain disruption caused by the pandemic. We have been diversifying our supply chain sources over the past nine months, so we are not totally subject to any particular country's supply chain bottleneck. Nonetheless it is challenging for us to foresee how the pandemic will impact our business over the ensuing six to twelve months until the virus clearly is under control and economic activities resume close to normal. What we will do is to stay extremely vigilant on the development of the pandemic and as I mentioned we stand ready to adjust and scale our operations in a dynamic and timely manner to ensure that the business can be run and expended sustainably. With that I'll turn the call to talk to Tod to review our financial performance during the quarter. Tod?

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 System. From a mix perspective, in the fourth quarter military sales were $1.5 million, representing approximately 42.5% of total sales for the fourth quarter of 2019, compared to $1.9 million or 61% of total sales for the fourth quarter of 2018 and $1.2 million or 40.5% of total sales for the third quarter of 2019. The sequential increase in the percentage mix of military sale as a percentage of our total sales quarter-on-quarter is primarily due to the timing of military sale, which has been delayed in the third quarter due to budgetary constraints at the DLA. The year-over-year decrease was driven primarily by reduced sales to one large distributor to the navy. Sales to commercial customers were $2 million, representing approximately 57.5% of total sales for the fourth quarter of 2019 compared to $1.2 million, or 38.3% of total sales for the fourth quarter of 2018 and $1.7 million or 59% of total sales for the third quarter of 2019. The increase in dollar sales was mainly due to new sales to several school districts and colleges as well as increases in sales of our RedCap product. Gross profit for the fourth quarter of 2019 was $950,000 compared with $19,000 in year ago quarter, a significant increase mainly driven by unfavorable access and obsolete and related reserve adjustments in the fourth quarter of 2018 of $590,000. On a sequential basis, gross profit was roughly flat compared to $1 million in the third quarter of 2019. As a percentage of revenue gross profit margin was 27.1% in the fourth quarter of 2019, compared to 0.6% in the fourth quarter of 2018 and 35.3% in the third quarter of 2019. However, when adjusting gross profit margins for excess and obsolete and related reserves, our actual gross profit margins become 29.3% for the fourth quarter of 2019, compared to 18.2% in the fourth quarter of 2018, and 23.6% in the fourth -- the third quarter of 2019. The sequential decrease in gross profit margin was a result of fluctuations in our excess and obsolete reserves which we experienced from quarter-to-quarter. Moving forward, we expect our normalized gross margins to be in the mid-20s in the near term and begin to approach the low-30% range as we introduce new products and make further improvements to our supply chain. However, depending on the sales mix and inventory valuations, we may see some fluctuations from quarter-to-quarter. Operating expenses in the fourth quarter of 2019 were $2.1 million compared to $3 million in the year ago quarter, a decrease of $865,000 or 29% year-over-year, which is driven by both lower product development and selling general and administrative expenses and the inclusion of restructuring expenses in the fourth quarter of 2018. Taking those one by one, product development expenses decreased by 408,000 year-over-year to $249,000 in the fourth quarter of 2019, as a result of lower salaries and related benefits, driven by a lower headcount, which resulted from office closures in San Jose and Taiwan in the first half of 2019, and lower outside testing fees. SG&A expense decreased 15% to $1.9 million in the fourth quarter of 2019, compared to $2.2 million in the year ago quarter. The decrease was a direct result of our directed efforts to streamline our operations and create an agile infrastructure to support sustainable long-term growth. Key drivers of the decrease were lower salaries, including stock-based compensation and related benefits, and lower headcount resulting from office closures in San Jose in Taiwan in the first half of 2019, which were partially offset by an increase in recruitment and legal costs. Sequentially operating expenses increased 14.3% compared to $1.9 million in the third quarter of 2019. This increase was primarily driven by an increase in salaries and related benefits and increased legal and recruitment costs. As James said, most of the new headcount we added in the fourth quarter of 2019 were related to sales driven activities and we consider all hires made as an investment in our future growth. Loss from operations during the fourth quarter of 2019 was $1.2 million an improvement of $1.8 million compared to a loss from operations of $3 million in the fourth quarter of 2018. Sequentially this compares to a loss of operations of $833,000 in the third quarter of 2019. The sequential increase in the loss was due primarily to lower gross margins resulting from inventory valuations and an increased investment in sales-driven SG&A salaries and related benefit costs. As James mentioned, we encourage investors and analysts to look at directional and longer term trends of our business and the actions we are taking to accelerate growth and narrow our losses, along a trajectory that will ultimately return us towards sustainable profitability. Net loss for the fourth quarter of 2019 improved to $1.3 million, or $0.11 loss per basic and diluted share compared with a loss of $3 million or $0.25 loss per basic and diluted share in the year ago quarter, and a net loss of $946,000 or an 8% [ph] (sic $0.08) loss per share in the third quarter of 2019. Now I would like to turn to the balance sheet. As of December 31, 2019, we had cash and cash equivalents of $350,000 compared to $6.3 million at the end of 2018 and roughly in line with $634,000 of cash and cash equivalents at the end of the third quarter of 2019. We continue to maintain a low yet acceptable minimum cash balance from working capital and other short term needs as part of our financial strategy to optimize the deployment of cash and reduce borrowing costs as much as possible. As we have said in the past, we no longer employ the practice of dressing up the balance sheet to be adding cash and debt but leaving net debt unchanged on the balance sheet that used to be used in the past. Total debt as of December 31, 2019, included short term credit line borrowings of $715,000 and convertible notes outstanding of $2.6 million, total debt balance of $3.3 million or net debt of $3 million. This compares to $2.2 million in total debt as of December 31, 2018, which was comprised solely of credit line borrowings, while $6.3 million of cash [ph] on the balance for a negative net debt balance. Starting now and moving forward, we would like to introduce you to a metric we view as very important and that is a metric we call total availability. We determine total availability at any point in time by taking the cash on hand plus any excess borrowing capability we have on a short-term borrowing facility. Effectively, this is a measurement of our access to cash at any given point in time, and is much more relevant metric than simply looking at a cash balance. As of December 31, 2019, we had a total availability of $2 million, which consisted of $400,000 of cash and $1.6 million of additional borrowing availability on a credit facility. Also, as of September 30, 2019, we had a total availability of $1.3 million, which consisted of $600,000 of cash and $700,000 of additional borrowing availability on our credit facility. We intend to continue to communicate this metric to you in future earnings releases and filings. Also, as James mentioned during the fourth quarter, we raised additional capital of $1.1 million in net proceeds through the issuance of a single note to a single lender, and subsequently subsequent to year-end we raised additional capital through a private placement of 3.4 million shares of our common stock and an aftermarket purchase price of $0.799 per share, and unregistered warrants to purchase up to 3.4 million shares of common stock at an exercise price of $0.674 per share for gross proceeds of $2.7 million, and net proceeds after expenses of $2.4 million, and finally $2.1 million after a mandatory debt repayment on a note to a single lender loan in the first quarter. Proceeds from these offering will provide short-term funding for our operations and initiatives for growth. We continue to analyze our cash needs considering sales prospects, current operations, and our plans for continual improvement. It is our current view that we may need additional external financing during 2020. We expect to explore and consider a variety of financing sources given the timing of when an need may arise and market conditions at the time. Our operating cash burn for the fourth quarter slowed to $464,000, largely driven by very effective working capital management. Accounts receivable were $2.3 million at the end of 2019, compared to $2.2 million at the end of 2018, a modest decline of $136,000 reflecting the decline in sales, as well as continued effective collection of accounts receivable. Inventories declined to $6.2 million as of December 31, 2019, compared to $8.1 million at the end of 2018. The decrease was due to low procurement in the first half of 2019 as a result of purchasing fee implemented by the current management team. During the second half of 2019, we also negotiated cost reduction terms with suppliers on certain products and introduced the price investment strategy on products we have an excess inventory, which resulted in net reduction of our gross inventory levels and excess inventory reserves of $1.9 million, compared to 2018. Please bear in mind that as we launch new products and deplete popular products inventory we will begin purchasing more inventory late in the fourth quarter of 2019 and in the first quarter of this year. Accounts payable declined significantly to $1.3 million as of December 31, 2019, down from $3.6 million as of the end of 2018, which reflects the large build up in inventory during 2018 and the need to pay suppliers for those goods during 2019. One other significant change to the balance sheet between 2018 and 2019 is the increase in current assets resulting from adoption and new changes from period-to-period you see on the earnings release are because of the adoption of the new standard for lease accounting. And finally, I wanted to update you on tariffs. Tariffs continue to be manageable for Energy Focus with no material impact on our business, with only about $140,000 for the entirety of 2019. In fact, recently, we've been able to eliminate 25% tariffs on electronic components charged towards the end of 2019 by sourcing some alternate suppliers in 2020. Also we continue to work with our vendors on price reductions to mitigate the need to increase prices and are also evaluating alternative sourcing locations and choices if necessary. Currently, we have no need to pass along a minimum level of tariffs we've 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. Finally, the recent U.S.-Chinese settlement, deferred planned tariffs that would have impacted some of our products and so was a favorable outcome. Our other potential meaningful liability remains manageable and non-material and that is our warranty liability. The combination of very low failure rates of our tubes and replacement tube and a replacement tube was identified for an existing customer which allowed us to continue to experience minimal costs or warranties and still be able to afford to offer very valuable 10 year and 5 year warranties to our customers. Lastly, as James mentioned, to-date, we have not experienced any significant disruption in either supply chain or sales due to Coronavirus pandemic. However, we've had to make some significant adjustments in our supply chain to ensure we continue to receive products in a timely and affordable fashion and we readily acknowledge that this is much too early to assess how the Coronavirus will impact our sales as we move forward. This is a very dynamic and changing world we currently live in, and our plans will have to be real time and we will respond appropriately. With that we would like to open the call for questions.

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.