Greetings and welcome to Energy Focus First Quarter Fiscal Year 2020 Earnings Conference Call. At this time all participants are in listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Brett Maas with Hayden IR. Thank you. You may begin.

Thank you, operator and good morning everyone. Joining me on the call today are James Tu, Chairman and Chief Executive Officer and Todd Nestor, President and Chief Financial Officer. Before we begin today's call, I'd like to remind you that we will be making 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 our most recent 10-K as well as most recently filed 10-Q 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 know 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 just posted on our corporate website at 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.

Thank you, Brett. Good morning, everyone and thank you for joining our first quarter 2020 earnings conference call. First of all, I hope all of you and your family continue to stay safe and healthy in this challenging social and economic environment due to the COVID-19 pandemic. Like everyone participating in this call, we have been watching the development of the pandemic and following our Coronavirus contingency plan very closely, and responding to changes as timely as possible. We are fortunate that our employees remain healthy and that our factory has remained open throughout the pandemic. In addition, I have to say that despite of the ongoing macroeconomic challenges and stay in home orders, our progress towards building Energy Focus into the next generation of lighting industry leader had not fold at all. Our employees, either at our factory or from home have been working very hard and very smart. I believe that the pandemic has challenged our team to be more creative, more efficient, more passionate, and more collaborative to accomplish our short-term and long-term goals. So for you as an investor of Energy Focus, as both Todd and I and our board of directors are, I'd like to say that the future of Energy Focus is not only much brighter than a year ago when we studied the restructuring and relaunch program, but also better than three months ago. As you have seen from our Q1 earnings release that came out this morning, our sales growth momentum continued to pick up in the first quarter despite of the unprecedented economic challenges posed by the pandemic. It was consistent over the past year since the management change in April 2019. We continue to make incremental by collectively significant progress, month after month, quarter after quarter towards stabilizing and economizing…

Thank you, James. Mac sales for the first quarter of 2020 were $3.8 million compared with 2019 first quarter net sales of $3.2 million, an increase of 19.1% year-over-year. The year-over-year increase net sales was driven by timing and military sales and compared to $3.5 million in the fourth quarter of 2019, net sales were up 7.1% on a sequential basis. Sales to our top 10 customers increased 10% compared to the first quarter last year and sales to our top 20 customers increased 16% compared to the first quarter last year. From a mixed perspective, in the first quarter military sales were $2 million representing 54.1% of total net sales, compared to $1.2 million or 37.6% of total net sales for the first quarter of 2019. The year-over-year increase in military sales was primarily due to timing of sales to one customer, which increased 113% compared to the first quarter last year. We also had a new military customer in our top 10 customers with a six-figure or were not present last year. Sales to commercial customers were $1.7 million representing approximately 45.9% of total net sales for the first quarter of 2020 down from $2 million or 62.4% of total net sales for the first quarter of 2019. The year-over-year decrease in commercial sales was mainly due to some delayed orders due to COVID-19 which specifically impacted our largest commercial customer, partially offset by increases from several other top 10 customers. Overall sales to our top 10 commercial customers declined 35% year-over-year and sales to our top 20 commercial customers declined 21%. This was more than offset by our military segment. Sales to our top 10 military customers increased 81% and sales to our top 20 military customers' increase 74%. Gross profit for the first quarter of 2020…

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

Thank you. Good morning, everyone. Appreciate you taking my question.

Good morning, Amit.

Hi, James. So with respect to the guidance, James, for the second quarter, can we assume you are factoring in some level of disruption from the current market environment in that guidance?

Yes, of course. As we mentioned, the commercial sales are still quite uncertain. So I think we - as I mentioned earlier, that we have about 70% of the business up; so we try to be conservative, but reasonably conservative. Not extremely conservative, but reasonably conservative.

Thank you for that. So you're at a cusp of really launching some very unique and interesting products into the market, especially on the EnFocus side, generally, the dynamics of deployment, et cetera. And then, in relation to the UV lighting solutions with disinfection type offerings, so this is sort of a new development, and both are very exciting. But from a distribution point of view, how are you thinking about managing the sales process, and engaging customers, and demonstrating the effectiveness of these solutions when there are all sorts of sort of restrictions at the physical level in going out and typically doing all of this stuff that you - the way you used to do it?

Yes. I mean, that's a very good point. And as I mentioned both in the press release and also in this - earlier in the earnings call, that with the introduction of EnFocus, which is a very unique product platform, we are almost changing - I wouldn't say changing - we're expanding our distribution network a lot more aggressively. As you know, in the past, we are known for working with large marquee customers, and ESCOs, and contractors for their projects, because it's a fairly competitive market, right? We always have a better product, but people want to buy cheaper products, right? In the case of EnFocus, it's actually - the most exciting thing about it is that it's a control platform that is also affordable, is not only high quality, but also affordable and simple. And so, we don't want to be limited to our own sales force. So we opened up for very extensive distribution network, which is why I mentioned about the new pricing mechanism that we have now. So to your point, we are leveraging on our agents, distributors, ESCOs, and contractors. We are talking to a lot of people. We are talking to probably 10 times more people than we had before. And I think that really take us to another stage where we will have a national network of channel partners that we didn't have before, which is actually extremely exciting, obviously, from the sales point of view. And it will bring us much more timely sales reach to customers, but also build the brand awareness, the product awareness in the marketplace. So we are opening up pretty much working with everybody now. As long as we can avoid the channel conflict, that's our goal.

Understood. And just one last question on the EnFocus side. Are you taking pre-orders for this? You're saying you're going to potentially launch this in early Q3, but are you taking pre-orders? Has that book been building? Or you're not doing any of that right now?

Yes, we are just start - we put out the press release on Monday. We just launched this officially, so I would expect that later in second quarter, maybe early third quarter, we will start taking orders. I mean, technically, we can start taking orders. We're just getting ready to ship in third quarter, early third quarter.

Wonderful. And then one last one on the disinfection lighting offering. You mentioned you are trying to patent some part of this solution. Can you give us some color on what that exactly is that you might be looking to patent?

Without going to too much detail yet, because we are still finalizing our prototype design, it's basically a - it will be an integrated general [ph] lighting and UV lighting product. If you look at the UV disinfection market, there are basically three major types of disinfection products. One is pretty much a robotic cleaner that use UV. Nobody can be in the room when you do that UV disinfection because people are not supposed to be exposed under UV. And then you've got the HVAC, and that's the disinfection system that is basically sitting at the entrance and of the exit of the back of the HVAC system to clean the air flowing out of the HVAC. And then you've got the upper room air disinfection system that basically shines the UV light across the room above, I guess, eight feet, right? All of those different disinfection technologies have their shortcomings. So this is why we developed the products that could be integrated into our general lighting, so you can use the existing structure. Basically, spot to retrofit into general lighting and UV lighting under our EnFocus control system. So in this system, you're going to have - without going into the design, you're going to have a dimmable general lighting, color tunable [ph] or circadian rhythm lighting, plus the UV disinfection. And it could be functional when people are inside. It will basically be air disinfection.

So will it be sold as a standalone solution? Or will you offer it as an add-on to the EnFocus as well?

It's an additional application on EnFocus, which is why we're so excited about the EnFocus platform, because they enable an existing building to add on these applications, be it beaming or color tuning [ph] or the UV disinfection.

Understood. That's really interesting. Thank you, James. That's all I had. Thank you.

Sure. Thanks.

[Operator Instructions] Our next question comes from Orin Hirschman with AIGH Investment Partners. Please proceed with your question.

Congratulations on a lot of progress, particularly on the operating side.

Good morning.

Hi, good morning. In terms of the military orders, what is causing the military comeback so strong? And it seems like it's not across the corner to the military divisions or customers or something [Technical Difficulty] based on those statistics.

As we mentioned in this earnings call and also the last earnings call that we - one of the things that we'll be working on is to reduce our costs through engineering, and we've been successful in doing that and dramatically reducing our cost of production of our products. And that enables us to be much more competitive in a market that has now new entrants. And so, that's why I emphasize that it's basically our overall increase of competitiveness of our products in the market. And we're just winning much more than what we did before because of that.

I will also - I'll add to that. This is Tod. In addition, the military in '19 had shifted spending to the wall. And so, that had suppressed some of the sales last year as well.

Yes, a comparable level. That's very effective. In terms of the new contract wins, to your question, I think our improved engineering and supply chain practices is the reason for us to win those new contracts.

Okay. And just again, I know you went through this, but just to try and pinpoint if you can more, in terms of some of the new product shipments, it sounded like chip-four or a second half, and is the disinfection the goal for the [Technical Difficulty] during that timeframe? If you can just reiterate the timeframe.

I'm sorry, I lost your second part of your question in terms of the timing.

The timing of the new products, including the one that includes the UV in the product.

Right. So as we mentioned, the EnFocus is already announced, and we expect to start generating some sales in Q3. And again, because of the economic slowdown right now, we are not putting too much expectation on the amount of sales or in focus in Q3. We do hope that if the economy starts to reopen in the next few months, we should start seeing the momentum picking up and showing folks generally more meaningful sales in Q4. For the UV product, we are slated to launch in Q4. So I would say that there might be some initial sales in Q4, and really starting to pick up in Q1. Again, for the UV products, it's a pretty new category. The market is new. So we cannot predict what the demand is going to be. We do know that - in our process of doing the research and development, we know that there's going to be a tremendous amount of demand there, based on the current understanding. So it's too early to tell how fast that product could ramp up.

And just again, the timing on the UV enabled product?

Q4 launch.

And then just one other follow-up on that product, or two follow ups. Are you capable of manufacturing that product across your existing lines? It's just a variation thereof, and you could achieve nice gross margins on it as well?

That's what we expect, obviously, yes. As I said, the product is built upon the EnFocus platform, so it can be controlled. It has to be controlled through the EnFocus platform. So it is just an extension, a new application on top of EnFocus control system. We look forward to scale the production based on what we have now.

And finally, just on the UV product, how far do the benefits from the UV extend? Meaning do they extend a few inches away from the fixture? And do customers - or if you've done any customer research already, you probably have, but do the customers understand where it fits? Meaning what it's capable of accomplishing, what it's not capable of accomplishing?

Yes. I think if you look at all the UV equipment, what we can claim is obviously that whenever the air flows through our module, we can kill say 99.99% of the viruses and microorganisms. It depends on how the variables and the space determine the impact of the equipment on the space. If you have a very fast air change, for example, then this might reduce the impact. But just like every other UV disinfection equipment, they cannot guarantee how much impact you can have in the space unless you have those direct UV surface disinfection products, which you cannot use when people are present. Our goal is to have a system where it's functional when people are in the building. We didn't develop this just for hospitals. We developed this for pretty much all types of institutional buildings, from hospitals, schools, offices, and commercial spaces. So our design is to achieve certain amount of disinfection capability. And it always depends on how customers use them. That's the one that obviously we expect to do more clinical studies to show that it can the extent of improvement; the virus counts reduction in the room overtime. But what we can say is just like how you buy your air purifiers at home maybe, they will tell you that they can filter 99% of the micro orgasms. But they cannot tell you exactly how clean your room is going to be because you don't know how big the room is going to be and you don't know if there are attracted [ph] inside. So those are the things that will take a little bit longer to prove the exact effectiveness. But again, every space is different. So the only thing we can say is that this unit will be very effective on filtering out the air and cleaning, disinfecting the air that goes through it. And what we try to design is to make sure that in a normal condition, this unit would be very effective in reducing a significant amount of viruses, and microorganisms, and pathogens in the room.

Great. Thanks a lot.

Sure.

[Operator Instructions] Our next question comes from Robert Smith with Center for Performance Investing. Please proceed with your question.

Thanks for taking my question.

Good morning.

Can you discuss specifically the IP protection surrounding the EnFocus line and also what you're seeking in the UV product?

As we mentioned, that we already filed several patents, EnFocus. And as I said, it's an ongoing practice, ongoing exercise. As we develop new technologies incorporated into EnFocus, we'll continue to file more patents. Same thing for UV. UV is earlier. So we filed a provisional patent on our design, and we expect to file more in the coming month as we solidify the design, also increase the sort of technologies involved in the product.

But James, what are the protections around the EnFocus line?

Well, the protection is that it is a unique application and technology because we leverage existing power lines for our communication.

But others can have the ability to have - control the dimmer aspect of it?

Again, we filed the patents to protect what we developed. People can - people get around to actually do the same thing. Anything is possible but obviously, when we filed the patent, we tried to exhaust all the options there to do this. So there's no guarantee that nobody else could do it. But we feel pretty good about the protection of our IP.

So inclusive of the dimmer in the COVID temperature [ph]?

Yes. Especially a way to communicate through the power line, the existing power line, right. It's not reduced signaling [ph] and their labor to install the system. And also, a brand new feature, in the cross-way [ph] section.

That's the primary feature, the power line?

Yes. But also different ways to - I mean, a lot of different type of applications field upon that technology.

Thanks very much. Good luck.

Sure. Thank you.

Our final question comes the line of Edward Gilmore with Little Grapevine. Please proceed with your question.

Hi, James and Tod.

Good morning, Ed.

Good morning. How are you? Congratulations on the progress this this quarter. Just had a quick question. Can you comment on sales efforts towards the academic and university segment? I'm just curious if you're starting to see sales resume in that area. Thank you.

I think you're asking about - can you repeat that question? Just to make sure that I - can you repeat that question, Ed?

Sure, yes. I know in the past, you've commented on some relationships with universities like Penn State University and some other academic institutions. I'm just curious if school is kind of on pause, as administrators are thinking about when they're going to resume in the fall. Are you guys seeing any additional opportunities in that area?

Yes. Again, we mentioned in this earnings call that we're seeing pretty much slowdown in every commercial vertical. College is the same. I do have to say that people are working. People are just not making big decisions, making big orders now. And over these past, I guess, week, two weeks, we start to see people getting more active. And I think schools is one of the verticals that we deal with. We've definitely seen some suspension of activities for now. I don't think colleges are exceptional. Again, we still get orders from colleges. But I think it's just one of those commercial sectors where we just are seeing slow decision making processes right now. Although, again, as I said, we are starting to see activities picking up over the past probably week, two weeks. It's still too early. Tod, do you have anything to add on this?

No. I just think it's - no, it's really delays in the orders that we're seeing, and behavior. It's not a cancellation. So, so far, there's no indication that people are canceling anything. It's just a delay in timing.

Okay. Thank you, guys.

Sure. Thanks, Ed.

Ladies and gentlemen, we have reached the end of our question-and-answer session, and I would like to turn the floor back over to management for any closing remarks.

Thanks, everyone, again for your participation in today's call. We look forward to talking to you in our second quarter 2020 earnings call. Have a great day.

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation, and have a wonderful day.