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Edited Transcript of EFOI earnings conference call or presentation 13-Nov-19 4:00pm GMT

Q3 2019 Energy Focus Inc Earnings Call

SOLON Dec 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Energy Focus Inc earnings conference call or presentation Wednesday, November 13, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James Tu

Energy Focus, Inc. - Chairman & CEO

* Tod A. Nestor

Energy Focus, Inc. - President, CFO & Secretary

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Conference Call Participants

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* Amit Dayal

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst

* Robert Smith;Center for Performance Investing;Analyst

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Presentation

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Operator [1]

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Greetings. Welcome to Energy Focus Third Quarter 2019 Conference Call. (Operator Instructions)

Please note, this conference is being recorded. I will now turn the conference over to your host, Tod Nestor, President and CFO. Mr. Nestor, you may begin.

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Tod A. Nestor, Energy Focus, Inc. - President, CFO & Secretary [2]

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Thank you, operator, and good morning, everyone. Joining me today for our prepared remarks is James Tu, Chairman and Chief Executive Officer at Energy Focus. Before we begin today's call, I need to remind you that we will make certain forward-looking statements. These statements are based upon information that represents the company's current expectations or beliefs. The results actually realized may differ materially from those stated. For a discussion of the risks that could affect our results, please refer to the discussion under the heading Risk Factors in our most recent Form 10-K filed with the SEC.

The company undertakes no obligations 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 release, certain financial metrics are presented on both a GAAP and a non-GAAP adjusted basis. Reconciliations of adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website at www.energyfocus.com. in the Investor Relations section of the site.

And now I'd like to turn the call over to James. James?

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James Tu, Energy Focus, Inc. - Chairman & CEO [3]

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Thanks, Tod. Good morning, everyone, and thank you for your participation in our third quarter 2019 earnings call. Since our last call, we continue to work diligently based on our relaunch plan to transform Energy Focus into a leading LED lighting company with sustainable and strong growth, characterized by superior product quality, impactful innovation and brand trust.

During our last call, I briefly talked about the company's history and the reasons why a return to Energy Focus as CEO and about the team and the culture we are building. During this call, I will focus on the progress we have made over the last quarter and the steps we have taken towards achieving our long-term goals, as I have summarized just now.

Let me start by brief highlights of our financial results. Tod Nestor, our President and CFO, will go into more details with you later on the call. On the top line, we recorded $2.9 million in revenue, which was slightly less than but close to our expectation of approximately $3 million. Revenues during the quarter were negatively impacted by the timing and the fulfillment of military sales to the Navy, which I'm happy to say, we are well on our way to fulfilling during the current quarter. As we mentioned in the last call, the U.S. Navy budget for the last 2 quarters of the 2019 fiscal year, which ended in September, were particularly constrained, mainly due to the unexpected reallocation towards building the border wall. We expect the new fiscal year to return to more normal budget levels and for our Navy business to start recovering from the third quarter low.

In fact, as we announced in the earnings release this morning, we just received a $2.5 million exclusive contract from the U.S. Navy to supply our -- naval fleet with our explosion-proof LED globe light, and we look forward to more such wins as we continue to strive to be Navy's most trusted LED lighting partner, as we have always been since 2007, where we installed our first LED lights on the Navy -- U.S. Navy ships.

The drop in sales from the same period last year of about $2.2 million resulted primarily from a drop in sales to our largest customer in the military business and to a large commercial company. It is relevant to note that the agency distribution models that the previous management implemented and, now we no longer rely upon, contributed basically 0 sales to this over the last third quarter period. All of our current significant customers were acquired before 2017 when the previous management took over. Therefore, in essence, the year-over-year sales drop was caused by lack of new customers, coupled with volatile sales number to a small list of significant existing customers.

This conclusion gives us confidence that our reinitiated customer-centric sales and R&D strategy that the company had before 2017 was and will continue to be a key factor in retaining loyal customers. As we revert back to our unique strategy within the lighting industry of educating and selling directly to our customers, we are confident that we can grow strong relationships again, especially as Energy Focus is now, more than ever, the most reliable and innovative LED lighting company today for the LED lighting retrofit market.

Gross profit for the quarter increased to 35.3% of sales compared with 24.8% from last year's third quarter and minus 3% from the last quarter. The large swing in margin quarter-to-quarter was mainly due to changes in inventory reserves, which Tod will provide details later. We're now accounting for inventory reserves in the period. Gross margin improved to 23.6% in the third quarter of 2019, up from 21.6% in the third quarter of 2018. We believe that as we continue to consolidate our supply chain and launch differentiated products, barring potential onetime inventory clearance events, margins should continue to improve in the quarters ahead.

Net loss for the quarter was $0.9 million or $0.08 per share -- $0.08 per share compared with the net loss of $1.9 million or $0.16 per share in the year ago quarter and $2.0 million or $0.18 per share in the second quarter of 2019. The improvement in our bottom line was largely the result of gross margin improvement as well as our continuing cost control efforts.

Now I will share some of other operational highlights as well as the progress was -- made during the quarter. As I've mentioned in our last earnings call, we set our focus for our relaunch and transformation plan initiated in April of this year. Our first goal is to achieve and maintain streamlined, sustainable and agile operation. Q3 operating expenses were further lower from Q2 and were about 40% lower than the same period in 2018 as well as the first quarter of 2019 before our restructuring. As part of our reorganization in the second quarter, we reduced staff by about 30%. During the third quarter, we continued to execute on our tight budget and streamline our processes to weed out redundancies and waste. We did start hiring again during the quarter, and we'll continue to expand our staff as we start to focus on growing the company. But we remain committed to manage our costs in every way we can.

Meanwhile, as I mentioned earlier, we also continue to consolidate and strengthen our supply chain to obtain better buying power and lower our future product costs, which we expect will start reflecting our higher gross margins, as we run down our current inventory.

Our second goal is winning business by effectively and constantly enlightening and educating our customers. Since April, when we reoriented our sales approach from relying on outside agents to focusing on directly enlightening and educating our customers, we had to rebuild our sales force literally from scratch.

During the quarter, first and foremost, as we expanded our sales organization, we reorganized it into 4 business operations, each led by an experienced and highly motivated sales leader and each dedicated to a particular sales channel. They are: first, military and maritime, which focus on both navy military bases and commercial maritime markets; second, commercial strategic accounts, which focuses on large national and regional government and commercial customers; third, channel partnerships, which focuses on leveraging the nationwide customer networks of our channel partners in various industries, such as manufacturing, commercial properties and utility; and fourth, SME, which is focused -- which focused on reaching out to small and medium-sized enterprise customers directly by our inside sales team as well as our new e-commerce platform to be launched shortly. We are aggressively building up all these 4 teams, so we can bring our quality and differentiated product to as many market channels and enterprise customers as possible.

While these teams each pursue different channels, they all adhere to our company's mission to enlighten and inspire our customers with the highest level of human touch, service and education, so that customers are armed with knowledge and content to choose the most impactful product from Energy Focus. So in addition to having our expanded and varied sales team in place, we also hired a new Director of Training to expand our training curriculum and operations for all our stakeholders, including employees, customers and contracting and channel partners. We also recruited an experienced VP of Product Management to oversee the broadening product line that we are developing and introducing to the market.

Working with our PR agency, DGI, we also have started publishing white papers, case studies and have had articles appear in targeted verticals that clearly outline the benefits of our products and solutions. In addition, our sales teams have expanded our presence in targeted industry conferences, which have resulted in increased exposure and some very exciting leads. We encourage you to follow our expanding publications, events and activities on our website or social media platforms.

Meanwhile, on the new business front, in addition to more school districts and hospitals, we recently added a few large institutions as new customers, including Penn State University, Michigan State University and Vanderbilt University. Since we just completed restructuring our sales force over the past few months, the speed with which we brought in these new market customers is particularly encouraging because it shows that the lead times for us to acquire new customers in now much -- is now much shorter than ever, even just a few years ago. This is not only because organizations are now ready to adopt LED lighting, but also perhaps more importantly, because Energy Focus now stands alone in the industry as one of the very few high-quality LED lighting brand, with a proven product reliability history and a long list of positive and favorable customer references.

Our third goal is to develop impactful and differentiated product and solutions based on LED lighting technology. Energy Focus is positioned as the premier LED lighting brand. A key to our sustainable growth in the years to come in addition to successful business development is being able to continually distance ourselves from the commoditized landscape through impactful product innovation and differentiation. I'm really happy and excited to let you know that we have made tremendous progress in this area in the past quarter.

As many of you might know, in addition to being the leading LED lighting supplier to the U.S. Navy, ever since introducing the industry's first Type B LED tubes to replace fluorescent lamps and eliminate fluorescent ballasts in 2010, energy Focus has been on the forefront of invention and innovation for LED lighting, particularly in the commercial retrofit market. We pioneer a flicker-free standard with UL and began the first UL-certified low flicker manufacturer in 2015. Then in 2016, we introduced our patented backup battery-integrated LED tube, the RedCap, and eliminates -- that eliminates the need of battery -- emergency backup battery. We believe that our next major product introduction, a high-quality and dimmable lighting control solution built upon our patented control platform and LED lamp will be the most disruptive technology we have ever introduced and will further differentiate us from others in the global lighting market. This new technology will be available during the first quarter of 2020.

As we mentioned in the previous press release, this whole new product family built upon our new control platform will enable existing buildings to provide dimmable and tunable LED lighting at a fraction of the cost of any other control technology on the market today, particularly for the retrofit market. The new product for which we filed several provisional patents will replace existing wall switches and fluorescent or tubular LEDs with our control package that includes switches and LED lamps that are dimmable and color tunable, without requiring additional wiring and electrical labor.

In the past, for most retrofit projects, this option has been far out of reach, confining to incorporate such control capability, but now since the controls are applied through the power line, there won't be this type of security issues introduced by wireless communication. An important consideration for organizations with mission-critical facilities, such as government, military, healthcare and higher ed, this new lighting system, with an upgraded option that also provides occupancy sensing, while also maintaining high-power quality as well as stay flicker free throughout the dimming and color tuning ranges.

Over the past 2 months, we've started introducing this family of products to some of our larger strategic account and also showcased it in several recent trade shows. I'm happy to report the initial reception to it has been overwhelmingly positive, and we believe there will be significant demand for it in our key target markets, mainly the educational vertical where it is particularly impactful to classrooms, healthcare facilities, including hospital patient rooms and nursing home as well as government and other commercial and industrial businesses.

In particular, the science of circadian rhythm, which is a natural biological process that regulates the sleep-wake cycle throughout the day has long been settled. Different light color temperatures induce different mood, mental acuity and melatonin levels that are crucial to human performance and health. As I mentioned, economics for mass adoption for such human-centric lighting technology has so far being the prohibitive cost required for rewiring for the control systems as well as the special de-lighting fixtures, especially for retrofit application. With our new product family, everyone can start experiencing high level of productivity and quality of life at the appropriate color lumen level and color temperatures.

As an example, hospital patients may be able to recover faster with higher color temperatures and higher light output in the day, while achieving better sleep quality with low temperature -- when lighting set at lower color temperatures at lower lumen output before resting. We believe the human benefits this product family will create for our customers are going to be unprecedented and far outweighed the (inaudible).

As I mentioned that we expect to launch this product family during the first quarter of 2020, in addition to ramping up our internal sales organization, we have entered into discussions with several large national lightings as well as nonlighting channel partners to market and distribute these products, and we also expect to recover first sales by the end of first quarter of 2020 based upon the strong preorder interest and demand we have already generated.

Our fourth transformational goal is building the most talented and passionate workforce in the LED lighting industry. As I have stated earlier, after the initial restructuring, we have started expanding our staff again to position the company for a strong and sustainable growth.

During the quarter, we recruited several outstanding leaders and business development managers, whom we believe will continue to strengthen our culture for accountability, trust, extraordinariness, firm openness and integrity as well as standard of excellence. We will continue to apply rigorous hiring as well as continuous education factor to ensure we are building the most capable workforce in the LED lighting industry for executing our growth plan.

Last but not least, as the company continue to invest in expanding our organization and, therefore, experiencing operating loss at the moment, we would need seek additional capital to continue to fund our growth initiatives. Outside of trade equity issuance, which we'll try to avoid before our stocks start to reflect anywhere close to the company's real value and potential, we do have other alternatives to fund the gap in our cash flows, including selling off our excess inventory, expanding our credit facility, growing our sale to reduce our loss and issue debt available to us.

We are confident that we'll be able to fund the operations in the next few months before we reach further significant milestones that create clear and substantial value for the company. And Tod will go into further details later.

As for our near-term business outlook, as we've mentioned in the earnings release, at this point, we expect fourth quarter sales to be in the range of $3.1 million to $3.4 million, representing 7% to 17% growth for the -- from the third quarter. We do caution you that, as you are aware of, because we have a relatively small number of large accounts at this point that drive the majority of our sales, our quarterly sales are highly subject to the timing of orders and deliveries to these accounts. That said, as part of our transformation plan, as we have a new management team, we would like to be as transparent, as forthcoming and as timely as we can in our communication with shareholders as well as all stakeholders.

Energy Focus has more strong and sustainable trust of institutions with mission-critical facility by being open and by being delivering exceptional values. This philosophy applies to our customers, and we believe it will apply to our investors as well.

In summary, now with our much more economized and strengthened organization of processes, energized and focused sales team and breakthrough control lighting products to be announced shortly, the company's ongoing transformation is well underway. I believe we are now positioned to achieve incrementally stronger and longer term sustainable growth from the fourth quarter now.

With that, I will turn the call to Tod to review our financial performances during the quarter.

Tod?

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Tod A. Nestor, Energy Focus, Inc. - President, CFO & Secretary [4]

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Thank you, James. As James mentioned, we made substantial progress during the third quarter of 2019. I will now summarize the financial results.

Third quarter sales were $2.9 million compared with last year's third quarter sales of $5.2 million and slightly down compared with second quarter 2019, which was $3.1 million. Part of the decrease in sales from prior year was the result of the postponement in military sales and to some degree, a decline in commercial sales. As James mentioned, we have already captured some of that shift to military revenue, and a portion of that will be captured in the fourth quarter. But for now, let me break down third quarter fiscal 2019 sales, which declined by $2.2 million or 43.5% versus that same period in 2018.

However, I do want to mention on a sequential basis, comparing the third quarter to the second quarter of fiscal 2019, the sales decline was only $167,000 or 5.4%. Back to our year-over-year quarterly sales comparison. By comparing the ratio of military to commercial sales between the third quarter of 2019 at approximately 0.7:1 and the third quarter of 2018 at approximately 1.25:1., the change in this ratio from period-to-period is demonstrative of the relative percentage declines experienced in the third quarter of 2019 when compared to the third quarter of 2018, with military sales decreasing approximately 59% year-over-year for the quarter and commercial sales decreasing approximately 24% year-over-year for the quarter. In addition, when evaluating sales changes due to price, mix and volume causes of change on a year-over-year basis for the third quarter of 2019 versus third quarter of 2018, the results were as follows. Sales increases due to prices for new product introductions during the third quarter of 2019 contributed about $111,000 or a 5% sales increase. In addition, the impact of prices on products sold only in the third quarter of 2019 that were not sold in the third quarter of 2018 increased sales by approximately $585,000 or 26% year-over-year. Finally, for those products offered during both the third quarter of 2019 and 2018, true price increases had very little impact on sales, only increasing sales by about $22,000 or 1% for the quarter.

From a mix perspective, items sold in both third quarter of 2019 and the third quarter of 2018, sales declined approximately $186,000 or 8%. In addition, mix was also impacted by items that were sold during the third quarter of 2018 but not sold during the third quarter of 2019, decreasing sales on a year-over-year basis by about $611,000 or 27%.

Finally, from a volume perspective, for items sold during both the third quarter of 2019 and the third quarter of 2018, the impacts on sales was a decline of $1.7 million or 77%, mostly from the military area. Finally, the impact of the volume on those items sold in 2018 third quarter, not sold in the third quarter of 2019, lowered sales by $440,000 or 20%.

Reported gross profit for Q3 quarter 2000 -- quarter 3 of 2019 was $1 million, with gross profit margins improving to 35.3% compared with gross profit in the third quarter of 2018 of $1.3 million or 24.8% gross profit margins and second quarter of 2019 of $109,000 at negative 3.5%. Third quarter 2019 gross profit included impacts from changes in the excess and obsolete reserves, which included a $394,000 decrease in the excess and obsolete reserve that improved gross profit margins by 13.5 percentage points. Conversely, increases in the excess and obsolete reverse -- reserves adversely impacted Q -- the second quarter of 2019 and the third quarter of 2018 gross profit margins by 14.7% and 3.2% of net sales, respectively.

The increase in gross profit in the third quarter of 2019 from the second quarter of 2019 resulted mainly from favorable changes in inventory reserves in the third quarter. In addition, there's some incremental gross margin improvement from lower material costs and reduced warranty and repairs in the third quarter of 2019. If you normalize margins for the 3 quarters and adjust for the reserve movements previously described, which should have less movement going forward, the normalized margins for the third quarter of 2019 would be approximately 23.6%, as James mentioned. For the third quarter of 2018, the normalized margins would be approximately 22.5%, and finally, for the second quarter of 2019, the normalized margins would be approximately 23.4%.

We expect gross margins to remain steadier and gradually improve as we continue to make improvements to our supply chain and launch new products, barring any potential onetime unexpected inventory write-down events. As James mentioned in his discussion, we continue to focus on maintaining streamlined, sustainable and agile operations. As a result of these efforts, third quarter 2019 operating expenses were significantly reduced by $1.3 million or 45% to $1.9 million compared with $3.2 million in the year-ago quarter and $2.2 million in the second quarter of 2019. Contributing to the decline were reductions in salaries and benefits related to the closure of our San Jose and Taiwan offices this past April and May, totaling approximately $325,000, another $290,000 related to reduced severance costs and $210,000 related to staff reductions plus $190,000 related to reduced stock-based compensation. So -- sequentially compared with the second quarter of 2019, operating expenses decreased by $180,000.

Loss from operations during the third quarter of 2019 was $833,000, an improvement of $1.1 million from the third quarter of 2018 when it was a $1.9 million loss and a $1.3 million improvement compared to the last quarter when we reported a $2.1 million operating loss. Net loss for the third quarter of 2019 improved to $946,000 or $0.08 per share compared with a loss of $1.9 million or $0.16 per share in the year ago third quarter and net losses of $2.2 million or $0.18 per share in the second quarter of 2019.

On a year-to-date basis for the 9 months of 2019, net sales were $9.2 million compared with $15 million in the year ago 9-month period. Loss from operations was $5.8 million in 2019 compared with an operating loss of $6.1 million in 2018, and net loss was $6.1 million or $0.49 per share in 2019 compared with a net loss of $6.1 million or $0.51 per share in the year ago 9-month period. As you can see, we've worked very hard to mitigate the losses despite the decline in sales and are working even harder to rebuild the sales going forward, as James mentioned previously.

Now turning to the balance sheet. As I mentioned to you on our previous call, we are very focused on keeping cash balances low since we view cash as negative debt. We believe it is most important that Energy Focus place importance on its debt capacity and ability to access cash rather than maintain a lot of unused cash on its balance sheet. Having said all of this, as of September 30, 2019, we had $634,000 of cash and cash equivalents on our balance sheet, with approximately $1.323 million in credit line borrowings and our $1.7 million of convertible notes for a total net debt, as of September 30, 2019, of $2.389 million This compares to net debt of approximately $1.145 million on June 30, 2019, with the increase in net debt pretty much reflecting our operating cash burn of approximately $1.2 million for the third quarter.

Accounts receivable were $1.8 million at the end of the third quarter of 2019 versus $2.2 million at the end of the fourth quarter of 2018, a $400,000 decline, reflecting the decline in sales as well as a continued effective accounts receivable collections. Inventory balances declined to $7.4 million as of September 30, 2019, compared to $8.1 million at the end of the fourth quarter, reflecting the gradual depletion to meet existing sales of the excess inventory on hand and a lack of need to purchase new inventory for a period of time due to the existing high levels of inventory. However, please note that as Energy Focus launches new products and depletes popular product inventory, the company will begin purchasing more inventory during late fourth quarter of 2019 and then the first quarter of 2020.

Accounts payable declined significantly to $1.2 million as of September 30 from $3.6 million as of December 31, 2018, which reflects the large buildup in inventory done by the prior management team during fiscal 2018 and the subsequent need to pay those vendors during the first 9 months of 2019 as well as the lack of need to purchase additional new inventory at this time, therefore, not incurring additional vendor credit. Most other significant balance sheet changes from period-to-period you see on our earnings release are because of our adoption of the new standard for lease accounting.

James mentioned earlier that we believe there is value in our strategic plans and ability to generate future free cash flow that are yet to be reflected in Energy Focus' stock price. While we explore all types of financing that makes sense for the business, at this time, we are most focused on exploring more traditional bridge financing to fund our growth and the company's interim needs, while the stock price has an opportunity to better reflect what we believe is a more accurate and fair price of the intrinsic value of our stock. Not only will we explore traditional financing approaches, such as expanding our credit facility, issuing debt that is available to us, but in addition we will also explore every possible operational opportunity to generate additional cash flow to fund the business, such as using our excess inventory effectively and efficiently, increasing sales to reduce our losses and create profits, et cetera. We are optimistic that we would be successful in funding our operations in the next few months, as we reach our anticipated milestones that we expect to enhance the value of our company.

And lastly, I wanted to update you on tariffs. Tariffs continue to be manageable for Energy Focus with no material impact on our business. We are working with our vendors on price reductions to mitigate the need to increase prices and are also evaluating alternative sourcing locations and sources as necessary. Currently, we have no need to pass along the minimum level of tariffs we have incurred from the products we source out of China at this time, but we'll continue to monitor the situation, and we'll respond accordingly. Also, given the very low failure rates of our tubes, we continue to be able to offer our 10-year warrant -- 10-year and 5-year warranties, and we can financially afford to continue offering this significant benefit to our customers.

With that, we would like to open up the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Amit Dayal, H.C. Wainwright.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [2]

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Just focusing on the gross margins first, just to clarify, and I apologize if I got this wrong, but are we going to be closer to the normalized levels of 25% or to the levels seen in the third quarter around mid-30% going forward?

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James Tu, Energy Focus, Inc. - Chairman & CEO [3]

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

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [4]

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

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James Tu, Energy Focus, Inc. - Chairman & CEO [5]

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Yes. We are expecting to launch this first quarter. Delivery should happen towards the end of first quarter. So we already have initial preorders, I would say, because we haven't really formally launched it. We've been UL -- going through the UL process and sampling process. So we would expect the first sale to be recorded in the first quarter. It might not be that material, but as I've -- we've mentioned, we have seen a lot of interest. I would say that second quarter, third quarter should -- we should definitely see the pickup on the sales for this product. But we do expect to -- again, if we are launching the first quarter, so we do expect the sales to happen the first quarter.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [6]

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

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James Tu, Energy Focus, Inc. - Chairman & CEO [7]

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Yes. It's a combination of military sales improving from the low in the third quarter and also our -- a few new customers, as I mentioned, a few colleges, very large colleges, and also the existing commercial customers continue to order more. As I mentioned, it's -- our strategy is, in terms of increasing sales, actually pretty straightforward. You have to have more customers, and your customers have to more -- order more from you. That's very simple. So we are -- we have relatively small number of customers before, and we're adding the customers, and each customers -- we're trying to sell more to each customers. And again, these customers could be end customers, it could be large institutions, it could also be large contractors as those that will buy more from us. I mentioned about RedCap being specified as a better product. We make a press release about the patents that we were awarded on RedCap. That's continued to be a very big product, and we believe that will continue to help our sales, is being specified in schools, colleges and again, it is early in our momentum to regrow that business That's -- the previous management, it has really optimized its potential, so we are seeing a lot of that opportunity picking up as well.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [8]

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Yes. So in that context, James, sort of the history of Energy Focus has been -- the initial growth was driven by a strong military business. And then we were trying to make inroads in the commercial side, and that kind of didn't pan out the way maybe everybody was expecting. So going into 2020 and beyond, how should we look at your efforts for keeping sort of the military business as well as growing the commercial side of things? Where could we come out in -- by the end of say 2020 in terms of mix from these 2 segments?

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James Tu, Energy Focus, Inc. - Chairman & CEO [9]

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I think you will see improvement on the military sales, and as you know, it's a niche market. It's is not -- the magnitude of market size is very different from -- between commercial and military, so we are doing a lot of things to increase the sales in Navy channel as well as military bases. That's a very sizable market for us. There are about 800 military bases that we just haven't tapped into, and we actually have just signed a distributor to about 20 bases, so there's still a lot of room for growth. So we should see continuing growth on the military, maritime business. But you're going to see -- and then we are targeting significant sales growth on the commercial side, as we outlined pretty extensively in the press release and just in the script, we have now 4 teams working on different channels. So I would say that the commercial sales will see the majority of the growth in the next few years.

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Amit Dayal, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Technology Analyst [10]

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

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James Tu, Energy Focus, Inc. - Chairman & CEO [11]

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Yes, that is -- like we mentioned, in the retrofit lamp base market, we do have competitors, but we believe that our quality is just so much better than the competitors. And one thing we have been doing over the past few months is to lower our cost, reengineer the product, and I believe that we could be more competitive in that market. Well, regardless, we still have about 70% of market share today. So we are not winning every opportunity in the retrofit side, but we are winning a lot. The -- by the way -- and I believe that based on what we know about competitors' products, however, I would say that we didn't really lose any sockets because product is just not very good. And for some reason, they get qualified, and we compete with them, and they have low price and all that, but I believe that eventually we can still own the bucket with better quality product. And I think what we hear from the Navy ships, and they really like our product.

The recent order that we announced, the contract we announced is actually for new-builds. The Navy is building a few ships a year. And these are -- we are -- this contract is about a small globe lights. We -- Navy has specified exclusively Energy Focus product. So it also depends on which product you're talking about. In this product, for example, we are the exclusive provider.

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Operator [12]

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(Operator Instructions) Our next question is from Robert Smith, Center for Performance Investing.

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Robert Smith;Center for Performance Investing;Analyst, [13]

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So my -- yes, my keen interest is in the new product, and it's the temperature control feature. So can you tell me about the IP protection around this? Is this something exclusive to you? Or what's this all about, excuse the pun, but maybe you can provide some more color?

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James Tu, Energy Focus, Inc. - Chairman & CEO [14]

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Yes, we like...

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Tod A. Nestor, Energy Focus, Inc. - President, CFO & Secretary [15]

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Like the pun, by the way.

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James Tu, Energy Focus, Inc. - Chairman & CEO [16]

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We'll file a few patents, as I mentioned, that's the most we can say now. And obviously, there will be patented product, and we intend to have global patent on the technology.

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Robert Smith;Center for Performance Investing;Analyst, [17]

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

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James Tu, Energy Focus, Inc. - Chairman & CEO [18]

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That's what we believe.

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Tod A. Nestor, Energy Focus, Inc. - President, CFO & Secretary [19]

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Based on our research on the patents, yes.

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James Tu, Energy Focus, Inc. - Chairman & CEO [20]

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Based on our patent attorney confirmation.

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Tod A. Nestor, Energy Focus, Inc. - President, CFO & Secretary [21]

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Yes.

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James Tu, Energy Focus, Inc. - Chairman & CEO [22]

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Right.

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Robert Smith;Center for Performance Investing;Analyst, [23]

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

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James Tu, Energy Focus, Inc. - Chairman & CEO [24]

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I'm glad you mentioned, that is our product road map. Actually, it has probably more application to the residential market than the commercial market, although either market is quite large. But it's our product road map, and we expect to launch that product.

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Tod A. Nestor, Energy Focus, Inc. - President, CFO & Secretary [25]

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More will come in the future on that.

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James Tu, Energy Focus, Inc. - Chairman & CEO [26]

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Yes, later. Later in the year.

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Operator [27]

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

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James Tu, Energy Focus, Inc. - Chairman & CEO [28]

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

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Operator [29]

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