Greetings, and welcome to the Energy Focus Second Quarter Fiscal Year 2020 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder 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, Executive Chairman and Chief Executive Officer; and Tod Nester, President and Chief Financial Officer. Before we begin today's call, I would like to remind everyone 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 on our most recent 10-Q as well as our 10-K—and the most recently filed 10-Q, sorry, 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 release, certain financial metrics are presented on both GAAP and non-GAAP adjusted basis. Reconciliations of the adjusted results to the GAAP results are available in the tables attached to the earnings release, which is posted on our corporate website, energyfocus.com in the Investor Relations section of the site. I'll now turn the call over to James. James, please go ahead.

Thank you, Brett. Good morning, everyone, and thank you for joining our second quarter 2020 earnings conference call. First of all, I hope you all stay safe and healthy as COVID-19 pandemic continued to rage across the country over the past few months. Deemed, as an essential business, we have continued our operations during the second quarter as normal, and implemented a Coronavirus contingency plan, or CCP, that mandates temperature taking, mask wearing and social distancing in our manufacturing facility and our corporate office. We are fortunate that none of our employees so far have contracted COVID-19. We appreciate the hard work from all of our employees, the business from our customers and the support of our suppliers in this unprecedented time. We are continuing to enforce CCP until we believe that COVID-19 is no longer a clear public health risk. Now turning to the review of our second quarter 2020 performance, it was both a challenging and encouraging quarter for Energy Focus. While our financial results were impacted by the previously announced shift of revenue from the second quarter into the third quarter, we continue to make exciting progress towards positioning our business for sustainable, profitable growth. Despite a significant amount of sales being shifted from Q2 to Q3 and a notable slowdown of commercial activities due to COVID-19, our net sales of $3.3 million in Q2 still grew 8.2% year-over-year over the second quarter of 2019. Gross margins also continued to improve, while our loss from operations decreased significantly from $2.2 million to $1 million, excluding quarterly warrant fair value adjustment. Our continuing growth during the second quarter was supported by a more resilient military business, which grew 11% from last quarter and 139% from the same quarter a year ago. As we mentioned in the last earnings…

Thanks, James. Net sales for the second quarter of 2020 were $3.3 million compared with 2019 second quarter net sales of $3.1 million, an increase of 8.2% year-over-year. The year-over-year increase in net sales was primarily driven by an increase in military sales. When compared to $3.8 million in the first quarter of 2020, net sales were down 11.8% on a sequential basis due in large part to the shift of a portion of certain military contract order from the second quarter to the third quarter, as James mentioned previously. Sales to our top 10 customers increased 34.1% and sales to our top 20 customers increased 20.7% each compared to the second quarter last year. From a mix perspective, in the second quarter, military sales were $2.3 million representing 68.3% of total net sales compared to $951,000 or 30.9% of total net sales for the second quarter of 2019. The year-over-year increase in military sales was primarily due to increased sales to two of our top 10 customers compared to the second quarter of the last year and one particular customer, representing most of the increase. Sales to commercial customers were $1.1 million, representing approximately $31.7 million of total net sales for the second quarter of 2020, down from $2.1 million or 69.1% of total net sales for the second quarter of 2019. The year-over-year decrease in commercial sales was mainly due to the impact of COVID-19, as James spoke about earlier. Overall, sales to our top 10 commercial customers declined 51% year-over-year and sales to our top 20 commercial customers declined 50%. This was more than offset by our military segment. Sales to our top 10 military customers increased 152%, and sales to our top 20 military customers increased 141%. Gross profit for the second quarter of 2020 was…

Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star, one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star, two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Amit Dayal with H.C. Wainwright. Please proceed with your question.

Thank you. Good morning, James. Good morning, Tod. Hope you guys are…

Good morning, Amit. Thank you.

I am good, thank you. Just thinking about EnFocus, again, a pretty exciting launch for you guys. Contribution in 3Q and 4Q of 2020, it looks like from the commentary, not much contribution in the third quarter from EnFocus, but going into the fourth quarter, and even into 2021, how are you preparing for the ramp? How should we think about EnFocus sort of being an important driver for growth for you guys from a contribution perspective?

Yes. That's definitely the question we're asking ourselves every day, right? Because the—I think in the normal times, EnFocus, probably would have been a much bigger product already in Q3. Just based on the feedback we've got from—as we described earlier, various types of users, channel partners, they love it, right? I mean this is a lighting control system that finally people can afford, and people are willing to put in the building. I would say that, that's really worldwide, right? I mean we have got interesting inquiries from over 30 countries. This would have been a much bigger product by now, but because of COVID-19, we just don't know the sort of the momentum—when the momentum of the business activities will start picking up. Our guess is that in fourth quarter, we should be—we're just starting—some projects being implemented. We mentioned that there has already been specified in some projects. I think fourth quarter is a little bit uncertain. A lot depends on when the facility managers are ready to make decisions. That's the question that is very hard to predict which is part of the reason why we have been focusing on developing the UV products as soon as we can. There is an urgency element to that because people—if you ask subsidy managers today, what's their top concern, it's about safety of their occupants, right? How do you get people back to the building? I think there are just not a lot of options out there that are really effective. EnFocus UV troffer is going to be one of those solutions that we believe is very affordable, very effective and can be deployed very quickly, right? I mean, you—again, as I mentioned you don't need any specified designer in between, you can basically replace the fixtures and the switches, and then you've got very effective air disinfection in the room, literally in every building. So that has an urgency—immediacy to it in terms of getting sales. We are hopeful that when we launch in Q4, it could start contributing more significant from Q1. It's too early to tell if we can make some pre-shipment orders. We did some orders before the shipments in Q4. That's probably the best answer we could do right now in terms of the Q4, most immediate impact. We do know that once the cloud is lifted or at least stabilized, we could see pretty substantial meaningful sales from EnFocus and EnFocus UV. I don't know, is there anything else?

No, that's perfect.

You know briefly, and I understand the lack of visibility you have right now because of current circumstances. But just again on the EnFocus sales and marketing side, are you taking control over that more—that process with your internal resources and team or are you going about selling that in the traditional way? I'm just trying to see if there's anything you are doing that allows you a little bit more control over the sales process for EnFocus.

Yes. When it comes to product development dimension, we have a very strong team internally. We are expanding that engineering team as much as we can aggressively. We also work with our suppliers, leveraging their later-stage engineering capabilities or resources. As I said, we put the UV development in top priority because it's not only good for our business. I mean, right now, that's what people are concerned about. That's what people are willing to buy back for people they can get money from, the federal, from the state, from the subsidies. That's good for our business. But it's also a good business. I mean, it's just that people need. You can help save lives, reduce infections. We want to make that our top priority. We put our resources there to launch the product. The first product, as I mentioned, is EnFocus UV troffer. There will be other products, and we'll be announcing in the coming months that will continue to expand our portfolio in UVGI. That's probably a very big, I would say, a strategic plus for the Company. We now have a very strong lighting portfolio, and then we are building aggressively on the UVGI portfolio. When it comes to EnFocus sales and UVGI product sales, they—we are expanding, as I mentioned, aggressively on the channel partnership network. That is the one thing that is very different than a couple of months ago before we launched EnFocus where we focus most on end users and the contractors. Now we are reaching out to as many agents and distributors and contractors as possible to help us deliver the product to the projects they are already working on. That's the best leverage of everybody's time. If you look at like three months back and versus today, the customers we are talking to are relatively larger. Many more customers are talking to—and obviously that trend continued to evolve, to strengthen over the coming months as we expand the distribution.

Yes, and then moving to the gross margin, James, for 3Q, could these gross margins remain elevated with contribution from military sales remaining strong?

I would say that the recent quarter is—I wouldn't say it will be a normal quarter. It was higher because of the mix. The high military mix in the quarter. We will expect in the mid to higher 20s generally as the commercial sector becomes a higher portion of the mix as we grow EnFocus, we will expect a sort of higher 20s to be more of the range. We do have a focus on our gross profit dollars. Some of these larger volume opportunities are there. That is a very important element of our growth. We believe the incremental dollars available to us that haven't been there in the past, will have a good blend of rate and dollars flowing to the bottom line. We still believe that range of the mid- 20s to the high 20s, low 30s is where you'll see us on more of a normalized basis.

Understood, and then just one last question with respect to sort of the COVID-impacted environment, are you facing issues with deployment? Has that sort of environment improved for you? Then on the collection side, are you comfortable with how you are able to handle your accounts receivables, etc., in this environment?

I'll handle the receivables side. The—we have had—so we have a couple—we're the beneficiaries of good luck on that. There are two aspects. We implemented an insurance program on our accounts receivables late last year. The timing of that couldn't have been better. That—but at the same time, we haven't experienced really any material defaults either. We do a very good job of assessing the credits upfront. One of the reasons we did go to the partner we're working with on that was they have a very robust ability to assess the credits of our customers. We think we have a very good "credit review" and a credit line process. We provide the proper lines of credit, and then the collections we're quite good at. We have very, very low default rates. It's one of the reasons we received such favorable terms on the recent AR borrowing facility we just refinanced with. We continue to experience very good receivable collections and I'd say, more favorable than probably most commercial entities. We have not experienced abnormal default rates. Amit, what was your first part of the question? I missed that, I'm sorry.

Yes. The first part was just any challenges from a deployment perspective, obviously, access to facilities, etc., in the second quarter may have been tougher. I was just thinking if that has improved for you guys and that hopefully facilitates the revenues as well?

Yes. I think the people are working. It's not like the managers are not working. They are working, they're just not making as many decisions as they usually do. They—imagine you're hospital, school, government agencies and state government agencies, your budgets are likely going to be constrained, and you are worried about how much money you're going to get next year, right? Because the states are having huge deficits now at the moment. That's the uncertainty that overhangs, and hospitals, you would think that the COVID-19 would give business, the hospitals—their business are not good because they are not having the usual business because of COVID-19. People are not going to hospitals as much. These are the budget concern of the facility managers. The excess is not an issue. It's the decision-making that we are consulting with. Which, again, we are literally using the UVGI product portfolio to offset that short-term softness. The softness might linger for months or quarters, we don't know. We could also see like what we have seen, like I had mentioned earlier, that some countries that already—that have seen the COVID-19 cases drop to the minimum level, they are seeing people coming back in most of the facilities. If we are three months away from that, we could see a resurgence of business then. That's really the uncertainty we are looking at. On the other hand, we are very excited about the UV product because it helps people come back to the facility, right? It's going to reach out to—we had the capital outside of the usual organizational capital budget. You could get this from federal funding now for COVID-19 relief, to implement these technologies, these products. That's what we're planning to sort of offset the short-term uncertainty on the EnFocus or typical lamp products that are on the—in the commercial market.

That's all I have guys. Thank you so much for all the color. Appreciate it.

Thanks, Amit.

Thank you. Ladies and gentlemen, as a reminder if you'd like to join the question queue please press star, one on your telephone keypad. Our next question comes from the line of Jason Revland with Revland Wealth Advisors. Please proceed with your question.

Hi, everyone.

Hi, good morning.

Good day (inaudible) Thanks for taking my call. I'm a new shareholder as of a few weeks back, and really got to know the story well. After listening to today's call, I really get the sense that you're gearing up for something significant as far as satisfying demand, given the balance sheet, the credit line activities, the targeting of larger distribution partners. I'm very encouraged to hear that today. My first question is, what are the engineering or testing steps that are left in place before you can actively sell the UV product? Have you trialed it with any of your partners yet?

The first part of your question is the engineering side, and which I already mentioned that we have overcome the key challenges on the engineering side. It's being fine-tuned right now. The product is working. It's working as we like. But we are fine-tuning to make it finalized. Our plan is to finalize the product design next month, which is September. Then we really could start going into production in Q4 and start selling as early as early Q4. It depends on, again, the process of the—UL process, how long it's going to take. We are—that's why we are projecting Q4. But we—obviously, as we—as I mentioned, we want to get this product out as soon as possible to—not only for the business but for the better good. In terms of selling the product, we have already, obviously, consulted with some of our customers, our early customers, just like what we did with EnFocus, literally a three month, four month lag. That how they think about the product. I can say that there's a pretty good level of interest. Again, we haven't shown deeper product yet. We’re still in the prototyping phase, we're finalizing that next month. But so far, all the indications are telling us that people would want this product.

Great, and my last question is, is there any sort of federal funding or state level funding opportunities that might assist you in the sale of that new UV product in some way?

Yes. We have not explored that actively. We have been still focused on developing this product. Eventually I mean, it's very straightforward. If this product works, we don't need the funding, right? That said, now we have the products that have pretty much close to finalization. We might start actually seeking federal and state assistance in terms of getting this product to more places faster. We don't necessarily need the research funding. We have already spent that money, and we have already did the work. That's one aspect of it. How do we get this product to more agencies, more schools, more hospitals as fast as we can? Number two is that there are other UVGI products in the work that has already—well under development that I haven't talked about. Those are the projects that we would likely seek federal support as well. But again, we don't need it. Can we get those support so it helps us move faster, we will be exploring those options?

If I might just ask one more, as far as some of the very large light manufacturers, do you see any possible opportunities to, let's say, partner with them, license out the IP that now seems to have somewhat added protection? Just maybe expand the market through, let's say, a much larger partner at some point?

Yes. That's a very good question and very important question actually because we have considered, obviously, licensing EnFocus in the future. We have just been focusing on getting the product out, asking, piloting, sampling with our current customers. We like to get the product in more facilities over the next few months and quarters. Then we can consider licensing the platform. We do see a clear potential of that. The other thing is that this platform is so unique and so powerful that we could continue to develop more products on top of it. The best example is this UVGI EnFocus troffer. This troffer leverages on the EnFocus capability. You can bring UVGI equipment into a room, for example, a building, but how do you control it? It's—that control aspect is going to involve cost. It's going to involve with design and everything, wireless sometimes, but then you've got the wireless protocol you have to deal with. This EnFocus platform enabled the UV product to go into an existing building very quickly with the simple change of switch. That enabled a lot of rapid deployment of advanced lighting technologies like the EnFocus UVGI troffer. We obviously are already starting to develop additional products on top of EnFocus. We'll continue to do that. We'll continue to move forward to expand the product portfolio. We will be considering licensing it over the next few months and quarters after we have enough sales and more facility implementing our products.

I'd like to just build on that with two additional short comments, James. One is that it would also be—EnFocus platform allows it to be done affordably. That whole UVGI capability is done affordably versus any of the current alternatives. On the partnership front, that can take many forms, not just licensing. There's many forms we're considering and talking about to leverage that intellectual property across the world, so to deploy it quickly and leverage our intellectual property.

Great, James, thank you. It's great to have you back on board. This has been a great call. Thank you very much.

Thank you, thanks Jason and welcome on board.

Thank you. Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. Tu for any final comments.

Thanks, everyone, for your participation on our call, and we look forward to talking to you soon in the next earnings call. Stay tuned, and have a great weekend.

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