James Tu – President and Chief Executive Officer Michael Port – Interim Chief Financial Officer

Carter Driscoll – FBR Shivani Sood – Oppenheimer Mark Miller – Benchmark Amit Dayal – Rodman & Renshaw Matt – ROTH Capital Partners James Liverman – Wells Fargo Advisors David Herman – Private Investor

Good day, and welcome to the Energy Focus third quarter 2016 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Michael Port, Interim CFO. Please go ahead sir.

Thank you, operator, and good morning to everyone. Thank you for joining us for Energy Focus' third quarter 2016 earnings conference call. Today, James Tu, our Chief Executive Officer and President and I will report on our results for the quarter. The news release and our quarterly report filed on Form 10-Q have been posted to our website under the Investors Section. As a reminder, today's discussion will include forward-looking statements, including predictions, expectations, estimates or other information that might be considered forward-looking. These forward-looking statements are subject to numerous risks and uncertainties. We encourage you to review our most recent filings with the Securities and Exchange Commission including our 10-K and 10-Qs for a complete discussion of these factors and other risks that may affect our future results or the market price of our stock. We are not obligating ourselves to publicly release any revisions to these forward-looking statements in light of new information or future events. Now, I'd like to turn the call over to James.

Thanks Michael and good morning everyone. I like to open up my third quarter commentary today by thanking everyone for their flexibility and under understanding of our decision to postpone the earnings release and earnings call originally scheduled for November 3rd. As we said in the press release, due to the very recent issue associated with higher than normal failure rate of our commercial Intellitube in limited installation, we did not have enough time before the previous rescheduled call to fully assess the advocacy of our financial payment disclosure, all warranty reserved, as of September 30. And as we laid out in the press release today, we have successfully reached a resolution, and the additional accrual associated with the failure is approximately $70,000 or less than 1% of our third quarter sales. With truly inspiring teamwork our employees have demonstrated that within a short period of time we were able to provide dedicated customer service and identify the root cause of the issue to finish the development of Intellitube 1.1 or IT 1.1, which is our further evolved version of commercial Intellitube, that addresses the failure issue occurring through certain ballasts and installation method. At this point we are trying to start delivering IT 1.1 in mid-December to address these warranty issues and fulfill Intellitube demand for new project. I do want to point that despite of the recent incident, our commercial Intellitube failure rate remains far lower than the industry average of around 3%, according to the recent survey by Facility Executive Magazine. And we believe that with the strengthened design of IT 1.1, we are on track to bring the failure rate of Intellitube back to the level, we have experienced historically for our commercial product which is less than 0.2%. In other words, our historical product failure rate are less than 0.2%, is approximately 1/15 of the industry average, demonstrating the TLED quality and proven track record of our technology. Now I'd like to share with you the highlights of our third quarter 2016 results, which show some improvement in the financials over second quarter and clear progress in our plans to stabilize our business with the military and to continue penetrating into the nascent commercial market with our exceptional LED lighting product. Our sales came in around $8.3 million, which was within the guided range we had provided. As we expected, our military sales continue to stabilize over the previous two quarter and our third quarter commercial sales grew 8% over the same quarter in 2016. And year-to-date commercial sales grew approximately 60% over the same period last year. The sales came in at the lower end of the guided range and certainly no one especially our leadership team and myself is, petrified with our sales at this level, and we are committed to bringing the right people and executing our plans to maintain sustainable military sales level and accelerate our commercial topline growth. As we have mentioned in the recent press releases and Investor Call, we have been making significant changes to our leadership team and establishing stronger sales and marketing organization to best position us to take advantage of our ongoing business development opportunity and new opportunities that we have been seeing the marketplace. As we target major public and private organizations, our sales lead times are typically low, ranging from three months well over an a year, and therefore we have not seen significant improvement yet on our commercial sales in the third quarter. That said, our sales opportunities pipelines have started to grow over the past few months and we are looking forward to accelerate the growth over our 2016 sales level in 2017. Over the past few months, we have also been undertaking a sales force transformation to enhance our focus and capability to communicate through our customers and prospect the unique value proposition Energy Focus offers, instead of commodity selling, that dwells purely upon product prices. We have refocused our sales team into a leaner structure with plans to recruit accounting executive with specific energy, lighting and technology solutions sales experience, to ensure we provide the highest quality of education and service to our customers. In addition, we made tremendous and exciting strides in strengthening our marketing operation and focusing our brand messages in every aspect. We have developed and as well as continues to develop marketing campaigns based on our high quality, high performance and filter-free product differentiation that emphasizes the triple bottom-line impact. Our products allow our clients to achieve better long-term ROIs and maximize the reduction of their carbon footprint through lighting. We are also facilitating a healthier and more comfortable environment for the employees, customers, even for patients. And as we indicated in today's earnings release, we continue to deepen our penetration on select vertical market. In addition to continuing the deliveries to our existing clients, which now include 49 government agencies and municipality, 19 healthcare institutions, 19 colleges and university, 101 school districts and 175 various commercial industrial clients. The most exciting new win came from our healthcare team. After multiple months of educating and working with various leaders, and that a globally renowned medical research and hospital group based in Minnesota, Energy Focus has been chosen to retrofit the group hospitals and office building. We expect to receive initial sales orders from this new client later this quarter or early first quarter 2017. We look forward to becoming their LED lighting partner as we have with our Northeast Ohio based hospital client, where we continue to expand sales opportunity to additional product category outside of tubular LED. With these key wins and increasing sales pipeline momentum we are experiencing in healthcare, which not only operates long hours and does demands more rigorous performance and quality on LED product, but also varies our flicker-free lighting from human health perspective. We are also seeing our average sales lead time in healthcare industry shorten, and we are expanding our investment in marketing and sales efforts for this particular vertical to further demand and leverage our leadership in the vertical to drive new account wins and sales growth. The other aspect of our operations that is key to our future growth is product development. During the quarter, our new 2-foot military Intellitube feature were approved for use in newly constructed U.S. Navy ship, making Energy Focus the first lighting company that Navy has approved to supply new lighting fixture in 70 years. We have submitted our first bit for new ship construction and we will update with you the status of the project as they progress. We will also be poised to pursue any expanded Navy fleet opportunities that arise under the Trump administration. As we are very much look forward to participating in the lighting of new Navy ship in the years to come. During the quarter, we also formally launched three additional new commercial products series that include our 500D product, with 150 lumens per watt efficiency that could save approximately 60% to 75% energy used by fluorescent. We also launched our T5 LED replacement tube series that now completes our tube offering for automation of fluorescent sockets. We also introduced our two-phase troffer that provides a fixture option for our clients that choose to replace the existing fluorescent fixtures without losing the flexibility to economically upgrade to the next-generation LED lighting. In a few years, by keeping the troffer, while replacing the LED tube. At this point, we are well on track to complete our initial product portfolio for commercial interior and exterior retrofit by the end of this year. So we will be able to provide a full line of lighting products for our clients. The broader portfolio of products will also expand our sales opportunities for clients and for project basis, and could make significant contributions to our sales growth in 2017 and beyond. I also like to highlight the development of our training programs, which are critical for us to ensure our staff are well prepared to be the best in their field and to represent Energy Focus in the most professional and informed manner. Under our newly created corporate training department, we have established Energy Focus University in comparing training programs and modules on our new employee orientation and training, technical education, legal and business compliance and ethics, and leadership development. Again, we believe that Energy Focus is starting the growth centers of the LED lighting industry, not only in product quality and performance, but also in advocacy and service. And such powerful [indiscernible] human interaction can only materialize evolving pro-ecommerce with this top level trend. Therefore we plan to continue expand and upgrade our training program offered to both Energy Focus sales and our channel partners For fourth quarter 2016 we are projecting similar sales level to that of the third quarter. We expect gross margin to be in the proximity of the third quarter level as well. While there are some continuing organization expansions necessary for multiple large opportunities we are pursuing, all claiming to purse. We have been implementing plans to contain cost primarily by slowing down new hires and controlling expenses. We plan to continue to defer our overhead expenses down or expand the cost control measures particularly on the timing and the taste of our sales growth over the next few quarter to minimize certain cash expense before we reach breakeven. We certainly do not see any limitation on our market potential as the enterprise LED lighting market continues to warm up and the abduction rate is likely to add slowly. We also believe that prudent cost effective operations will lead to more sustainable and optimal long-term growth. Lastly, despite of the potential threat of the [indiscernible] policy towards clean energy technology and product under the Trump administration, we do not anticipate much of adverse impact on our business of our particular market. LED lighting today isn't directly subsidized by the government, and the rebates offered by utilities usually favor full fixtures instead of the tubes and lamps lighting focus primarily. Should there be reduction of rebates into less stringer carbon emission regulations on utilities under the new administration, our products will likely gain competitive cost advantage against much more expensive full fixtures, particularly in the retrofit markets where budgets are more constrained. Well informally, CapEx for our products in most of the projects are client and project are working on today, is already within two or three years without any rebate and the economics only getting better and as the efficiency and intelligence of LED lighting continues to follow the law of exponential goal. We are optimistic that with our direct vertical focus sales and marketing strategy, we are on the path to create very robust brand trust and leverage on the amount of life multiplier effect from our growing number of successfully and enthusiastic client references within particular verticals to capture them up [indiscernible] as the adoption takes place. Now I'd like to turn the call over – back to Michael to elaborate on the financials of the quarter.

Thank you, James. Before I discuss third quarter results, I wanted to provide and update with respect to our discussion during our second quarter earnings call regarding the fact that certain shipments prior to the third quarter of 2016 to not comply with our process to assembled finished products in accordance with the applicable standard for those orders. I'm pleased to report that as of September 30, we have resolved the issue with all the affected customers and there were no related material adjustments during the third quarter. As the previously discussed, we've implemented improvements to our sales, supply chain and manufacturing process and enhanced communications with our customers regarding the purchasing requirements and have implemented internal processes to ensure that our inventory fulfillment is in line with those needs. Turning my attention to the third quarter of 2016, net sales were $8.3 million down 55% compared to the third quarter of 2015. Net sales of our military maritime products decreased $10.2 million or 69% compared to the prior year's third quarter, well our commercial product sales increased 8% from the prior year's third quarter as we continue our efforts to diversify and expand our commercial markets. For the quarter, commercial product sales comprised 44% of net sales while military maritime product sales represented 56% of our net sales. Based on this product mix, our third quarter 2016 gross margins were 37.3%, a decline of 12.5 points from the third quarter of 2015, when military maritime product sales represented 81% of our net sales. As we've indicated previously, the decline in gross margin percentage from the levels we saw in 2015 is expected, as our commercial products become a bigger part of our net sales. Total operating expenses of $6.2 million increased by $843,000 from the prior year's third quarter due to higher SG&A expense, principally related to the investments in our sales and marketing efforts, product development and the Company's transformation efforts James just discussed. Our third quarter 2016 employee related expenses of salaries and related benefits, severance and related benefits, recruiting and relocation expenses, and stock based compensation increased by $240,000, $352,000, 240,000 and $118,000, respectively when compared to the third quarter of 2015. Additionally sales commissions increased approximately $334,000 compared to the prior year's third quarter as we changed our selling relationship from our military maritime products for the U.S. Navy effective October 1, 2015. Under this new relationship, we began using an outside sales representative who earns a commission on these sales rather than purchasing them at distributor pricing. Partially offsetting these increased expenses was a decrease in consulting expense of $661,000 during the third quarter of 2016 compared to the third quarter of 2015. At the end of the third quarter 2016, we had about 45 sales, marketing and sales support personnel, which is increase of five since the beginning of the year. This compares to about 30 at the end of the third quarter of 2015. At the end of September, we had about 130 full-time employees worldwide, which is an increase of approximately 10 since beginning of the year. The number for full-time personnel is expected to increase by about five during the fourth quarter, as we continue our investment in our sales and marketing efforts. Due to the operating loss incurred in the quarter and after the application of the annual limitation under Section 382 of the Internal Revenue Code, we recorded no provision for U.S. federal income taxes and have a full valuation allowance recorded against our deferred tax asset. The net loss for the quarter was $3.2 million or $0.27 per share compared to net income of $4.3 million or $0.40 per share in the prior year's third quarter. Net sales for the nine months ended September 30, 2016 up $23.8 million decreased 50% from the prior year's first nine months. Net sales of our commercial products increased 59% in the prior year. Our military maritime product sales decreased 69%. The gross margin for the first nine months of 2016 was 36.7% of net sales compared with 46.1% in the same period of the prior year, was a decrease being primarily attributable to a change in product mix between commercial and military maritime product sales. The net loss for the first nine months of 2016 was $9.1 million or $0.78 per share compared to net income of $7.5 million or $0.72 per share in the prior year. In regards to the balance sheet, cash decreased $5.8 million during the third quarter to $19.6 million at September 30. The decrease was primarily due to the net loss of $3.2 million and approximately $3.9 million in accounts payable, principally related to payments for inventory purchases. The majority of which was received during the latter half of the second quarter. Based on our current inventory purchasing forecast, we expect our cash payments related to inventory purchases to be lower than the third quarter. Our inventory balance at September 30th was $14 million, a $577,000 decrease from June 30th, and we don't expect inventory levels to rise much, if at all during the fourth quarter. But that is dependent upon sales levels as the majority of inventory has long lead times and most of the purchasing of these items has already taken place for the quarter. Our accounts receivable balance was $5.1 million at September 30, 2016 compared to $5.2 million at the end of the second quarter. Our day sales outstanding was approximately 35 at September 30th, which is consistent with prior quarters during the year. As we've indicated in prior quarterly calls, we expected our operating expense to grow as we invest in our sales, marketing and product development infrastructure and strength that management team's facilitate our efforts to grow our commercial products. As a result of these investments, we saw a $1.3 million increase in operating expensed in the first two second quarter of 2016. However we experience and overall decrease in operating expenses in the second to third quarter of 2016 of $212,000. In the near term we expect that operating expenses to approximate our third quarter's spending. With that, I'll turn the call back to the Operator for questions.

Thank you. [Operator Instructions]. We will first go to Carter Driscoll with FBR Capital Markets and Company.

Good morning James.

Good Morning Carter.

How are you today? So, I guess maybe just a little bit more in terms of understanding your confidence that the failure – the product failure rate behind you obviously, relative to your competition is still relatively low rate. But since you are growing to growth the C&I sectors, as well as the growth portion of the story, just trying to get comfortable that you think that this should opine you that it has – going to have a limited impact on future penetration of this marketplace, you can just talk about kind of how you learned about the issue. I know you talked about specific stuff monetarily, but what you think you have in place going forward that will prevent this issue from happening again?

Thanks for the questions Carter. So, obviously as we say in the press releases that we found out these problems in a pretty unique setting, right in different type of setting there we configured them unique, that's why we didn't counter them in our original testing, that involves high voltage of electrical usage in the building and sometimes lending, you know hot-swapping and all these things that we don't suggest to kind of do, and they did it in this project and they found out that, they caused more failures. So going back to your question, we did find out a way to resign the circuit in a much robust fashion to eradicate the situation. So, we're pretty confident that we have resolved this issue concerting the recent failures. Going back to the Intellitube being part of our commercial product portfolio, it is – I do want to remind you is the smaller part of our product sales team in the commercial market. In most of the cases we encourage third wire. It just doesn't make sense in most cases to keep the ballast which is the real industrial age product in the fixture. So, we – in most cases we build the rig wire products which now is not dependent on bulb performance but also more economical in terms of the energy usage, if you say that will approximate two watt on top of Intellitube direct fit fashion. So, it is a small part of our sales, but we are confident that we have eradicated the cause, the cause of the issue, so we are confident that moving forward we will move a pretty, go back a pretty robust product portfolio.

Okay. Thank you for the commentary. You mentioned in your prepared remarks that you think you've shorten the average lead time at least for the healthcare vertical. Can you talk about is that a comparison of your most recent win versus what's you had with the Cleveland Clinic or is that overall in general or maybe you can talk about maybe bring some numbers too or ranges around what you think move from and to?

Yeah. This is across the board, we have been talking to different healthcare institutions and we are seeing that people are making decisions faster. As you know it took us above 18 months from the beginning to receiving the first PO for the Cleveland Clinic. So, it was a pretty long battle and Cleveland Clinic is extremely professional world-class operation and its very well evaluations and we expect other world-class healthcare institutions like the one we just announced from Minnesota to do the same thing. But now they can references as they can ask other clients that we have worked with. So it's a combination of better references, better track record, but also the LED market is also accelerating for these organizations, and so it's a combination of these main two factors.

And then maybe one more for me, in terms of the new construction market in Navy, could you kind of bracket and realize that this is not the growth area for the company going forward, but still it's a nice incremental expansion of the opportunity with the military maritime. Can you talk just where you see the size of new construction market maybe timing verses you know how long it took you on the retrofit side, it's going to be little shorter because of your past history with the Navy and I'll get back in queue. Thank you.

Yeah. Now we are seeing the retrofit market stabilizing at the current sales level. The incremental sales growth from new construction is probably we're looking at an annual basis between $5 million to $10 million. So again this is before the Trump administration, so we have heard that there might be increased spending on Navy new ship construction so and that will be obviously upside for us.

Okay.

And obviously going forward, we are exploring additional products on the specialty lighting markets expanding from the core military product portfolio, such as commercial maritime businesses and we don't have the specific to share with you yet. When it is the right time, we'll talk about our plans in that market.

Maybe I just squeeze in more and how about – you've had couple of recent wins with the allied Navies, maybe just an update on progress there and timing of either incrementally new opportunities or potential ramp in some of the initial deployment?

Yeah. As we announced, we spoke to Canadian Navy last quarter and we continue to make progress there, I think we'll see more sales from Canadian Navy in the next 12 months. We continue to work with the multiple navies and we'll update with you when we make the progress on securing the first deal.

Appreciate all the answers. Thank you.

Thanks Carter.

We'll take our next question from Colin Rusch with Oppenheimer.

Hi. This is Shivani Sood on for Colin Rusch. Can you just speak to the inventory levels that when you expect them to unwind them first of all?

Sure. I think we mentioned before that based on our lead times, so prior the inventories, we utilize our sales forecast and projections. So as I talked about in our comments, we don't foresee the inventory levels to increase as we've already booked the majority of our inventory purchase requirements and as we're looking at the sales in the pipeline that we anticipate taking place in the fourth quarter and on into the first quarter.

Okay. And then just in terms of the opportunities that you are taking down for optimizing the supply chain. I guess what sort of impact do you think that could have in your costs numbers?

I am not sure if I understand your question, maybe you can elaborate that.

Yeah. Just in terms of any opportunities that you might be seeing in the market, you optimize their supply chain as you try to mitigate the cost increases?

Could you start with sourcing?

I think the – you'll talk about gross margin impact, is that what you are trying to…

Correct.

Okay. Yeah. Even in large opportunities, we hold our margin relatively well, just because of our product are just in many aspects superior to the competition, and for the right customers they appreciate that. They appreciate the whole package we are providing from quality performance to service unless there is high positive human health impact and all these factors. So we don't see a tremendous pressure on margins. I think as I said before, our limitation is getting into the right customers and continue to educate and advocate our product, that differentiation. So, I don't see too much of a margin of pressure. Obviously I do have to emphasize that you know LED lighting market is rapidly changing market and we have to stay cost competitive, and this is why we have a pretty robust supply chain operation when it comes to working with OEMs and in a very agile fashion to adjust our costs down, but definitely won a lot of tough priorities.

Great. And then just lastly for us, as you look at the competitive landscape, are you seeing kind of backing up anywhere, and do you think there are particular areas in your IT that are especially susceptible?

The competition landscape really hasn't changed that order much. Remember we are targeting large organizations. And in those types of project and competition, we face mostly large incumbent brand, I mean the Philips and GE of the world in a way. Because of the more rigorous demand now on performance and quality, we don't see much of a change in terms of competitive landscape. I think our competitors are trying to understand our price and sometimes we do have to walk away from projects, but I don't see that's different. I think we need to stay ahead of the curve, not just on product performance and quality, but also on cost competitiveness as I mentioned. This is why we early on we established a pretty robust supply chain operation because it's the whole package we are selling to the customers that matters.

Great. Thank you so much.

Thank you.

We'll take our next question from Mark Miller with Benchmark.

Good morning.

Good morning, Mark.

Just was wondering, what do you look at as your breakeven revenue levels, is it still around $16 million to $17 million?

I believe that we could be lower than that, given the expense control that we are working on, we have been working on and we continue to work on. I cannot give you a specific number yet, we should be able to provide you the more specific breakeven lines in the next quarterly conference call, but suffice to say that it will be lower than that number that we're working on.

Well, if you are in that relative range just from by my model and I mean just projecting them on fairy modest increase in OpEx as you go up to the sales level, basically SG&A. This would indicate the bigger margins have to come up substantially, but as you've indicated as you've mix more towards commercial product, they're lowering margin. So are you getting significant benefits from increase factor loading? I am just wondering how the margins come up with the lower product mix?

Well, if you look at this quarter between commercial and navy sales, it's close to 50/50, not quite yet, but you're talking about close to 55% on navy and 45% on commercial sales, and our margin are still at 38% level. So we are comfortable that margin will maintain above the 35% level even when our commercial sales grow.

I apologize if I missed this. I had some distractions. Did you give the cash flowing from operations?

The cash used in operations for the quarter referenced to the cash flow statements was $13.7 million for the nine months, for the nine months of activity.

For the nine months. Okay. Thank you very much.

We'll go next to Amit Dayal with Rodman & Renshaw.

Thank you. Good morning guys.

Good morning Amit.

We had some product returns in the second quarter as well. Is there any relation between that?

No. they are different issues. One is concerning how we manufacture the product, the other is actually design issue, but it treated under as I said unique expenses. So they are not related and both of them have been resolved completely.

Understood. You spoke about the sales cycle renew within three months to a year. Is this sales cycle sort of pro-long potentially due to capital constraints on the customer side?

It's just the nature of our customers. They are large organizations. They take time to evaluate. It takes most of all decision makers to come together and agree upon a LED lighting tender for usually large scale projects. It's just an inevitable process. Officially as I mentioned before, when you are comparing choosing GE, Philips or Energy Focus and, we would like to say nobody gets fired by using Philips light. So, to use Energy Focus, they have to actually evaluate the Company's product and the Company's sales more extensively and it's just an inevitable process, but once they do it very likely and they ultimately they choose to partner to Energy Focus, because our material packaged altogether. But I think as I said before, as we – the references from the cabinet verticals that we've been working continue to expand, we believe that it will continue to show them the sales cycle.

Also some of your commentary earlier, you know that it's now been almost a year this effort into billing the channel et cetera. On the C&I side should we expect a much stronger sort of acceleration when those sales cycles sort of come to an end, you start winning some of those?

That's definitely our plan and our expectation going into 2017. As I've mentioned, also we've been reorganizing our sale force in a more focus on the select verticals in first two quarters really, so we expect to start seeing the expectation of in the next quarter two quarters

And for the military and the navy deals, these lower now, should we expect these to sort of be the new normal sort of levels or…

I will say that from now that's what we are expecting. As I mentioned this a while ago, you know our approach to grow our sales is the brick lane exercise. Right, I mean we have a core business that we want to hold on to and then we add on top of that new business. And that applies to the military side and that applies to the commercial side. On the military side we have existing retrofit market for existing ships and then we just add account on top of that the new construction opportunities. And for the navy, and we need to expand on these all three markets incrementally and that's how we can improve grow the military sales again. And on the commercial side, we have the public sector, vertical we have the healthcare sector and we have the commercial industrial sector and we have teams benefiting through these verticals to growth the business.

Understood. That's all I had thank you James.

Thank you, Amit.

We'll go next to Craig Irwin with ROTH Capital Partners.

Hi guys it's actually Matt in for Craig.

Good morning Matt.

Can you maybe just elaborate a little bit on the changes you've made on your mid-pointer sales force? It sounds like they are going to be more focused vertically. I mean where are you in terms of completion of this, are you half way, three quarters, two-thirds or any color you can give there, and then just also looking into 2017, when can we start [indiscernible] evade a little bit?

I would say that we are pretty much, we are probably 80% done in terms of the sale reorganization with the team. As I just mentioned, we have teams that focus on particular markets and we are focusing especially on healthcare and the public sector at this point, because we've seen department growth and opportunities at hand, and going to 2017, we've definitely expect to see this increasing sales pipeline turn in sales.

It's helpful. And just in terms of Q4 any qualitative and looking into 2017, any qualitative commentary you can give on what you are seeing in terms of your backlog and how you see that growing going out over the next two to four quarters?

In terms of Q4, as we said, we expect sales level growth to Q3.

I apologize if I missed it in the prepared remarks, but we've got pretty even split upon commercial and military and then within commercial, it sounds like you have a nice deal with the Minnesota hospital system, but what other traction are you seeing in terms of just going to 2017 with some more of vertical ramp that you are putting money, so far?

The Minnesota hospital system, we expect – focus our sales coming in 2017. It obviously will be a multi-million dollar account, and we're very excited about that. That's just one of the 19 hospital systems we now working with. So, and market [indiscernible] are contributing more significantly going to 2017. Again as we laid out before, in most predominant most of the situations we said on the new accounts, they don't give us one big contract, the rest will fill a few building, then a few building and they expand the programs from there. And that expansion itself initially especially will take multiple months. And that why we lay out a number of customers now we have in our commercial business and you see all this the hospitals and industrial commercial customers, they are all going to continue to contribute to the growth in 2017. So, if there are multiple accounts, we try to let everybody know. But overall, we're seeing increasing number of increase – increasing number of companies, large companies that are turning to us, and I think it will be pretty exciting momentum at this point initially. And obviously as I said, as we've just reorganized the sale force, it will take a few months to really start ramping the sales, but the indicator or sales is the sales pipeline, and we're seeing that improving.

Then just my last question is, you mentioned in your prepared remarks, yeah, collaboration of intelligent lighting. Can you just walk us through a little bit about how you are positioning yourself to address that, the growth in the market and capitalize on it?

Sure. If you look at our product lifecycle over the past three year, we've seen interesting thing in new product on annual basis, new generational product on annual basis. We are planning to – this year was the first year that we introduced our Network-Ready Tube and the tube will be able to be adjusted either remotely, wirelessly or via through the landline. So it gets ready to become more intelligence when you introduce, say data harvesting or occupancy setting through the mechanism and that's why we're planning to introduce next year. So again, I think every year you will see the evolution of the intelligence being cooperative into the tubes or other lining products. We also have been introducing some fixtures, troffers that we're also incorporated in Intellitube. Again, I think the difference between our market and the new construction market is that our customers are very cost conscious, ROI conscious. And so when we will introduce the intelligence, they have to generate the benefits for the customers to the income and that's why Energy Focus is dedicated to providing a very competitive high performance, high quality product portfolio.

Great. Thank you very much. That's all I have.

Thank you, Matt.

So we'll go next to James Liverman with Wells Fargo Advisors.

Hello, James

Good morning, Jim. I don't know if you can hear me. So I am very impressed with all the transitions you're managing to address all at once and that looks like as you said things will be moving very nicely towards 2017. Can you comment on the progress or changes that are happening in the department of defense where the lighting upgrades would be more easily addressed by you or do you think that's a longer term prospects?

You're talking about specifically for the new administration?

Well actually the Department of Defense – I thought they had done a procurement transition for their buildings to improve lighting from Jupiter fluorescent to tubular LED, and I was wondering, if it becomes very big opportunity just independent of the administration that's how you are seeing some path where you may be able to address that market or is that going to be slower to evolve do you think?

We addressed the public market through our public sector, which is what we call the energy service company market, ESCO market where they provide energy efficiency upgrades solution. Again that market is – they usually require budgets and that's what the ESCO provide. So we try to partner with the ESCO industry to gain to the market. As I mentioned earlier in the call, we believe that there was wired tubes replacing fluorescent is the most economical and smartest way to retrofit the fluorescent socket. And at this point, government regulations have not allowed direct wire yet in the GSA building and we have been working with GSA, agency officials about changing this. So we are in the process of working on that. But even before that we still have the Intellitube to provide to the market. And so, short answer to your question is that, absolutely we are dedicated to taking advantage of this public sector opportunity.

Thank you very much. I appreciate the answer.

Thank you, Jim.

And we'll go next to David Herman, Private Investor.

Thank you for taking my call. My question is that no mentioned was made about your partnerships with, you call the [indiscernible] partner. I was wondering if that was progressing sale change that you have divided to change that?

That's a great question. No, we didn't decide to change that. It's now no more part of our business. We are all about building our partnership network. I believe that they are more than 40 of them now in the list, so we just didn't mention in this particular press release, but as deals is going forward that's absolutely our main focus of growing our commercial business.

I guess my follow-up question to that is, I mean this must be a $1 million each I understand, year or so to build. Do they take a while to add up, I mean thinking of sales? I guess then everything you are talking about is great, but we're not seeing it translate into sale. I mean, like the Navy it took a year or so to catch up the sales and we think they're falling back again, but I'm just not seeing the ramp up in sales yet. I guess my question is, when can we start seeing this approved? So, just talking about if you are 40 of them and $40 million a year roughly, I mean there are some of who are performers obviously and some might fall out, if thinks like it's not translating into the number here

This is a good question. And this is why I mentioned earlier that the sales lead time and the rebuilding of our sales force this year, we expect them to payoff in 2017. And the second thing I will mention is that the vertical focus that we have been talking about, it does take time for us to build the momentum. And your presumption about the 40 IWPs or Intra World Partners that could produce $40 million a year is not a bad one, on the other hand a lot of them, we just signed up this year. So, if you got to let them to take time to build the project, and again the project they build will take multiple months, it's not longer to that contributing to sales to them and to us. So, we are always to say that it will take time to build hopefully very sustainable and respectable business with a rapid growth from 2017.

I was here for the navy build-up that happened rapidly.

Well, that's not true though. If you think about the navy build-up, we had the initial restructuring in the mid of 2013 and we really didn't see sales growth until, I think third quarter of 2014 and really acceleration – rapid acceleration in early 2015.

That's brings me to my other question is, obviously there was inventory build in the Navy distributor and that little blip turned out to be a year-long, and we seem to be stabilizing. But again my understanding was that we would catch up to the inventory some time, and sales might edge up a bit here. I mean do you see that happening?

Yeah. So, you're right. We've been trying to deplete the inventory and we have made good progress there and we'll continue to do that. I think our strategy is that we do not like to see this monitor quarter-over-quarter sales frustrations, so we are managing a more sustainable quarterly value in the navy business that is our choice.

I guess what I'm trying to pull out of you is, I mean are we getting close to seeing the – I mean it's stabilized, I mean the inventory is getting close of being eliminated and can…

Yeah. We are getting close. Again, it doesn't mean our sales growth will suddenly jump, because we are managing – we are seeing, I think we mentioned that impact two three quarters, that we've been doing a lot of grassroots selling this year as opposed to we rang on our distributors and that grassroots selling has the pace of sustainability there we like to maintain that.

Okay. Very good. Thank you for taking my call.

Thank you.

It appears there are no further questions at this time. I'd like to turn the conference back over to James Tu for any additional or closing remarks.

Thank you for your support and patience. And we look forward to catching up with you next quarter. Have a great day.

This does conclude today's conference. We thank you for your participation. You may now disconnect.