Michael Port - CFO, Controller and Secretary Ted Tewksbury - Chairman, President and CEO

Colin Rusch - Oppenheimer Craig Irwin - Roth Capital Partners Carter Driscoll - FBR Capital Markets Mark Miller - Benchmark Company Amit Dayal - Rodman & Renshaw Research Allan Snider - Oppenheimer

Good day and welcome to the Energy Focus First Quarter 2017 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Michael Port, Chief Financial Officer. Please go ahead sir.

Thank you, operator, and good morning to everyone. Thank you for joining us for Energy Focus' first quarter 2017 earnings conference call. Today, Ted Tewksbury, our Chairman, 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 web site 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 and our actual results may differ materially from these statements. We encourage you to review our most recent filings with the Securities and Exchange Commission, including our 10-K and 10-Q 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 Ted.

Thanks Michael. Good morning everyone and thank you for joining the call today. First, I would like once again to welcome Michael Port back as Chief Financial Officer. As most of you know, Michael served as Interim CFO in the second half of 2016. He knows the company well and has proven himself to be an exceptional and capable leader. Thanks to Michael, the CFO transition has been seamless, and I look forward to working with him to implement our turnaround plan. Next, I'd like to briefly rewind to last quarter's earnings call in which I outlined a strategy to return Energy Focus to profitability and achieve our vision of being the leader in LED lighting retrofit technologies for the toughest applications. The plan consisted of three parts; reduce operating expenses, improve gross margins, and grow revenue; very simple. The revenue growth plan consisted of a five point strategy. First, light up the country with an experienced network of Energy Focus trained agents, representatives, distributors, and channel partners. Second, focus our commercial business on healthcare, education, and large commercial and industrial applications that value our differentiation, while exiting commodity markets. Third, defend and grow our military maritime business, while diversifying into other extreme and demanding applications. Fourth, expand our available market by diversifying the product portfolio into new categories of lamps, fixtures, and controls. And fifth, partner to develop connected lighting solutions for smart buildings, cities, and the Internet of Things or IoT. I'll provide a progress update on these initiatives in a moment, but first, let me review some of the financial results for the current quarter, which Michael will cover in more detail. Net sales for the first quarter of 2017 were $4.1 million consisting of $3.1 million in commercial and $1 million in military maritime sales. While the overall revenue for the quarter was down 43% sequentially and 51% year-over-year, sales of new products introduced in the last six months actually grew to 24% of total revenue, higher than in all of 2016 combined. Gross margin for Q1 came in at 14% and our net loss was $4.5 million or $0.39 per diluted share. We ended the quarter with $15 million of cash and no debt on the balance sheet. In our military maritime business, Q1 revenue of $1 million was $2.8 million lower than last quarter. This drop is due to the expiration of our exclusive distribution contract as well as delays in government funding partially offset by new orders for the military. Recall that in 2016, the company shipped an obligatory $3.1 million per quarter to our navy distributor under the terms of our exclusive distribution agreement. Adjusting for that $3.1 million quarterly stocking order, military revenue would've actually increased and overall revenue would have been flat quarter-over-quarter. As a result of the stocking agreement, our distributor still has inventory of our Military Intellitube although I'm pleased to say that the amount has come down significantly since our last earnings call. Consistent with our strategy, we continued to expand our customer base and diversify our markets for military lamps. In addition to ships, we completed our first sale of tubular LEDs to U.S. Navy base. The positive references gained from this first successful military base installation should help drive additional wins in this segment. During the quarter, we also started shipping our two-foot fixtures for new ship construction and our recently introduced floodlights are gaining strong traction with the Navy. We are well positioned to benefit from President Trump's Buy American, Hire American executive order, which should favor companies like Energy Focus with U.S. based manufacturing and assembly operations. Because we have manufacturing operations in both Ohio and Taiwan, we have the flexibility to produce products that are made in the USA as well as Buy American Act and Trade Agreement Act compliant. It is important to note that tubular LEDs are not just light bulbs, they are sophisticated electronic systems that are capable of being compromised by embedded malware and other electronic devices, thereby posing a potential security threat to the United States. When security, reliability, and product lifetime really matter, we are confident that the U.S. Navy will continue to support Energy Focus over foreign competitors and other unproven sources. Energy Focus was the first to market with Navy certified TLED and has shipped over 0.5 million lamps to the Navy over the past five years, with virtually no defects. We are committed to our Navy customers and we intend to defend and grow our leadership in this important segment. In our commercial business, Q1 revenue of $3.1 million fell 6% from the prior quarter and to 18% [ph] from Q1 of 2016. The unfavorable year-over-year comparison was due to the timing of our energy service company or ESCO partner projects in 2016 and not due to any deterioration of business fundamentals. Our commercial revenue as you've seen tends to be lumpy and difficult to forecast due to the small scale of the business, long design cycles, and the uncertain timing of customer orders and construction and renovation cycles. We can expect this trend to continue until the adoption cycle is more fully underway and we reach higher revenue levels. Despite quarter-to-quarter fluctuations, we're experiencing strong customer interest in our products and have a robust pipeline of design wins. In healthcare, we continued to expand sales to a well-known Northeast Ohio healthcare facility and we received their approval for our recently introduced industrial down lights. Another other large Ohio healthcare system has also moved forward with retrofits in multiple locations. In education, we were awarded a 40,000 tube project at a major state university, we completed the retrofit of the largest Jesuit high school in the US, and we secured a partnership with a major ESCO on retrofit contracts at four schools. According to our estimates, the healthcare and education segments represent total addressable markets or TAMs of approximately $2.2 billion and $4.6 billion respectively. The addition of industrial, manufacturing, and retail brings the total commercial and industrial TAM to over $20 billion. In contrast, we estimate that the size of the U.S. military maritime TAM is less than $100 million due to our penetration of 40% of the available sockets and the dramatic price erosion caused by recent foreign competition. Given the immense TAM and the mere 7% penetration to date ph , there is no excuse for our commercial revenue not to be growing. Many of these applications require the long lifetime, low flicker, durability, and low maintenance that Energy Focus' products provide. We have the right products as evidenced by our high success rate with the customers we've touched, the problem has been that we're not reaching enough customers and our current sales model just doesn't scale. The key to unlocking growth in the commercial sector is to augment our direct sales force with a countrywide network of experienced sales representatives, agents, distributors, and channel partners who can expand our customer reach and geographic coverage. This will enable us to greatly multiply revenue with products that we already have. To lead this effort, we hired Larry Fallon as our new Senior Vice President of Sales and Marketing. Larry, who joined us on May 1, has over 30 years of experience in lighting, controls, building automation, and IoT. As Vice President of Sales at CIMCON Lighting, Larry built and led the company's sales organization, introducing it into a 75 agent market and growing revenue fivefold in 12 months. Before that, Fallon served as Vice President of Sales at Sensity Systems where he managed the transformation of the company from traditional lighting to networked lighting and data. Larry's background is a perfect fit for the new direction of Energy Focus and I'm very excited to have a lighting industry veteran of his caliber to help grow our sales to the next level. Turning now to our product portfolio diversification initiative, we have named Jeremy Heilman as our Chief Technology Officer. As CTO, Jeremy will be responsible for leading our product roadmap, developing technology partnerships, and defining innovative new products to address the growing opportunities for connected lighting in smart buildings, smart cities, and the Internet of Things. Jeremy has a PhD in physics from Case Western Reserve University and is well known and highly respected by our customers, employees, and partners. Jeremy was the architect of our RedCap battery backup TLED and our Network-Ready dimmable tube. These products recently won first and second place respectively in the Linear T8 category of the 2017 Sapphire Awards sponsored by LEDs Magazine. With the addition of Larry and Jeremy to the management team, the two key positions I mentioned on the last earnings call have now been filled. Finally, let me review progress on the cost reduction program we announced last quarter. During Q1, we cut operating expenses by $1.5 million quarter-over-quarter and reduced our cash burn to only $1.6 million, the lowest operational cash consumption in five consecutive quarters. The company's workforce was reduced by approximately 15% and our offices in New York, Arlington, Virginia and Minnesota were vacated. In addition to operating expenses, we are reducing our cost of goods sold through product reengineering, manufacturing cost reductions, and component price reductions. Combined with the higher value, more differentiated products flowing out of our new product pipeline, these product cost reductions are part of a company-wide gross margin improvement program. Taken altogether, these initiatives support our goal of achieving profitability by the end of 2017. In summary, while I'm not at all happy with our financial results this quarter, we are in line with where I would expect us to be just one quarter into this turnaround. In our business, the time delay between cause and effect is roughly four to six quarters. This is the time it took for our revenue to decline from its peak in Q3 of 2015 to its trough in Q1 of 2017 and I wouldn't expect the recovery to previous revenue levels to occur much faster. While this would be a multi-quarter turnaround and we have significant work ahead of us, our restructuring initiatives and the implementation of our strategy during the first quarter confirm that we are making great strides in our efforts to return Energy Focus to profitable growth. I'd like to thank all of our employees for their hard work and commitment to our mission and all of our investors for their patience and steadfast support. With that, I'll turn it back to Michael to discuss our financial results in more detail.

Thank you, Ted. Net sales for the first quarter were $4.1 million, down 51% compared to the first quarter of 2016. Net sales of our military maritime products decreased 73% primarily due to the expiration of our exclusive agreement with our distributor to the U.S. Navy. Although the agreement expired March 31, 2017, the final minimum quarterly purchase order of approximately $3.1 million was shipped in December 2016. Net sales of our commercial products decreased 33% compared to the first quarter of 2016. First quarter 2016 commercial sales included approximately $1.6 million of lighting projects through our energy service company or ESCO partners that did not repeat at the same levels in the first quarter of 2017. As Ted previously discussed, our commercial revenue tends to be lumpy due to the long design cycle, uncertain timing of customer orders, and construction and renovation schedules. Because of these factors, our first quarter 2016 commercial sales represented the highest level of quarterly commercial sales during 2016 and the quarterly average of commercial sales was $3.7 million. During the quarter, sales of commercial products comprised 75% of net sales while sales of military maritime products represented 25% of net sales. This compares to a first quarter 2016 product mix of 55% and 45% for commercial and military maritime sales respectively. Our first quarter 2017 gross margin was 14%, a decline of 23 points from the first quarter of 2016. The overall decline in margin percentage is primarily the result of lower volumes, which unfavorably impacted our manufacturing and overhead absorption and product mix as the military maritime products sold in 2016 generally had a higher standard gross margin than our 2017 military maritime standard gross margin. The period-over-period margin decline was principally due to competitive pricing pressures. To address this, we have implemented a company-wide gross margin improvement plan, which includes product reengineering and manufacturing cost and component price reductions. Total first quarter 2017 operating expenses of $5.1 million which included a restructuring charge of $700,000 were comparable to our first quarter 2016 operating expenses. We announced a restructuring initiative during the first quarter of 2017 with a goal of reducing our annual operating costs by an estimated $10 million from 2016 levels. The restructuring activity started in late February 2017, so we didn't realize a full quarter's worth of restructuring saving. Additionally, due to the accounting rule surrounding the recognition of restructuring costs, some costs including leased office rent expense are classified as first quarter operating expenses rather than restructuring costs. The restructuring charge of $700,000 recognized during the first quarter of 2017 principally represents severance and related costs, most of which will be paid out after March 31. I would like to point out that our first quarter 2017 operating expense level of $5.1 million represented the lowest operating expense level since the second quarter of 2015. Our sequential quarter-over-quarter operating expenses excluding the first quarter restructuring charges decreased by $1.5 million. 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 assets. The net loss for the quarter was $4.5 million or $0.39 per share compared to a net loss of $2 million or $0.17 per share in the prior year's first quarter. With regard to the balance sheet, cash decreased approximately $1.6 million during the first quarter to $15 million at March 31, 2017. Cash used in operating activities of $1.6 million was the lowest operational cash consumption in five consecutive quarters. The decrease in cash was primarily due to the net loss of $4.5 million and approximately $1.6 million in accounts payable payments principally related to inventory purchases. These were partially offset by a $3.1 million decrease in accounts receivable and a $866,000 decrease in gross inventory balances. Our accounts receivable balance was $2.6 million at March 31, 2017 compared to $5.6 million at December 31, 2016, decrease representing the collection of our fourth quarter restocking order from our distributor to the U.S. Navy. In closing, our February restructuring and cost reduction initiatives was a significant first step to return Energy Focus to profitable growth. Building on the momentum of these initiatives, we are keenly focused on executing the five point revenue strategy as the next critical step in our multi-quarter turnaround effort. Given the continuing quarterly volatility in military maritime sales and the timing uncertainty in commercial sales growth, it is challenging for us to provide quarterly revenue guidance at this time. Our focus is to control our operating costs and implement our strategy so that we can reach our goal of achieving profitability by the end of 2017. Once our revenue achieves a more predictable growth rate, we will provide further guidance. With that, I'll turn the call back to the operator for questions.

[Operator Instructions]. We'll go first to Colin Rusch, Oppenheimer.

Can you -- just a housekeeping question to begin with, can you give us a sense of the inventory levels, how much of that is finished goods material and how much of that is just supplies?

That information is actually detailed in our Q, which I'm flipping through right now. The majority of that would be finished goods product.

Okay, fantastic and then with the U.S. Navy, we're seeing some competitors get qualified there. Can you talk a little bit about the sales dynamics from a pricing standpoint and a quality standpoint, obviously as the incumbent, we would assume that you guys have some inherent advantages there, but just want to get a sense of how those conversations are evolving as that market dynamic changes?

Okay, let me talk about the competitive landscape. So we have one competitor that has been certified with the Navy and has won an award, but to my knowledge hasn't actually shipped anything. We have a second competitor that has been certified, but not awarded anything, and we have a third competitor that has announced that they opened up a facility in California. On the other hand, Energy Focus has shipped 500 million units to the military over five years with not a single defect. So as far as quality is concerned, we are proven. We have, as you know, a 10 year warranty that is proven. None of these other competitors have shipped anything or proven any quality or reliability, so far, it's been talk. Now that said, I respect my competitors and we are doing everything we can to reduce our cost structure to be competitively there. We have one foreign competitor that we talked about, we all know who it is, LED Smart in Canada. They are owned by Chinese investors. They source a lot of their components in China. We have yet to see whether they can achieve the quality criteria of the Navy, but they have come out with a very, very low-priced product, roughly half the price of ours. That has in one fell swoop reduced the size of the available market, might say, cut it in half. So the pricing implications are that military products, which traditionally have been our highest gross margin products are starting to approach the level of commercial products and at same time, as we increase the value of our commercial products, the gross margins are coming up -- will come up on those long-term. So I anticipate they'll probably meet in middle somewhere.

All right, perfect. And then, last question for me, just on the design cycle, how do you think about the pacing of -- evolving the product designs. Certainly, there's a lot happening with suppliers and looking at the applications downstream from you guys, so how do you think about the pacing of that and what's the right cadence as we think about as we go forward?

Well, in terms of product development cycles, we're talking about typically a year to 1.5 years to develop a new product. In terms of design in cycles, you're probably talking about anywhere from six months up to 18 months depending on the customer and the installation, but obviously there's a long and highly variable time lag between the time a customer tell us that they want us to do an audit and we actually get the product designed in and the customer gets their funding and actually begins the installation. If you take a look at our healthcare facility here in Cleveland, we've been working with them for several years, on a number of products, some of them with long cycles, of a year and some of them with shorter cycle. It's highly variable, but I would say six months to 18 months is a good rule of thumb.

Okay. Thanks so much guys.

We'll go next to Craig Irwin, Roth Capital Partners.

So the first thing I wanted to ask about was something you mentioned in the prepared remarks, the exit costs that were actually included in the operating expenses. Can you maybe detail that for us any amount that was booked under accounting rules in the first quarter as an operating expense that we can expect to go away pretty quickly?

The estimate on that Craig would be about $400,000 based on the accounting rules and the timing of our exit of our leased office spaces and the timing of the separation of individuals.

So then two parts there, you disclosed, what was it, $674,000 versus your prior guidance of $1.1 million, so it sounds like that's the delta. Can you maybe help us, what part of that was in cost of goods sold versus SG&A?

We would have had -- none of our restructuring activities would have been recognized in cost of goods sold. They would have all been reclassifications if you will from operating expenses to the restructuring line. The restructuring method you're referring to is $677,000 is principally the severance related benefits for the employees who were affected.

Okay, excellent. So then the $1.5 million sequential reduction in SG&A excluding this accounting issue would really be more like $1.9 million sequentially, is that correct?

Yes, that would be good estimate.

Okay, excellent. Can you talk a little bit about the new products that you've launched in the last six months. What markets are they going into? Where you are seeing the most uptake at this point?

In the last six months, we had industrial down lights, which were primarily for industrial applications. The first win for those was in a hospital environment. And of course can go into any kind of an industrial application. We also introduced a military fixture, it's a two foot fixture for new Navy installations and we already talked today about how that is been designed in to a number of Navy applications. We had what we call the 500D series, which is a direct-wire 150 lumen per watt TLED which we have seen very good traction with and then we had a T5 tube as well as that was introduced. Other products that are in the pipeline, which haven't quite introduced, but are very close would be the Network-Ready dimmable tube, which I talked about that won an award as well as the, what we call the RedCap battery backup TLED for emergency backup applications. That one is close to being introduced, but we've made some improvements in the features and the performance, which has caused some delays. So that will be introduced in the second half of the year, but those are the primary product introductions that will be generating revenue over the next, -- well, from now through the end of 2018.

Thank you for that. So last question if I may is kind of a big picture question. Over the last couple of years at Lightfair when we met with the largest competitors the company faces in the market, the competitors that also sell tubular LED products. They said that very often they either follow Energy Focus into an account or Energy Focus follows them into an account. So we knew that the company was talking to a number of the right customers in the last two years, but it appears that volumes are taking off with some of these large commercial customers. Can you update us on your discussions with these customers, if there is any specific gating factor that might have you see a different competitiveness right now? Any solution maybe that needs to be addressed like a balance sheet issue or maybe biomeric [ph] issue that would facilitate traction with some of these customers that appear to be buying quite a lot of product?

Yes, is your question more around the fact that competitors are winning those sockets or are you asking about --

To make it really simple right, Osram, Philips and others that sell LED tubes, right, that have conventionally had large -- GE throw them in the mix, had large fluorescent business in the past. Do you say that they see you guys often in the right accounts? And all of your major competitors out there are reporting fairly significant uptakes in tubular LED product sales to commercial customers and I was wondering, is this a price point thing that we're not seeing Energy Focus really participate as much? Is this maybe a balance sheet issue where customers want to see a balance sheet that we give them confidence in that 10-year warranty? Is there something else regarding your supply chain that maybe could be addressed that would allow you to participate in this market momentum?

I understand your question now. There are two types of customers that we see in commercial applications, you got your low-end retail outlets and so forth that really only care about price and then you've got another group that really cares about performance and long life. We made a deliberate decision when I came on board and actually before I came on board, the previous CEO had made the same decision, which is a good decision on not to pursue low-end commodity businesses where customers don't value the low flicker, the high quality, high performance and long life that we provide. So we don't waste time with a lot of the lower-end commercial customers. We have instead taken a very targeted approach focusing on education, healthcare, and really harsh extreme demanding industrial environments. Those are the customers that really are willing to pay for a high quality product with a 10-year warranty and low flicker. So that's part of the answer to your question. The second answer to your question is that we have not had the sales force to reach as many customers as we should be and I made that comment in my prepared remarks. With all the customers that we touch, take for example the local hospitals here clearly recognize the value proposition and we've had extraordinary success. The problem is that we haven't been able to scale that up and as soon as we can, I expect that we'll be shipping the same kinds of volumes as the Osrams and Philips of the world.

Great and then another one I guess is Walmart appears to have changed strategies around their LED retrofit. Previously, they were going to go with GE manufactured, well, mainly not manufactured by GE, but it was Albeo Technology, produce for GE with GE's logo on it. They were going to retrofit all their stores and it hasn't happened over the last couple of years and now I understand that Walmart is in pretty intense discussions with three companies for supplying of LED tubes for retrofit for all of their stores would be more than 1 million tubes in a single buy. Can you tell us whether or not you're pursuing any business opportunities right now that would be of that size?

Well, I'm not going to talk about specific customers although we are talking to a lot of the big box retailers that we have in the past and again, my previous answer, a lot of those customers are really more focused on low price than they are on high quality and long life time and that's just not where we compete. We really don't want to bring our prices down and compromise our value proposition to go after a segment of the market where we can't make money.

Great. Thank you for that. I will hop back in the queue.

We'll go to Carter Driscoll, FBR.

So taking maybe just a step back and I want to ask how do you think about the balance -- the need to develop new products to build a national sales presence through different channels in direct, to manage your OpEx versus your cash balance. I mean how do you think about those moving parts and versus your goal of reaching breakeven by the end of the year, obviously there's a lot of moving parts, you're trying to penetrate different verticals, you're trying to reinvigorate your military maritime business. Is there an internal model or metric that you think you'll hit by 4Q whether it's sales margin that will lead to breakeven, you can share with us today and at what point do you have to potentially maybe burn a little additional cash to get out with the right product portfolio or invest in that sales channel and maybe degrade what is still a fairly stable balance sheet right now through a capital raise. So, I realize it's a multiple part question, but just want to get your thoughts?

It's a great question and its multi-dimensional, so let me try to address it. First of all, we're not going to provide guidance today. We do have an internal model but because of the uncertainty around the military as well as the timing of the commercial projects, it's very difficult for us to provide any credible guidance. We have given you the endpoint which is that we are still aiming to become profitable by the end of 2017. With that, if I gave you our expenses by quarter, you could figure out the revenue and if I gave you the revenue by quarter, you could figure out the expenses. So, we're not going to do that today, but in terms of how we're managing our expenses, let me talk about sales and new product development separately. So in sales, we are putting in place this new model, which is going to be heavily based on reps, agents, distributors, and channel partners. This is a proven model in the lighting industry. It's what most of our competitors do. Larry Fallon has implemented this kind of a model many times in his past career and it works and it's also cost efficient versus trying to build a direct sales force of over 100 people and trying to do it all ourselves. So we will still need a direct sales force but those direct sales people instead of going out and knocking on doors, calling on customers will be spending more time training, supporting the channel partners, providing collateral material to help themselves and so forth. So it's a more efficient sales model, which will enable us to scale our revenue without a proportional increase in cost. On the new product development side, we are really simplifying this company. We are a technology company, we're an LED lighting technology company focused on retrofit opportunities and focused on high-end very tough applications. In the past, we've had a tendency I think to try to be too many things to too many people and trying to be a complete solutions provider. I don't view us being a complete solutions provider. We're not going to be installation and products and audits and financing and all these other things the previous CEO wanted to do, it's too costly. So we are going to focus on differentiated technologies and then our channel partners, those agents and the reps and the LRCs, they will provide the complete solution to sell to the customer and take our products and bundle it with other companies products. So again, that's a much more cost efficient way go to market. And then secondly as far as R&D is concerned, I mentioned in my five point strategy that we will rely on partnerships for many of these more advanced products that include the IoT and Connected Lighting. We're already talking to a number of partners who can collaborate with us to provide those functions so that we don't have to build them internally. So we're really getting back to focusing on our core competencies, which is LED retrofit technology. That's kind of a long winded answer, but that's how we're managing our cost structure.

Very structured. My next question, just getting back to military maritime business. So if I heard correctly in prepared remarks, you get your first sale to outside of the traditional -- your first base, excuse me, sorry, I was struggling for the word, your first base and maybe just talk about the opportunity set there that is something that the former CEO had talked long about penetrating obviously with the kind of penetration the retrofit market and the Navy and competitive environment, are the dynamics changing there? Can you compare and contrast those two opportunities? I think bases used to be considered a C&I sale. Do you consider it still a C&I sale and then I just have one last follow-up in terms of the new build business on the Navy side.

Yes, we did use to characterize it as a C&I sale, which is problematic and led to I think some misunderstandings about who is calling on those bases and we didn't take advantage of the opportunity. We consider it a military opportunity right now and my Vice President of the military maritime business unit is now developing that market and it's a little premature for us to give you a TAM estimate, but it is significant and hasn't been highly penetrated. One of our competitors recently announced a win, but there's a lot of sockets out there, but I can't give you the exact number right now.

Could this potentially fall under the new IDIQ extension that was just signed a short while ago in terms of addressing military bases and would this qualify under federal buildings?

I don't know the answer to that question to be honest with you, but that's something that in consultation with my -- I'm sure my VP of military maritime would have that answer right off the top of its head and I can get back to you on that.

Sure, okay and then just last question, could you talk about -- I know it's not a huge opportunity, but the new build market and maybe contrast the competitive environment with what you're facing in the retrofit side?

Yes, again we are primarily focused on retrofit opportunities. I really consider us to be a retrofit company and that obviously is where the biggest opportunity is and we're talking about retrofit not just lighting solutions, but every socket, there's a potential IoT node and so that's a big opportunity for the company and that's where we're focusing most of our resources. Now where it makes sense and we have existing customers like the Navy, who want new fixtures for ships, we will do those as long as they are not extraordinary or exorbitant R&D investments, but it's not a huge opportunity although recently with the approval of the defense budget in the house today, almost $600 billion higher than last year's amount, there's a very good opportunity for selling our fixtures in new ships, but really our primary focus is on retrofit.

And then maybe this doesn't qualify, maybe a little bit out of scope, but in terms of addressing municipalities and the smart city opportunities using IoT and lighting, is that potential area focus going forward or is that maybe beyond the current product roadmap?

Well, the IoT as I mentioned in my strategy is very much a focus area for us. Every socket, every two-by-two foot hole in the ceiling is an opportunity to install not just lighting, but also IoT nodes and that is really the most straightforward and least disruptive way to install IoT into existing building infrastructure. So that is very much on our roadmap and as I mentioned, our CTO is focused very heavily on developing new products that will address that opportunity. But I see it -- the revenue is going to rollout in stages. First, we will roll out this new sales model with the reps [indiscernible] agents and that will result in additional revenue from products that we've already got in our portfolio. Secondly, we've got the new products that I rattled off earlier in the industrial down lights, the two-foot tubes, which have just recently been introduced and those will start layering on a second layer of revenue. And then third, we've got the new products which are in the pipeline, but haven't introduced yet. Those would be the RedCap and the Network-Ready dimmable tube. Those will start generating revenue in 2018. And then fourth, we've got new products that are in definition right now, but -- they haven't started entering the engineering pipeline. Those we'll introduce probably in 2018 and generate revenue in 2019. So when you start layering on those four components of revenue and now you've got a sustainable model for revenue growth over several years.

And do you feel comfortable that you have the leadership team in place to move forward with the strategy?

Yes, I do.

Okay. All right. I will get back in the queue. Thanks for answering my questions gentlemen.

Thank you.

We will go next to Mark Miller, with Benchmark Company.

Good morning. Your goal of being profitable by the end of the year, I'm just wondering approximately what revenue level would be breakeven, $9 million, $10 million I believe that was your cost [indiscernible]?

Again, I really don't want to -- if I gave you that number, I'd be giving you guidance and I'd prefer not do that. We still have a lot of moving parts as far as -- there are various -- we're looking at various revenue scenarios and we're also looking at various OpEx scenarios and I don't have sufficient visibility at this time to be able to tell you how much the top line is going to be, maybe a quarter in or two quarters in when we have better visibility, I'll be able to do that, but right now, you're just going to have to take us on our words that we are aiming for profitability by the fourth quarter. Maybe it's not exactly fourth [ph] quarter, maybe it slips by a quarter, maybe not, I don't know now, but we do have the $10 million year-over-year cost reduction target, which we're marching to and we'll make adjustments as we go based on how the top line materializes, but I hope you understand that at the scale of our business right now, it's very, very difficult to project the revenue. When you've got a pipeline every quarter or say -- we've got roughly 10 direct salespeople and they are all chasing a bag of opportunities, most of them are small, some of them are big. Let's say, you got 10 guys, each chasing the biggest opportunity is $1 million. Well, if all of those fall in the quarter, you get a $10 million quarter, if they don't, you get zero and you're probably somewhere in between, but there's not enough opportunities to rely on any kind of averaging effect and so giving you any kind of numbers on revenue is very speculative especially since those 10 opportunities depend on customer's estimated project start dates, which depend on funding and various other parameters that are moving. So that's the reason why at this stage it's -- I don't think its beneficial for any of us to put numbers out there that are so highly variable.

So, in that regard, you couldn't really provide any estimates for what percent of OpEx you would be around initial profitability, OpEx with [indiscernible] sales?

You want to take a stab at that?

At this point with the strategy getting underway and with Larry coming on, I think it's a little premature to be providing guidance and providing some numbers that we're just not comfortable of providing at this point whether they be percentages or operating expense targets or revenue targets.

Again, just to elaborate on that. I know that's frustrating for analysts and investors to hear. I know you like to hear revenue and OpEx numbers by quarter and normally we would provide that, but this is very much a turnaround situation, lot of moving parts. I think the best way for the Street to measure us right now is not on the basis of revenue, but on the basis of how well we are tracking to that five point strategy. Have we hired the right people that we said we need to hire to get the job done and then looking at how many reps, distributors, and agents we're bringing on board every quarter because that's really going to be the determinant of our success and what is going to drive revenue. That's the leading indicator that we've got to look at.

We'll go to our next question from Amit Dayal with Rodman Renshaw.

Thank you. Good morning guys. This $10 million in savings on the operating side, is this achievable in 2017 or is this going to spill into 2018?

As Ted and I indicated, our goal is to achieve that $10 million savings. We are on pace right now because of the timing of the restructuring. We're on pace to be a little bit behind that. We are slightly behind some of our internal forecasts and estimates for what that would be, but based on where we're positioned right now, we're still driving towards those efforts and that goal.

Got it. In terms of sales side of things, are there any opportunities in the pipeline that could move us to sort of the double-digit millions? It looks like we are still a little behind some of our comparable companies on the commercial front and I know you're putting this new sales organization together, but in terms of the opportunities that maybe in your pipeline, are there any deals that are larger than what you have previously been going after?

Yes, again, I'm as frustrated as you are with the fact that our commercial revenue hasn't grown and in my prepared remarks, I tried to indicate that we understand the problem and we're in the process of fixing it. The problem has been that we simply have not been reaching enough large customers and we haven't had the sales resources and coverage to do that. With Larry on board, we're going to be building out this network across the country and if you look at some of our competitors and I won't name names, they have 50, 60 sales reps and agents and we don't have any. I look at that and to me that's low-hanging fruit, that's exciting. As soon as we put that network in place and don't rely just on direct sales, there's enormous opportunity to generate revenue with the products we already have.

We'll go next to Allan Snider, Oppenheimer.

I have a quick question. The previous management had discussed the possibility of some Australian and Canadian naval orders. I was curious if there's anything further on that? Any progress there and the other new item is simply, I had read recently that the German government was considering a major shipbuilding campaign possibly related to bolstering their NATO defense and I guess incurring a larger obligation in terms of NATO. Is there any comment on those two items?

Yes, I'm glad you brought that up. That's something that I've been pushing on pretty aggressively since I came on board here. We've had discussions with the Australian Navy and we've been talking to the Canadian Royal Navy as well, but in the past, we have relied on third parties for those discussions. Since I came on board, we've been taking those discussions directly into our military maritime business units. So I expect you'll see more activity. We've had a number of meetings just over the past quarter and there's a high level of interest in Australia as well as Canada. So I hope that in the next earnings call or in the future earnings calls, I'll be able to tell you about more design in activity with those parties.

All right, at this time, I would like to turn the call back over to Ted for any additional or closing comments.

Thanks Alicia. I'd like to thank all of you for your patience and continuing support as we navigate the turnaround. We'll be at Lightfair in Philadelphia from May 7 to May 11 and we look forward to seeing any of you who are there. Please contact Peter Seltzberg in IR if you'd like to schedule a drop by at our booth at the Lightfair show. With that, thank you very much and enjoy your day.

That does conclude our conference for today. We thank you for your participation.