EFOI...Earnings Call Transcript...I may get back in.
They seem to be making some solid progress. They're not just a military vendor anymore.
If the PPS drops some more, I may consider getting back in. This is the first time in over 3 years that I have said this seriously.
Energy Focus' (EFOI) CEO Theodore Tewksbury on Q2 2017 Results - Earnings Call Transcript
Energy Focus, Inc. (NASDAQ:EFOI)
Q2 2017 Earnings Conference Call
August 09, 2017, 11:00 ET
Executives
Theodore Tewksbury - Chairman of Board, CEO & President
Michael Port - CFO, Secretary & Controller
Analysts
Craig Irwin - Roth Capital Partners
Mark Miller - The Benchmark Company
Carter Driscoll - FBR Capital Markets
Operator
Ladies and gentlemen, thank you for standing by, good day and welcome to the Energy Focus Second Quarter 2017 Earnings 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.
Michael Port
Thank you, operator. Good morning and thank you for joining us for Energy Focus' Second 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 website under the investor 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-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. I'd like to point out that our prepared remarks this morning includes non-generally accepted accounting principles or GAAP measures to supplement our discussion of the impact of our restructuring costs on our GAAP operating results. A reconciliation of these non-GAAP measures can be found in this morning's press release. Now I'd like to turn the call over to Ted.
Theodore Tewksbury
Thanks, Michael. Good morning everyone and thank you for joining the call today. For the benefit of anyone on the call, who may be new to the story, I'd like to begin with a brief recap of the big picture. Our mission here at Energy Focus is to enable our customers to run their facilities with greater energy efficiency, comfort and wellness or maximizing the functionality of their existing lighting infrastructure. Our vision is to be the leader in smart LED retrofit solutions. Our strategy is first to grow sales with an experienced energy-focused trained network of agents and channel partners. Second to defend our military business, while diversifying into the much larger, commercial and industrial market. And third to expand our product portfolio to higher value lighting solutions, incorporating controls, sensors and wireless connectivity.
I'll begin today with a summary of our financial results for the quarter, followed by some color on our end-markets and then provide a progress update on the turnaround initiatives we announced in February. Net revenue for the second quarter of 2017 came in at $6 million, up 46% sequentially. Gross profit of 25%, increased 12 percentage points over Q1. Thanks to our cost reduction initiatives; operating expenses excluding restructuring charges fell to $3.5 million. The lowest level in 10 consecutive quarters. As a result, cash consumption decreased $200,000 sequentially to $1.5 million, the lowest level in 6 consecutive quarters and at the end of the second quarter with a cash balance of $13.5 million. In addition, we reduced inventory by $1 million quarter-over-quarter to $13.2 million. Our continuing efforts to diversify and grow our business in $13 billion commercial and industrial markets are showing encouraging results. Q2 commercial revenue grew 68% sequentially to $5.2 million, the highest level in 6 consecutive quarters. Commercial and industrial now represents 86% of our total revenue versus 46% in the same quarter, a year ago. We are seeing solid demand from the healthcare and education sectors, each of which represented approximately 40% of our commercial revenue in Q2. Customers in these markets have demanding lighting requirements and choose Energy Focus products, because of our highest quality, near zero flicker and long life time as guaranteed by a 10-year warranty. Among other projects, our products we used to retrofit at VA hospital in Puerto Rico and multiple schools through our energy service company partners.
Before I turn my intention to our military business, I thought it would be helpful to clarify the components of our military market. We currently participate in 3 distinct military applications. First, we have the Tubular LEDs or TLEDs for retrofitting existing ships. Second, our military fixtures principally for new ship construction and third, our TLEDs for military base retrofits. With respect to TLEDs for ship retrofits, Energy Focus is the undisputed leader in this category. Our products were built and qualified to the Navy specifications and we have shipped approximately half of a million LED tubes to them over the past 5 years without a single defect. Energy Focus TLEDs are installed on all 185 ships in the US Navy surface fleet. Other companies can talk about quality, but Energy Focus' military tough TLEDs are the only ones that have been proven over time, under the harshest conditions at sea.
We were the first company to assemble Buy American Act or BAA compliant TLEDs in the United States, which we have been doing in our Ohio factory since 2012. We enjoy a rare sole supplier status [indiscernible] through the fourth quarter of 2016, achieving nearly 50% penetration of the Navy's available sockets. Not surprisingly, our leadership and success has attracted followers. Since the fourth quarter of 2016, we have seen 2 new competitors entering the market, one receiving qualification late in the fourth quarter of 2016 and one receiving qualification in the second quarter of 2017. Market demand for TLEDs through the US Navy bid system increased by 55% in the first half of 2017, when compared to the first half of 2016. Of this demand approximately 50% was awarded to our distribution partner, Atlantic Diving Supply or ADS and was satisfied through their existing inventory of Energy Focus products. At this time, the only outstanding bid still to be awarded through the U.S. Navy bid section was issued in early June of 2017 for less than 3,000 TLEDs. To our knowledge, no other significant bids have been issued since June to satisfy the roughly $50 million remaining market for U.S. Navy retrofit tubes.
In regard to military fixtures as previously disclosed, we obtained qualification in the third quarter of 2016 for our 2-foot fixture. Since then, there have been 2 bids for fixtures issued and awarded for new ship construction, including the USS Fort Lauderdale or LPD. We successfully competed against the incumbent, a private company with 70 years of experience in new ship construction and one approximately have of the total awards. We are encouraged by our early success in fixtures, the new ship constructions and feel that the quality and reputation of our military TLEDs will open up additional opportunities, in what we believe to be a $25 million 5-year total available market. Turning to military base TLED retrofits, we have had several notable wins to-date, including an installation that we announced last quarter. We have only scratched the surface of this $165 million market. Our prior direct sales model made it difficult for us to access these opportunities, many of which rely on existing relationships between the military bases and sales agencies or the network of - or other energy service companies. We believe that our transition to a nationwide network of sales representatives and agents will enable us to drive greater sales in the military base market. Overall, our military sales continue to be weak, accounting for 14% of our second quarter net revenues, but in line with our expectations.
While we're optimistic about our military opportunities, we don't believe that in the short term, our military sales will return to their pre-2016 level, when we were the only qualified provider of TLEDs to U.S. Navy and the available market was 4 times that it is today. Forecasting future military sales is a challenging proposition due to our lack of control of the competitor's pricing, U.S. Department of Defense budgeting, uncertainties in our ability to successfully penetrate military bases with our new sales agencies and we have the yearlong cycle between the award of bids and the delivery of products for new ship construction. I'm confident, however that we have the right people and the right products to pursue these in military opportunities.
Let me now provide an update on our turnaround initiatives. On the cost reduction front, the actions we have taken are expected to reduce operating expenses by $8 million year-over-year and to be sufficient to achieve breakeven at a revenue level of approximately $10 million, a quarter. With expenses under control, the exact timing and magnitude of the transition to profitability now depends on top line growth, which hinges on sales in the short term and having a predictable and differentiated flow of new product introductions over the long term.
Let me comment briefly on each of these priorities. In sales we are making rapid progress in transforming from a small team of direct sales people to a nationwide network of agents and channel partners. The agency model is the key to expanding our geographical coverage and growing our revenue. The increase in sales resources will enable us to reach a much broader range of vertical markets, including commercial and industrial, healthcare, education, government, military, parking and exterior applications. Under the leadership of our new Senior VP of Sales, Larry Fallon, we signed and trained 9 top-tier sales agents in Q2. This adds an additional 72 outside sales people across the country, an effective eightfold increase since the beginning of the year. Geographically, we've made outstanding progress in key territories. The Northeast, from New Jersey to Maine is now 100% covered with 4 agents. Prior to Q2, we had no sales coverage in this territory at all. Given our focus on healthcare and the fact that this region has one of the highest concentrations of hospitals in the country, it's not surprising that we weren't achieving our sales potential. California is now 100% covered by 2 agents with a total of 31 outside sales professionals. Texas and Alabama each have an agent under contract and trained. In the Midwest, we've landed the region's largest electrical and lighting agent, Hawkins Sales with 9 outside sales professionals strategically located around the state.
Energy Focus' products have been enthusiastically embraced by the agencies who are seizing the opportunity to fill unmet customer needs with a premium quality TLED family. They have already identified multiple opportunities that are new to Energy Focus and our sales pipeline and quoting activity are growing. We expect to hire and train a total of 30 sales agents by the end of 2017, which will give us complete coverage of the United States. So while the first wave of growth will come from increased sales of products we already have, the next wave will come from new products. In Q2, we completely overhauled and reformulated our new product road map, killing undifferentiated products and refocusing resources on game changers that are aligned with our mission of smart retrofit solutions. Our objective is that every product we introduce will be a world's first or a world's best.
A great example is our new RedCap Emergency Battery Backup tube. RedCap turns any existing fluorescent or LED tube socket into an emergency battery backup that provides 90 minutes of illumination in case of a power outage. Current implementations require installation of a bolt-on battery pack with a tangle of wires above the ceiling. RedCap makes installing an emergency backup battery as easy as changing a light bulb. RedCap is a new to the world product that defines an entirely new category. Energy Focus demonstrated RedCap as well as other product innovations at the 2017 Lightfair show in May. As written by LEDs Magazine, emergency lighting was a surprisingly hot topic at LFI. Energy Focus had a crowd lined up to see its RedCap LED tube product with built in backup capability. That product won an LEDs Magazine Sapphire Award earlier in the year. So it's an exciting time to be at Energy Focus. The changes happening here are creating enormous excitement and attracting the best people in the lighting industry.
As with any turnaround, Energy Focus has the potential to deliver outsize returns over the long term. However, in order to get there from the challenging initial conditions the company found itself in at the end of 2016, we have had to completely rebuild our sales structure and new product pipeline. And of course, I'm sure you're all wondering how long it will take to do that. At a high level, it comes down to product development and sales cycle times that are characteristic of our industry. Typical product development times from definition to design, test, UL and other certifications to market launch typically range from 6 months for a derivative product to 20 months for a breakthrough product like RedCap. Sales cycles on the other hand, from initial customer quote to revenue recognition can take another 8 to 12 months. In addition, it will take through the end of this year to complete the build out of our sales agency network. So putting it all together, we're looking at 3 phases. In 2017, revenue will be driven primarily by sales of existing products through our existing direct sales channels. In 2018, we expect to see a significant expansion and sales of existing products plus soon to be introduced new products such as RedCap through the agencies. And then, in 2019, we anticipate the layering on of additional revenue streams from newly defined products that are just entering development now.
We frequently get asked how we intend to communicate with investors between earnings calls. So let me address our policy. In the past, this company has had a tendency to issue press releases that had limited potential for near term impact. For example, RedCap was first announced back in May 2015. I don't think that was particularly helpful to our investors, but I'm sure it was helpful to our competitors. And as you know, there were also a number of design wins announced that didn't result in a material impact to our financial results. So we're not going to do that anymore. Instead, we are limiting our press releases to substantive items that will be impactful to the company in the near term. This includes new product launches, exceptionally large or notable design wins, major partnerships or technology agreements, conferences and trade shows we're attending and awards.
Since we're not providing guidance at this time, other updates can be communicated more effectively in the quarterly earnings calls. Additionally, now that we formulated our strategy, we plan to attend more investor conferences to keep shareholders informed and evangelize our story to new investors. And of course, we can always be reached by emailing or calling our investor relations department.
So in summary, Q2 was the quarter of solid execution. All of our key financial metrics, revenue, gross margin, operating expenses, cash burn and inventory are moving in the right direction. We made significant strides in building out our nationwide network of sales agents and channel partners, greatly expanding our geographical coverage and customer reach. In addition, we overhauled our new product pipeline to provide a long term revenue growth engine.
While this is only the first quarter of a multi-quarter turnaround, I am confident that this level of consistent and disciplined execution quarter after quarter will enable us to return the company to sustained, profitable revenue growth in 2018 and beyond. I'd like to conclude by thanking our incredible employees who have embraced the company's transformation and use creativity, passion and drive are the keys to our success. I'd also like to thank our shareholders for their continued support and patience as we turn this company around. With that, I'll turn it back to Michael to discuss our financial results in more detail.
Michael Port
Thank you, Ted. First, our second quarter results. Total net sales for the quarter were $6 million, down 16% compared to the second quarter of 2016. Net sales of our commercial products increased 57% compared to the second quarter of 2016 as we completed various projects through our ESCO partners and experienced overall increased demand. As a reminder, our commercial revenue tends to be lumpy due to the long design cycles, uncertain timing of customer orders and construction and renovation schedules. Our second quarter commercial revenue of $5.2 million extends the trend in the increase of commercial sales and is the highest level in 6 consecutive quarters.
Net sales of our military maritime products decreased 78% primarily due to our distributors' ability to satisfy the US Navy's current demand from their existing inventory. As you may recall, we fulfilled the final contractually required stocking order to our distributor in December 2016 and the contract expired in March, 2017. For the quarter, sales of commercial products comprised 86% of net sales while sales of military maritime products represented 14% of net sales. This compares to a second quarter 2016 product mix of 46% and 54% for commercial and military maritime sales respectively.
Our second quarter 2017 gross margin was 25%, a decline of 10 percentage points from the second quarter of 2016. The overall decline in gross 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 margins. Additionally, our second quarter 2017 gross margins were impacted by the higher cost of inventory, which was ordered in late 2016 and early 2017 to satisfy anticipated demand, which did not materialize. Based on our current anticipated demand, we expect to deplete this higher cost inventory during the remainder of 2017 and replace it with lower cost inventory due to our product reengineering efforts and manufacturing cost component price reductions.
I'd like to remind you that during the second quarter of 2016, we recorded an adjustment to reduce revenue by $814,000 and cost of goods sold by to $221,000 to reflect the return of products sold during the fourth quarter of 2015 [Technical Difficulty] second quarter 2017 total operating expenses were $4.6 million, which included a restructuring charge of $1.1 million. This compares to total operating expenses of $6.4 million for the second quarter of 2016. The restructuring charge of $1.1 million consist of approximately $900,000 in facilities costs related to the closure of our former New York, New York and Arlington, Virginia leased offices; $100,000 in severance and related benefits; and $100,000 and other restructuring costs including the writing off of fixed assets and prepaid expenses. While we do not anticipate any further major restructuring activities in the near term, we expect to incur an additional $100,000 in additional restructuring charges over the life of the remaining lease obligations, which extend to June 2021.
Excluding the 2017 restructuring charges of $1.1 million, our quarter-over-quarter operating expenses decreased by $2.9 million. I would also like to point out that excluding the $1.1 million restructuring charge, our second quarter 2017 operating expenses of $3.5 million represents the lowest operating expense level since the fourth quarter of 2014. 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 tax and had a full valuation allowance recorded against our deferred tax assets.
The net loss for the quarter was $3.1 million or $0.26 per share. However, if we exclude the restructuring charges, our net loss for the second quarter of 2017 would have been $2.1 million or $0.17 per share. This compares to a net loss of $3.9 million or $0.34 per share in the prior year's second quarter. Product return I discussed earlier increased the second quarter 2016 loss by $590,000.
I'll now turn my attention to the first 6 months of 2017. Our total net sales for the first 6 months of 2017 were $10.1 million, down 35% compared to the first 6 months of 2016. Net sales of our commercial products increased 5% compared to the first 6 months of 2016 while our net sales of military maritime products decreased 76% primarily due to the expiration of our distribution agreement as I discussed previously. For the first 6 months, sales of commercial products comprised 82% of net sales while sales of military maritime products represented 18% of net sales. This compares to the first half 2016 product mix of 51% and 49% for commercial and military maritime sales respectively.
Our gross margin for the first 6 months of 2017 was 20%, a decline of 16 points from the first 6 months of 2016. As I indicated earlier, the overall decline in gross 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 margins than our 2017 military maritime standard gross margins. Again, our first half 2016 sales and margins reflect the impact of the return discussed previously.
Our first half 2017 total operating expenses were $9.7 million, which includes a restructuring charge of $1.7 million. This compares to total operating expenses of $11.6 million for the first half of 2016. The restructuring charge of $1.7 million consist of approximately $900,000 in facilities costs related to the closure of our former New York and Arlington leased offices, $700,000 in severance and related benefits and $100,000 in other restructuring costs. Excluding the 2017 restructuring charges of $1.7 million, our period-over-period operating expenses decreased by $3.6 million. For the reason I indicated previously during the first 6 months of 2017, we recorded no provision for U.S. federal income taxes. The net loss for the first 6 months of 2017 with $7.6 million or $0.65 per share. If we exclude the restructuring charges, our net loss for the second quarter of 2017 would have been $5.9 million or $0.50 per share, which is comparable to our net loss of $5.9 million or $0.51 per share for the first 6 months of 2016. Again, our first half 2016 net income was negatively impacted by the sales return discussed previously.
At this time, I'd like to address our progress against our previously stated goal of reducing operating costs by an estimated $10 million from 2016 levels. The intent of our restructuring strategy was to maximize operating cost reductions without sacrificing either our new product pipeline or potential long term revenue growth. During the second quarter of 2017, the first full quarter of our restructuring activity, we refined our strategy and cost saving estimates and are now on track for a total cost reduction of approximately $8 million from 2016 levels.
Throughout the remainder of the year, we will continue to balance our goal of maximizing operating cost savings against opportunities to drive future growth. With the change in product mix and our 2017 restructuring activities, Energy Focus is a much different company today than it was in 2016. While comparisons of 2017 to 2016 are helpful, I believe that it is also important to point out some sequential quarter-over-quarter comparisons. From the first quarter of 2017 to the second quarter of 2017, our net sales increased 46% while our gross margins increased to 25% in the second quarter from 14% in the first quarter. The improvement in gross margin was due to the higher sales volume and our decision to accept strategic sales opportunities to some excess inventory items we had reserved in 2016 in accordance with our accounting policies and GAAP.
Our sequential quarter-over-quarter operating expenses excluding restructuring charges, decreased from $4.4 million to $3.5 million, a 20% decrease. Again, please remember that our restructuring initiatives were implemented in the middle of the first quarter. So the second quarter of 2017 is the first full quarter of operating cost savings. Unless we make the strategic decision to adjust operating cost spending to capture new growth opportunities as I discussed earlier, we anticipate our quarterly operating expenses for the remainder of 2017 to approximate second quarter spending.
With regard to the balance sheet, cash decreased approximately $1.5 million during the second quarter to $13.5 million at June 30, 2017. Cash used in operating expenses of $1.5 million was the lowest operational cash consumption in 6 consecutive quarters. The decrease in cash was primarily due to the net loss of $3.1 million and an increase in accounts receivable of approximately $900,000 partially offset by a decrease in inventory of approximately $1 million and an increase in accounts payable of approximately $1.5 million. Our accounts receivable balance was $3.5 million at June 30, 2017 compared to $2.6 million at March 31, 2017, the increase due to the timing of our second quarter sales activity. Our accounts payable balance was $3.2 million at June 30, 2017 compared to $1.7 million at March 31, 2017, the increase principally due to the timing of vendor payments for inventory purchased in the second quarter.
As Ted indicated, we've made great strides in our goal to return the company to sustained profitable revenue growth in 2018 and beyond. However, 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. 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.
Question-and-Answer Session
Operator
[Operator Instructions]. And first we'll go to Craig Irwin with Roth Capital Partners.
Craig Irwin
Congratulations on that nice revenue rebound. So Ted, I wanted to ask a few questions about your commercial sales in the quarter, See if maybe you could give us additional color on the character of the revenue. Can you maybe share with us, the number of deliveries over 50,000 or over 100,000 to make up that pretty respectable number that you posted, $5.2 million. And as we look longer term, the military business is a very different business than the commercial business, if you could talk a little bit about the margin profile of commercial and where you think things could settle out as volumes continue to increase?
Theodore Tewksbury
To your first question, as far as providing more granularity on the commercial sales, we don't generally do that, it's quite fragmented and I'm not sure if it will be particularly useful information. What I can reiterate is what I said in the script, which is that approximately 40% of the commercial sales came from healthcare opportunities and those tend to be fairly large opportunities, not by 100s of 1000s of dollars in revenue. Similarly, with the schools, I mentioned a couple of schools, those generally go through our ESCO partners, but I don't want to provide any more granularity beyond what I provided in the prepared remarks. Now as far as the margin profile is concerned, there's 2 trends that are happening here.
First of all you've got military margins that historically have been much higher than our average, but those are starting to come down now due to the increased competition that we're seeing. Unfortunately, our competitors have not done any favors as far as fostering gross margins in that market. Pricing basically got cut in half. So we're seeing military margins coming down and at the same time, over time, you're going to start seeing our commercial gross margins going up really for two reasons, one being that we're paying a lot of attention to reducing our cost of goods sold, but more importantly, because we're increasing the value of our commercial products.
I mean products like RedCap is a unique new to the world product that nobody else in the world has today. Now we won't be able to enjoy that advantage forever and that's why we're loading up the pipeline with more high value-added lighting solutions and as we start to transition to connected lighting solutions that have occupancy sensors and daylight harvesting and other connected attributes, that will increase our value further. So to answer your question, the goal that I've got in my mind is 35% to 40% over the long haul and hopefully being the semiconductor guy, I'm used to seeing much higher margins and hopefully we can do that.
Craig Irwin
Great, that's really good to hear. So if we could talk a little bit about the past. the EBITDA breakeven. So I know when you originally put together the plan, the company was in a significant period of transition and visibility around revenues never really all that high in the lighting markets. Can you maybe comment on whether or not there are additional actions that you might take internally that could pull that forward or maybe bring the quarterly revenue breakeven down or if you're comfortable with the plan you've implemented and see this as something that's a reasonable match for what you're anticipating as far as near term demand and where you expect to execute to?
Theodore Tewksbury
Yes, there's really two components to this. First was our announcement of the $10 million year-over-year cost reduction plan and we put out the $10 million goal back - backed them as a company for 2 months and I had been CEO for about a week. We're currently tracking to $8 million out of that $10 million, which is - to put that in perspective, that's a 30% reduction in operating expenses year-over-year, which is incredibly impressive for a company of our size, but more important than hitting the exact number is making sure that we dial in the right number to balance short term profitability with longer term revenue growth and that longer term revenue growth of course depends on making sure that we've got a robust pipeline of new products and those products get introduced on time.
So now that I've had a full quarter of - well, we as a company have had a full quarter of the restructuring under our belts and we've completely reorganized sales and reformulated the new product pipeline, we're able to refine the model and strike the optimal balance between short term profitability and long term growth. And so right now, what we could tell you for certain is that year-over-year reduction is going to be somewhere between $8 million and $10 million, probably the optimal was closer to $8 million based on the information I have today, which is much better than the information that I had when we put the original goal out there, but let me emphasize that $10 million is still our goal and we're going to be sharpening our pencils and doing everything we can between now and the end of the year to get as close as we can to that number.
Now, as far as breakeven is concerned, now that we've reduced our costs and we're controlling our expenses very vigorously, now the return to profitability depends on the top line and as you know, that's where historically this company has been challenged in getting accuracy on the forecast largely because the funnel of opportunities has been relatively small and so, we get very lumpy revenue. Typically - just to give you some insight, typically our backlog coverage at the beginning of the quarter is only about 20% of revenue for the quarter - actually less than 20%, somewhere between 10% and 20%, that's increasing, but that doesn't give us a lot of visibility into the quarter.
So we've succeeded in reducing our breakeven revenue to $10 million, we don't know exactly when revenue is going to cross that threshold and so going forward, I prefer to talk in terms of breakeven revenue and how close we are to that and rather than try to nail down a specific time when we're going to reach that breakeven because that's really not important in the long term, what's important is striking the optimum in terms of our cost reductions and then getting that revenue growth moving, but I'll just add one, I know I'm going on too long on this question, but to add one more important point, which is as we bring on these sales agents, one of the main reasons for doing that is to increase the number of opportunities in our sales funnel, that's going to allow us to benefit from the law of large numbers, get more averaging and get better accuracy in our forecasting. And so, we'll keep you posted on how we're doing on - and hopefully be able to provide revenue guidance so you could track where we are relative to that $10 million breakeven revenue by the end of the year.
Craig Irwin
Great, thank you for that. Another question I wanted to ask is actually on the product road map. So when we talk to the lighting agencies and your competitors, Cleveland Clinics is a great example. We understand that there were - some of the biggest players in lighting in there competing for that job and Energy Focus won the job straight and even and the company's been recognized in the past for significant innovation, the Intellitube got big highlights at Lightfair a couple of years ago shortly after it was introduced. As we look at the current status of the market today, the one product in LED tubes that seem to be getting the most attention is the products with embedded controls in the last few inches.
I don't think these are big volume products yet, but a lot of the agencies we talk to say that they are mandated to include controls in a lot of the projects, particularly things like schools by the building codes and if they can just throw in the new tube that has the controls embedded in the end seems a lot of money since they don't have to change out the fixtures. It's a much more compelling product to the customers out there. Can you comment whether or not this is something you're working on? Do you have something that you're in trials with? Would you expect to be completing effectively versus the people that have introduced the products to date and are there any particular different functionalities should you see as increasing the value add in your 2 products that maybe will come out in the next year?
Theodore Tewksbury
The answer is absolutely yes Craig. Today, if you look at the company, we are known for quality, performance and lifetime. That's our value proposition and under performance, we have lowest flicker and many other attributes in terms of efficacy, THT other attributes. In the next year or 2, we will be known as the connected lighting solutions leader and when I say solutions, that's not just lamps, but also fixtures. The connected lighting trend is very real. It hasn't gotten a lot of traction yet, but it undoubtedly will and when I look at Energy Focus, our strength is retrofit. Today we're retrofitting lighting in this industry but if you look at IoT, the best way to get IoT including sensors, daylight harvesting, tunable color temperature as well as asset tracking, non-lighting related capabilities, the quickest way to get that into an existing building is through the lighting side.
You want to have the sensors and wireless nodes in every place in the building or you got people and assets and they have access to power. Well, what's ubiquitous and has access to power? Lighting side is. So this will happen, it is happening. We actually did have a connected lighting product in our portfolio. I sold it because I didn't think it was forward-looking enough. I didn't meet my criterion for being a world's first or a world's best. So I have reset that program and I assure you that when we do have the introduction of our first connected lighting product, it will be a game changer, but that is very much in our road map, so is tunable color temperature, daylight harvesting, task tuning, occupancy sensing, these are all important capabilities, but I'm not going to say more than that because as I mentioned in the prepared remarks, this company has had a tendency to get too far out of their skies and announce what they are doing to the benefit of competitors and I don't want to do that.
Operator
And moving on, we'll go to Mark Miller with The Benchmark Company.
Mark Miller
You mentioned I believe when there will be a hospital in Puerto Rico and some schools, were there any other wins during the quarter for you?
Theodore Tewksbury
Well, yes, many, many. To get to the price point, $2 million in commercial revenue, but I don't want to get into the minutia of rattling off the entire risk, but that gives you some general color on where the wins are coming from. Well I have certainly mentioned also in the prepared remarks, I don't think it's particularly helpful to give the investment community visibility of every win down to the $50,000 or $100,000 level every quarter. So what we will be doing is anything that's particularly large or noteworthy like Cleveland Clinic or a major retail chain, we'll certainly announce that, but we'll avoid getting into the weeds.
Mark Miller
You mentioned you were replacing higher cost inventory with lower cost inventory. Do you expect any inventory obsolescence causes in the quarters ahead?
Michael Port
We continue to evaluate that on a quarter basis and our policies - accounting policies and under GAAP. Frankly, if you go back and look at the history since 2015, we've taken some pretty healthy reserves because of our anticipated demand slowdown. I think as of right now, we're back on track and we won't be experiencing the excess inventory reserves that we have in the past over the rest of the quarter. We've slowed down our buying substantially and we have that under the control and we're working very diligently to make sure that we've got a process in place that matches up our inventory purchases much closer to our anticipated demand and when these items will ship to customers.
Mark Miller
You've done a good job on managing your cash over the first half of this year. Do you expect a similar cash drain or should that be reduced in the second half of the year?
Theodore Tewksbury
I think what principally drives our - there's 3 - couple of things that drive our cash consumption. The most significant one of course is that top line, the revenue and how much we can - how much more we're able to drive that and tied to that is the reduction in inventory and accounts receivable. So I think this quarter is fairly representative of Q1 and again, we'll be able to either generate cash or consume cash based on sort of how we're able to drive our top line.
Operator
Carter Driscoll with FBR Capital Markets has our next question.
Carter Driscoll
First question, just kind of following up, is there potentially any 0 cost inventory that you could flow through in future quarters?
Michael Port
So let my comments indicate that we made some strategic decisions. Again, we have to balance off all the equations and being able to move some of the inventory that we have reserved. Based on some of the inventory we have, we do have some that's fully reserved. I'm not going to get into the granularity as to how much that represents, but if you go to our 10-Q note 5 for the inventories, you'll notice we have a - as of June 30, we had about $5.3 million in inventory reserves for excess slow moving and some valuation reserves.
Carter Driscoll
Okay, that's helpful. Maybe Ted, of the military segments you're targeting, obviously give a little bit of color on the retrofit and what was your conditional domination of the Navy for that segment? Which of those kind of 3 that you've identified you think could contribute more to near term growth? Would it be the bases for Navy, just trying to get a sense of how you rank those in terms of a rebound in military business going forward?
Theodore Tewksbury
Well, going in reverse order, probably the one that's not going to be as much near term revenue would be the new ship fixtures because those cycle times tends to be very long as I pointed out depends on DoD budgets and from the time you win a bid to the time you actually ship the product can be up to a year. So that's going to be a longer term, probably 12 months plus kind of initiative. I think the wildcard in all of this is the bases - the base is the largest remaining opportunity at $165 million total available market and we've had some good initial successes. The problem as I pointed out is that we haven't had the right sales force. Now that we put the sales force in place, I'm very excited about that opportunity, but again, it's a wildcard because a lot of it depends on relationships that we haven't had in the past and that we're going to have to build, but I think that's a very promising avenue.
Now I think the third opportunity, which is the one that we've historically focused on is retrofitting of existing ships. That one, we don't have a lot of visibility into. As I mentioned, there's only one bid out there now for less than 3,000 tubes and there's still a good deal of inventory in our distributor - ADS. And so once that market comes back and once the inventory is exhausted at our distributor, I think that will continue to be a revenue generator for us, but to put that in perspective, we think there's only about $50 million remaining market there due to the excellent success we've had in the past. We've penetrated about 50% of that business and now the remainder is going to be shared between 3 competitors and the price is half of what it used to be. So looking at all 3, the one I'm most excited about is the base opportunity.
Carter Driscoll
And then in terms of all other channels - you've done since you've taken over, do you feel that this will help improve or reduce the amount of turns business you have in a particular quarter. Obviously you're still going to have a significant amount I would imagine for several quarters until you completely change out the product portfolio and develop the channels, but could we see increasing - I'm going to say backlog or conviction in the quarters ahead, could we reach 50% type of book to typical ship within a quarter over some time frame?
Theodore Tewksbury
I think that's unlikely to happen. It's just the nature of our business, it's a book and ship kind of business where we don't have a lot of visibility. So I'd be surprised if we ever saw backlog coverage at the beginning of the quarter growing an extra by 20% I'm hoping it will but what will happen is that we will have more certainty on the trends side of our business simply by virtue of the fact that we've got some more opportunities in the funnel. So I mean, think of it, it's just numbers.
Today if we had say 10 major opportunities, major being a few hundred thousand dollars or more in the funnel for the quarter and if 1 or 2 of those go away, well then that blows our forecast. If you got a 100 or 1,000 of those opportunities in the funnel and a few of them go away, they are likely to be offset by a few that pop up out of nowhere that you didn't forecast. And so what the agents are going to bring is just a massive increase in number of opportunities in the funnel. So that's going to make our revenue more predictable even though turns is going to remain on a high, those turns will be more predictable simply by virtue of the law of large numbers, more averaging going on.
Carter Driscoll
And then, I know it's been asked a bunch of times, let me see if I can ask this slightly different way, in terms of the commercial customer base, could you quantify just the total number of customers you think you're shipping to either in this quarter over say the trailing 6 months?
Theodore Tewksbury
You want to take a stab at that Michael?
Michael Port
I'd hate to guess because it is fairly lumpy. Again we get rather large orders in and then we ship some small ones. We can definitely come up with that data at some point, but it's not something that we particularly track.
Carter Driscoll
More than one few hundred thousand.
Michael Port
Yes, if that's something that you're interested in seeing, we can start reporting those numbers. I don't want get into the granularity of disclosing customers name and that sort of thing, but we can give you some aggregate numbers on the number of opportunities. I'm not sure it's very useful because we've got small opportunities too and we've got customers who are shipping 5 to 10 tubes and then we've got customers who are shipping 200,000 tubes.
Carter Driscoll
Just trying to get a sense of how many customers say might order in 1 quarter, go away for 1 quarter or 2 or come back just trying to maybe assess the change in that customer group from QtoQ, maybe that provides a little granularity since there's so many other things that are difficult in a book to ship business?
Michael Port
It's a good question Carter, let me go away and see if we can come back with a metric that will answer that question for you.
Carter Driscoll
And just last one if I may, on the healthcare side, so obviously Cleveland Clinic was a substantial win for you a while back. Prior administration was talking about the New York City - some of the large hospitals in this area, some of the other hospital change, could you maybe talk about progress there again without necessarily naming names. Something of a - if not a similar size of Cleveland Clinic, but maybe a major win that hurdles and/or kind of competitive environment that you have to overcome to get such a large win in that segment? Thank you.
Theodore Tewksbury
I think in general we are the tube of choice for hospital retrofits. Obviously we have very good references from Cleveland as well as some of the other well-known hospitals in the area here. The problem has simply been that we've lacked the sales coverage and we are working with virtually every notable hospital in the Ohio area here in the Midwest, but we just haven't had the coverage in Boston or San Diego or Florida or other areas where there are a lot of healthcare facilities. So we're already seeing an increase in quoting activity for - for other large hospitals as a result of our agents and net partners. [indiscernible] just to give some indication as I mentioned, of the $5.2 million that we did in commercial this quarter, 40% of it was healthcare. So it's significant.
Operator
And that will conclude today's conference. We'd like to thank everyone for their participation. You may now disconnect.
