Energy Focus Inc (EFOI) 2007 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the fourth-quarter and total year 2007 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS)

Thank you, Mr. Davenport, you may begin your conference.

Thank you very much, Marcy. On the call with me is Eric Hilliard, our Chief Operating Officer. I will start with a few comments and then we will have a chance to hear from Eric before we open it up to questions. We will try to keep the call to about an hour.

But first, I am required to remind you that forward-looking statements made on this conference call are pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements regarding our goals and outlook for 2008 and thereafter; future EFO sales; enhancements to EFO; our revenue; and DARPA funding. Investors are cautioned that all forward-looking statements involve risk and uncertainty. Actual results may differ materially from the results predicted.

Factors that could cause actual results to materially differ from the forward-looking statements in this presentation are set forth in our most recent annual report on Form 10-K for the year ended December 31, 2006. We disclaim any intention or obligation to update or revise any forward-looking statements.

Now I would like to address a few items briefly before turning it over to Eric. First, I'll address our overall 2007 and Q4 results; then I'll give you our forecast for the business in 2008. Finally, I will turn it over to Eric for some specifics.

First, our 2000 (sic) year-end and Q4 results. Total revenues for 2007 were a disappointing $23 million, a 15% decrease over 2006, due to declines in traditional product revenues and, in particular, pool revenues which were off $2.2 million for the year due to a continued decline in the housing market.

Q4 revenues were, at $5.4 million, off 24% over 2006, again due primarily to a decline in pool revenues.

EFO sales for the year, however, increased to $7 million, with EFO now representing about 30% of total sales for 2007. EFO sales in Q4 were $2 million.

Cash usage for the year was held to $7.5 million, a slight reduction versus 2006, in spite of a revenue reduction of $4 million. This was the result of cost reductions during the year. Year-end cash was at $8.4 million.

There was also considerable progress in 2007 in developing. EFO technology. Energy Focus now has 55 issued patents, more than six -- six more than this time last year, with 35 applications in progress.

Energy Focus was awarded a $1 million contract to develop a VHESC, very high-efficiency solar collection, with DuPont and others for the Department of Defense. Energy Focus is responsible for the optics, which has allowed the team to achieve a record-breaking 42.9% in efficiency.

We've also developed four new LED product families, which were introduced in January and are already generating sales.

In 2008 we expect to double EFO sales for the year to $14 million, with about 60% coming in the second half of the year. At that level, EFO sales will represent more than 50% of revenues for 2008.

Unfortunately, we also expect traditional product sales to continue to decrease, led by continued pool sales declines in a difficult housing market, by about 15% for 2008. However, with the forecast EFO sales, overall sales should increase more than 20% in 2008. This takes us back to 2006 revenue levels, but with a big difference. EFO will have grown from 5% to more than 50% of the business.

Increased sales, together with a reduction in expenses due to changes made in 2007, are expected to limit cash usage to less than $5 million, positioning the Company for positive cash flow in 2009. This still allows for a significant investment in solar and other advanced HID and LED EFO technologies to drive future product offerings.

However, the Company is very much aware that, given $8.4 million on the balance sheet as of December 31 and a forecast $5 million usage in 2008, of its having to meet cash needs on a timely basis and is exploring a number of avenues to ensure that we accomplish this, including equity financing, debt financing, refinancing of existing debt, or a combination of those means. At the appropriate time, we will provide definitive information to our investors.

Regarding the first half in particular of 2008, we expect to see EFO revenues to double in the first half of '08 versus '07 as a result of, first, increased traction from our sales force, a positive result of our recent reorganization.

Secondly, increased sales realized due to construction delays in 2007, which we will get in the first half of 2008. Sales from our new product offerings -- the four new product families that I spoke about earlier. And sales from new channels -- the government, as well as our TCP and Eco Engineering relationships.

We'll also see reduced cash usage. We expect to reduce first-half cash usage about 50% versus the first half in 2006.

There will be further organizational changes in 2008. We have added a marketing manager and we'll add a senior business development manager who will focus on new business activities. These adds will be offset by further reductions elsewhere.

Now I would like to turn it over to Eric.

Thanks, John. Hello, everybody. I'd like to let you know where we are as of today. Then I'll talk about how we got here and, most importantly, where we are headed.

So far, we have shipped and backlog approximately $5 million in the first quarter with additional backlog of $1.3 million. EFO shipped and backlog products for 2008 is already more than $3 million. This is why we believe we will see more than double the EFO sales in the first half of 2008 as they compare to 2007.

I would like to frame this by discussing our changes in 2007 as they relate to our organization, our strategy, and our 2008 financial expectations.

So first, I'll frame this in our organization. Organizationally, accountability is important; and to establish this we had many changes in leadership positions throughout 2007. They occurred in our US commercial group, our pool group, and our financial group.

Additionally, these three groups have seen significant reductions in total headcount towards sizing the business to the volume of sales that is being generated, as well as the expectations of profit necessary to move closer to a cash flow neutral business.

The total reduction being recognized just in the US alone is $1 million in overhead and operating expenses.

Secondly, our strategy. Our strategy toward increasing the commercial growth has evolved. We have added four new commercial LED product applications with a total of nine offerings within these lines.

The products are spinoffs from the military development with the United States Navy and have allowed for highly-efficient optically focused LEDs that display advanced thermal properties for long life. Because these products are military developed, they offer durable design and protection in rugged environments.

These products, launched in January, are available not only from our internal salespeople as well as our manufacturers' reps, but now two strategic partnerships for distribution in the United States.

These two new alliances formed with EFOI have allowed for greater exposure to national accounts with our products, which will allow for a much faster and less expensive market introduction of the products.

I'm currently working on two new alliances in Canada which will distribute our product in a similar fashion and again be extremely cost-effective in rolling out our new and existing EFO products.

Further, our government business unit has shown great movement toward direct sales into the military. We have three ships with product still at sea, and have sold our products on to bases and into a commissary as well.

With these new additions to our selling approaches, we have also continued our traction into our existing accounts. Our Whole Foods now have over 50 stores with increased sales volume per store orders. Wal-Mart Mexico continues to install our product; we now have four installations at two locations. The Limited Brands' Bath & Body Works has several stores since our initial installation. And we had been approved for a retrofit installation with a new large US retailer. We are talking about a potential of 200-plus stores.

Finally, EFOI is previewed its new showroom in Solon, Ohio and we toured four groups. When they saw the EFO technology in an environment that not only displays the EFO energy savings, but it's a great lighting quality and versatility, they were really excited.

In fact, the last tour had one of the fastest closes with a new account. In fact I received a purchase order yesterday.

The grand opening is scheduled. It is going to be on May 2. We will have a founding member of the US Green Building Council as well as a US congressman from Ohio as keynote speakers. They will be talking about the impact of the new House bill banning the incandescent light bulb and how technologies like EFOI are poised to provide today what Congress is mandating in the future.

Finally, the 2008 financials. All of the changes just described are intended to provide the growth in 2008 for 20% overall growth in sales worldwide; doubling of EFO over 2007 actuals, 40% of which will come in the first half of 2008; cash usage of not more than $5 million, as we have cut costs but still need to invest into solar, LED, and HID technologies. And finally, the first year that will show EFO product sales of more than 50% of the total Company sales worldwide.

With that, I will turn the call back to John. Thank you.

Thanks, Eric. Now I'd like to open it up for any questions.

(OPERATOR INSTRUCTIONS) Brion Tanous with Merriman Curhan Ford.

Good morning, John and Eric. I have a couple of quick housekeeping questions. Then I will come back (technical difficulty) for some additional color.

Regarding your commentary about the $5 million of product shipped to date, I guess that is total revenue you're referencing for the first quarter of '08, coupled with the $1.3 million backlog attached to it. Is that accurate?

No, let me restate that. I think you might have not caught what I said there. I'm saying that we have shipped and backlogged approximately $5 million in the first quarter; and we have an additional backlog of $1.3 million.

Okay, excellent. Thank you. I believe I heard you say $3 million of EFO shipped in '08 to date. Correct?

No, what I said was we have EFO shipped and backlogged in 2008 of $3 million so far.

Okay, so the same, all right. So that's very good.

Finally, regarding your commentary on the operating expense reduction for '08, did I hear you correctly in saying that you expect it to be reduced by $1 million for the fiscal year?

In the US, that is correct. We worked hard in the United States to reduce our operating expenses. [Just here], it does total $1 million for the year.

That's 2008, correct?

That's correct.

Okay, great. I will get back in the queue for some additional questions. Thank you.

Robert Smith with Center for Performance Investing.

Good morning. So, this comment about the 200 store possibility, my question before I heard that was -- when are we going to move away from the isolated order to the breakthrough order that validates the technology? So would you call this kind of a beginning? Or when are we going to see this kind of breakthrough?

Well, I think that we're seeing -- we're beginning to see that. We are seeing multiple stores. We also talked about -- we're seeing multiple stores now, also from The Limited.

So we're beginning to penetrate into locations where there is significant opportunity. That is going to support in large part this doubling of sales that we're forecasting for EFO in 2008.

Back East here in New York, I hear on the radio a commercial that is run by United Technologies' Carrier division which says that they've achieved a 30% increased efficiency in refrigerator cases over the last two years.

I know you guys really have done quite a bit better than that. I'm wondering what is taking so long in this respect to really penetrate that market.

Into the freezer case market, I think that the penetration -- there is a multitude of landscape there. We're working with the freezer case manufacturers still.

We actually have -- we may have [effectively] sold more of our product into the regional supermarket. I think we're finding that that is really where we're getting the better traction, at the regional levels of these freezer case opportunities.

Because they are really in need of that margin improvement, where the national chains, they still follow a lot of the distribution channel that has existed for quite a long time. We recognize that to break in through that it's a little bit more than just the energy story that needs to be provided. There is still some other competitive landscape there as well.

I can't believe that the bottom line would not be a very powerful sales tool in this kind of an economic environment.

I don't disagree. I think the bottom line is always a powerful tool. I'm saying that there is more to that competitive landscape than just offering the energy story in these major chains in this landscape.

We found out --

Well, what is it? What are the other elements of the story then?

We found out that we do best when we are solving a problem. For example, in Whole Foods we solved the problem, the seafood problem, where overheating the seafood. That coupled with the energy savings was a compelling story for them, and we're making progress.

Yes, but John, I'm specifically speaking about the refrigerator cases. The freezer cases.

Yes, freezer cases, the energy story is important. The fluorescent freezer cases have an Energy Star rating. There have been progress made with fluorescent. Although we are one-third the energy, those are still more energy-efficient than the older freezer cases. That story has been playing -- is continuing to play out.

We are making progress, in particular with those folks using freezer cases who are really sensitive to the bottom line. And these regional folks are very, very sensitive, and we are making inroads.

Okay. Finally, what are your expectations with the TCP alliance?

Our expectations with this alliance are obviously to grow the sales. But my expectations when we began this partnership and the strategy behind it is that it allows us access to more national accounts, by utilizing their ability to reach the accounts they currently have without having to continue to add to the fixed overhead of our business and have a more cost-effective rollout of our products into the market. It helps expand the market.

So my expectation are to allow our commercial growth to grow without having to continue to further the investment into our own operating expenses, as it has been done in the past.

And we've been making sales through that outlet. Some of the sales that you've heard Eric talk about, EFO sales, are in fact through TCP.

Yes, and this also will help expedite, I think, the ability to bring the product in a much-reduced time to the market, recognizing the sales.

The first sales recognized with this new distribution approach actually occurred as we were in the process of finishing the development and coming through the UL. We actually presold, and upon getting the UL we were actually out. You know, had the orders to move out to move out the door. It's working the way we expect it to work.

What is the contractual relationship would you say, or can you say?

I don't really want to talk about that on the call. But the relationship is that we have an alliance, we are a true partner in this to distribute products and offer our technology through their tremendous channels.

Okay, I'll get back in the queue. Thank you.

Phil Goldsmith with Goldsmith & Harris.

Good morning. Just looking at the cash, which is down to $8 million, and you're going to burn another $5 million, and you have no significant debt at this point. What is your expectation in terms of -- are you going to use bank lines to give you some safety net here? Can you get through the tunnel without the additional equity? What are your plans there?

Well, I did make a statement earlier; and I said that in fact we are exploring a number of avenues so that there won't be an issue in 2008. Those avenues include debt financing that you just talked about, refinancing existing debt; and equity financing; or a combination of the above.

When we've got something definite to report, we will report on that. We fully expect in 2008 to be able to meet our obligations.

All right. Well, with the expectation that you will either do a debt or equity financing or a combination of both, what about bank lines? Where do you stand there?

The bank lines? We have a line of credit, a revolver, which we use. In fact, it's a $5 million line of credit. It is tied to receivables, so we only are allowed a certain portion of that to be able to be used. So we are trying to expand that.

Okay, all right. Just let me -- insofar as your legacy business is concerned, how do you see that playing out over the next 12 months or so?

We said that we would see a further -- we are forecasting a 15% decline in the legacy business.

We are obviously trying to avoid that. We have some new products that we are introducing into that business. We have not abandoned it by any means.

We have -- it is contributing to our overall business. So I'm going to ask Eric to add a little bit more flavor, more specifics to that.

Thanks, John. What we're trying to do here is come back at the channel that really kept that traditional business going strong and really reinvigorate it. We have done that by -- we now have three salespeople who are actively engaging our manufacturers' reps, both with EFO and traditional product lines, to make sure that we are meeting the needs of the consumer, okay? As well as the pool business.

We are moving the EFO product line. As we said, we expect it to finally take 50% of the total sales in 2008. But we don't also want to turn away a customer who has a need and we can fulfill that need because we currently have a technology.

So we're working very aggressively back into those channels to continue to sell those products.

Yes, we have a very -- we have a new leader in our pool business who is aggressively pursuing sales. So we are forecasting a continued decline mainly because of the forecasts that we have heard on the housing market in 2008.

Will your margins -- do you expect the margins to decline as well in this segment?

No. No we have actually resized that business so that the margins will increase. That is an important element. We wouldn't -- we're very, very much aware of that. In fact, Eric has worked very hard in 2007 on this.

Right. We had sized the business in 2007 preparing for this year. Some of the onetime restructuring costs were associated with that, unfortunately. But we had to prepare last year, as we knew the market trend was going to continue in these traditional lines.

We've taken -- it's a number like $0.5 million out of that business already.

Right, so you did it through cost reduction. What about pricing?

Yes, not to openly talk about our pricing strategy on the phone, but yes, we have engaged our pricing strategy to help improve that as well.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS) Brion Tanous with Merriman Curhan Ford.

Yes, could you discuss the gross margins for the fourth quarter of '07, and why they were down to those levels?

Eric?

Yes, sure. The fourth quarter in '07 saw a lot of -- as we were coming through 2007, we had incurred some expenses as we were coming through, on some restructuring that we had thought were going to be restructuring expense; and then we had to re-put those back into operating expenses.

It was unforeseen as we were coming through the year. It helped -- these onetime efforts that we were coming through and onetime charges were pushed through in the fourth quarter; and it caused the fourth quarter to be skewed.

But we also had a significant reduction in sales and, of course, in the fourth quarter year-over-year. That lower sales of course leads to lower margins.

Yes. Then finally, we were launching the new LED product line. We brought in some inventory and that took some hits as well, as we were expecting some things coming through during a product launch. Unfortunately again, it was like a onetime (multiple speakers).

But as you look at the gross profits over the year, we have really moved about 1.5% off of where we were last year. With such a reduction in the sales volume, we had significant improvements in our overall yearly cost structure to allow us to maintain those percents of gross profit in the face of such a volume drop.

We are expecting to see significant improvement in gross margin in the first quarter.

But the work through 2007 helped us end the year with a volume drop in the sales of just a slight, slight reduced gross profit. So there was a lot of work done there to ensure we could do that.

Okay. There's a lot of moving parts here on this gross margin issue, and the overhead absorption, and the onetime charges in the fourth quarter, and then the increasing mix here on EFO in '08, declining pool sales.

Can you quantify at all for us how we should think about gross margins as they move through fiscal '08?

Yes. In 2008, as we come through this year in each quarter by quarter, first let me say we are going to see much improved gross profit. It's because we have -- again we have sized the business right; we've done a lot of good things in reducing cost and gaining good efficiencies.

We recognized some of these onetime hits that occurred in 2007, and we do not foresee those things coming through 2008.

So, when we look at running the business, we are seeing that, and actually we are seeing that as we review our numbers to date, as we come through this quarter -- that it is much improved.

Okay, excellent. Can you talk a little bit about the solar cell activity with the DoD? Can you qualitatively describe what exactly you're doing there?

Then also could you comment on the $1 million contract? How far through that are you? Where does that show up? Is it an offset to R&D or is that in the revenue line?

Well, let me start out by saying a little bit about the solar work, okay? We are playing a very significant role in the VHESC program. We are responsible for the optical development, and we are leading that effort.

The optics really are what make the VHESC approach different from all the others. We are actually splitting the light spectrum into three or more elements, where we have a low-energy, a medium-energy, and a high-energy portion of the spectrum.

To do that efficiently -- and those optical elements that are directed towards devices that are more efficient in those regions of the spectrum. In fact, there are device technologies -- gallium arsenide. Indium gallium nitride for example is one of them that is more efficient at high energies; and there are other materials that are more efficient in the other regions.

To take advantage of that, you have to have very efficient optics. In fact, our target optical efficiencies are well over 90%. That is nothing like what has been achieved, for example, in concentrator technology.

So that is the role that we are playing. We are also responsible for developing an ongoing series of prototypes that take us through this program.

The goal of the program is to create a manufacturable system with a target efficiency of 50%, which is terrific.

We expect to participate in developing a series of products, probably tied to our efficient lighting, which will take advantage of this. So EFO optical technology makes this approach -- I'll call it EFO solar -- really exciting for us.

From the point of view from how we are booking that, I'm going to let Eric talk a little bit about that.

Okay, John, thanks. Yes, Brion, what we are looking at as the total solar contract being able to recognize somewhere in the neighborhood around 35% of it in the coming year.

Okay. Was some of it recognized in '07?

No.

We had a separate contract in '07 in the first quarter. It was Phase 1. This is, the $1 million we're talking about is the Phase 2 program.

Okay, okay. So just to paraphrase real quickly, you are essentially developing the optics portion to enhance the conversion of light energy into electrical energy on, for example, a gallium arsenide, solar cell or other type of triple-junction solar cell.

So you're actually not working on the solar cell itself, but enhancing the light hitting that (multiple speakers).

Right, the device technology belongs to other partners. The actual chip technology. The optical technology is our role.

Okay, fantastic. Just a couple more quick questions. Can you elaborate a little bit more on the developments with the military? Have you gotten some feedback from the three ships that are at sea? What is the optimistic scenario that could play out in terms of some reoccurring revenue streams coming from these systems you have put on the ships?

Yes, we're getting very positive feedback from the systems onboard ships. In fact, we are forecasting sales, I think a portion of the sales that we are forecasting for EFO will be military sales, actual military sales onboard ships.

We are also, interestedly enough, being asked by the military, by the government, to place EFO in other locations. We've done a commissary, for example, recently. That is a supermarket for the military, if you will. There are other locations on bases where we are placing products. So we expect to see a real military business emerging in 2008.

Okay. Then the last question, regarding the new large US retailer that you're targeting with 200-plus stores, can you give us the status of that now? Have you demonstrated a system for them? Are you bidding and quoting on various stores?

The answer is yes. We have not only demonstrated, but more importantly we have been approved. Our product meets the spec. That is -- I can't tell you how important that is. That we are now in the point of moving this towards a commercial opportunity.

But getting to be on the spec for this retailer was the big, big hurdle.

Has the retailer discussed a large renovation project so that you really have a good number of stores in the pipeline potentially, or is that --?

Yes, this is a plan. The retailer plans to renovate these stores and has a definite objective and is going to put someone's product in those stores.

Great, thank you very much.

Walter Schenker with Titan Capital.

Thank you. Having listened to conference calls, I guess, now for about five years, it is still unclear whether the problem is the technology is no good or the organization is having problems penetrating accounts. Are we yet in all the regions in Whole Foods?

I will answer the first question -- or the second question first; and the answer is we are not yet in all of the regions. We just picked up a new region. So we are continuing to expand.

Let's talk about these five years. What has this been about? The first phase -- and you asked us, does the technology work?

The first phase, the thing that was really important -- is the EFO concept viable from a technological point of view? We have demonstrated that.

In the first year or so really that was what it was all about. Does this thing work? Is it energy-efficient? Does it make light comparable to a light people would use?

The second phase, which has been the last couple of years, is -- will anybody actually buy this material? Is there a viable market out there for this product?

We have now multiple customers. They are repeat customers. If you interview these customers, they say they love this product.

So, I believe that there is a significant market for this product. We have talked in the past about how sizable that is, and it is very sizable.

This phase, what we're trying to do now, is to achieve scalability, to actually get this product into channels. That is why we've been talking -- why we've been trying to expand our efforts.

Going in and just going for, say, large plays, that is a good thing to do; and we've got some great people working on it. But it takes time to get those to work.

We are multiplying these efforts without multiplying the dollars by creating new channels. For example, the TCP channel and the Eco Engineering channel that we have opened up, as well as the military. Those we can do very cost effectively. And we are working yet on another channel opportunity.

That is really the challenge for 2008 and beyond. We have now crossed 50% of the business, EFO business. We have gone in those five years from basically a pool and specialty lighting business with an energy-efficient idea -- okay? -- concept. To a business in 2008 which is principally an energy-efficient lighting business.

So there has been things happening. I believe we're going to see significant growth in EFO as we have said 2008. And it's going to continue to grow significantly beyond that.

Aren't we -- I mean, again, I obviously have a lot of frustration. The market has frustration; and you people probably have some of the frustration.

But we are in supermarkets who are using it which have tens of thousands of units in total, if we add Albertson's and everybody else. We are in -- we did a couple of buildings with Gensler. Is that a correct statement?

We did a couple of installations, yes. We have actually done two. I think maybe the buildings you are thinking about are the W, which is part of a Starwood chain. That is a big deal, and we are pursuing Starwood. Starwood is interested in what we are doing.

But if in fact the supermarkets which have it in like it, if Starwood likes it, as opposed to -- if Limited likes it, if people who have very large numbers of units like it, if we have in fact not just the downlight but the loading docks, the freezer cases, and all of the newer products, it is hard to understand why the opportunity is adding 200 -- which is nice, a renovation which might have 200 stores -- instead of adding another 1,000 stores at Albertson's.

Well, we're giving you an example that is concrete that we can give you. It isn't that we are not working on other things that we are not -- we don't really want to disclose at this moment.

Okay. Lastly, just to voice the last frustration, which is the achievement of getting EFO to more than 50% is as much a function of collapsing -- maybe not our fault -- the traditional business, which has managed to lose much more money than anyone, I think, ever thought two or three years ago, as it is to grow EFO.

I mean if the pool business was back where it was three, four years ago, we wouldn't be 50% of it. I end my frustration.

That's true. Nevertheless, we've gone in those five years, we've gone from $0.5 million in sales to $7 million in sales; and we are predicting that that number will double in 2008.

So even if you strip away -- sometimes I feel exactly the same way you do. Sometimes I think maybe the best way to have done this is as a greenfield. Then we wouldn't be talking about the traditional business.

I have a frustration because of the collapse of the housing market, for example, and basically the erosion of that business. But it is what it is.

This kernel is emerging from our traditional business; and in 2008 our business was an energy-efficient lighting business by all the measures.

Yet with $14 million of EFO business, and with reduced costs and shrunk expenses on the traditional pool business, the Company still anticipates it's going to burn through $5 million of cash.

So we are still a long way from being profitable or cash flow positive on an annual basis. I realize you may come out in the year in a different way.

That's correct, and it's only because we are continuing -- the primary reason for that is we are continuing to invest in this technology. We are seeing the fruits of that this year.

We spent more in 2007 than we did in 2006 on R&D. The fruits of that were a whole series of new products that are doing well. We see a need to continue to fill that product stream in 2008.

We could say -- we could close our eyes and saying -- no, we're not going to do that, and turn this thing back. But we are a technology company at this point, and we need to have the growth engine which is really the technology turned into products working for us. That is really the thinking here.

Yes, Walter, if I could add something to what John was saying, I think too -- I've been here over a year now. And I think too, watching and understanding a little bit of the history and then living through the last year, that this Company has come a long way in learning more and more about coming to market with these technologies.

We have gotten even more customer feedback and it's enabling us to continue the traction and then further it. One of those is these two alliances. We now have alliances that open up further distribution channels and further customer bases with us. And partnered with us to help get the product out there to help educate the people out there about this technology so that it does further itself through this year.

The showroom coming online is going to certainly do that for architects and designers and specifiers, being able to see these applications and see how aesthetically pleasing it is, and then really understand the true energy significance of it.

I think that as we have learned how to bring this product of market, we have gotten better at it, and we will continue to get better at it, and it will help grow it.

But if you are in fact -- you had me done, and now I have one more. I promise this is the last one.

If in fact we are a technology company, why aren't we in fact a technology company who develops technology and then licenses it to people who have in place -- Philips, GE, pick your name -- the distribution, the marketing clout. The ability to go to market across the full spectrum around the world, to then try and take this technology and create a very large revenue stream from it.

Even if we only get royalties of it, which is what many technology companies do, why isn't that a more appropriate way then to go to market?

Let me just try this. I used to work for GE, as many of you know. In fact I used to evaluate some of these opportunities. What got GE's attention were sales levels that started to make inroads into markets they were interested in. Technologies that actually had shown, had demonstrated market viability. Not only a technical idea but market viability. That is kind of Phase 2.

I believe that we are at that level. I believe that we have attracted some attention. In fact, there may be opportunity in 2008 and beyond pursuing exactly the kind of things that we are talking about.

Our movement with TCP for example, is a great example. Why is TCP interested in us? Because we are a technology company and we can offer them solutions for their customers that they can't really get by themselves or elsewhere. That is why they are interested in us.

They are the world's leader in compact fluorescent lights. Why on earth are they interested in us? Because CFLs, while they're great products for them now, aren't going to last forever. They need to form alliances with companies that can provide products for the future.

So that is an example. It is not the only example that we are working on, but that example is real, and we are beginning to get revenues from it.

Thank you.

Robert Smith with Center for Performance Investing.

You made a comment during the introductory remarks about cash flow positive. What was that?

We were talking about positioning ourselves in 2009 to be cash flow positive.

By 2009?

2009.

That is for the year as a whole?

That is for the year as a whole.

So again, I just want to just go over this landscape again with the national accounts. What is the difficulty in not approaching, but getting a national account more interested?

I mean, for example, say Whole Foods. When the question about the regional (multiple speakers). Yes, go ahead.

The Whole Foods, you have to think of them as 12 different companies. It is really the best way to think of them.

Yes, I understand that, John.

So they don't take the word of the other guy. So you have to go through pretty much the same process.

Let's talk about -- a little bit about The Limited, where we had a real competitor, several real competitors. In fact that process I think is illustrative of what you have to go to secure a national account.

Now here the decisions for The Limited are made in one location. It's not regional. So it really is probably a better example.

Here, we had to -- first of all they were interested in solving a problem. We had a lot of great technology. They were not interested in our great technology, because they are interested in solving their issues.

They had a very specific problem where they were having their fluorescent lighting just burning out on them. They had -- it was a maintenance nightmare for these guys, and they needed a solution.

Now that solution also had to save energy and so forth. So we demonstrated that solution. We were very, very responsive. We developed actually a product version that was specific for these folks. So we did some tooling and so forth.

We put it into a store. We demonstrated the actual performance. They brought in all of their design -- all of this takes time -- all of their designers and so forth. We are basically specced into that application.

That is the process you go through. The thing that is different is that we are not naive. We have great products, but we're not sitting here thinking the world is going to beat a path to get this product from us.

These folks have problems that they've got to solve during the day.

I was more directing this to the supermarket field. We were waiting for these --

Why don't you talk a little bit about supermarkets, Eric, in 2008 and their growth?

Okay, we will speak to the Whole Foods. I know you've mentioned it.

Okay, so we continue, continue, continue to sell into Whole Foods. In fact we sold in some more this month. We got a new region in the United States with Whole Foods, and we expect to continue our process with Whole Foods.

But Eric, it's hard to believe that the tipping point won't be reached within the Whole Foods organization where everyone who is not participating just sits up and says -- hey, this is the way to go.

You're referring to the corporate headquarters?

Well, whatever. I mean someone has oversight.

But what we are saying is -- what we're saying here is that it's regionalized by -- it is regionalized decision-making.

It isn't -- it is autonomous at those levels. [Though] people set up and may talk about best practices at those things with the whole -- with this kind of organization, it is still these people having to manage their own capital, their own capital investments, and weighing those out with the returns on those investments.

As well as we have to work through winning the business at each region every time. It's not centralized. I think that is what John's point was.

In some segments it is a centralized decision; in others it is not. What I was referring to about the landscape of these grocery stores, when we referred to -- you had mentioned freezer cases earlier -- is that once you get through the energy story and the return on that, you look at the landscape of a freezer case. There are integrated modules of systems.

So when you step back and look at the approach to that, there are two ways. You can go through the OEM which brings the integrated system together; or the regional supermarkets which have a significant still amount of stores regionally. But we will still have to go through the same Whole Foods concept of winning each region because the landscape of this competitive distribution channel.

So that's what I'm saying. I think that we are at the right level. I think we're at the right strategy in the regional base and winning them, as we are winning them.

Because it does continue. Once you're in that region, and they expand, you are with them.

And that is a great win for us, because once you're there you're there. And once you've proven it out, which we have, they keep buying that technology. Better, they allow us to expand within those stores with our new product introductions and our existing products where those applications go.

So Whole Foods is another great example where we started with one and we have expanded into other departments; and the per-store order has grown considerably since we went down this path. Which allows us to go back in that channel into each of those regions and widen the sales volume.

How about a Safeway, so to speak?

Well, let me give you Wal-Mart. We talked about Wal-Mart Mexico. That is a great example. We are now into four; we have four installations in Mexico. Wal-Mart is planning on building a number like 24 such locations. I think maybe there are two installations per location.

That is a real opportunity for us. I don't see why we're not going to wind up in all of those. That is our goal.

So far when they are building these things, we are winding up specced into those things. (multiple speakers)

Are you still alive in the Wal-Mart domestic runoff so to speak? You said you were (multiple speakers).

We are still alive. We are still alive.

All right, thank you. Good luck.

Ryan Kilstein with Marathon Partners.

Hi, Ryan. This will be the last question since we are now heading into the hour.

It's a quick one, so it's perfect. Just I think I missed it in the beginning; I dialed in a bit late. Did you guys give a fourth-quarter EFO sales number?

What's the year-over-year growth in that with the reclassification?

Yes, we did in fact give a fourth-quarter EFO number. The EFO number for Q4 was $2 million dollars. It was $7 million for the year versus $5.3 million with the reclassification; or a 32% improvement with the reclassification over 2006.

What was it for fourth quarter of '06? What was the growth year-over-year for the quarter?

Fourth-quarter '06 was about -- yes about $750,000 or some number like that with the classification.

Okay. All right. Thanks a lot.

Thank you. Thank you, I wanted to thank everyone for their participation in the call. I look forward to discussing Q1 with you in a few weeks, in April.

This concludes today's conference call. You may now disconnect.