Energy Focus Inc (EFOI) 2008 Q4 法說會逐字稿

Good afternoon. My name is Kala, and I will be your conference operator today. At this time I would like to welcome everyone to the 2008 fourth-quarter of total-year 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. Kaveski, Chief Executive Officer, you may begin your conference.

Kala, thank you very much. And thank everyone on the line for again joining the Energy Focus 2008 fourth-quarter and total-year earnings call.

Today, joining me is every member of the executive Management team of Energy Focus, and I am delighted to introduce to our shareholders/investors our newest member, Gerrit Reinders, who is Vice President of our Lighting Energy Solution Sales.

Before we begin I would like to turn over the conference call for the moment to Nick Berchtold, our Chief Financial Officer, for the reading of our Safe Harbor Statement.

Thanks Joe. I would like to remind all of our shareholders and our investors that today's discussion may contain some statements that may be considered forward-looking in nature. These forward-looking statements may include comments related to the 2009 financial projections or other comments related to the Company's strategic plans, objectives, expectations, or intentions. These matters involve risks and uncertainties, and actual results may differ materially from those projected or implied in the forward-looking statements.

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 2007 and the soon-to-be released Form 10-K for 2008.

So what that, I would like to turn the conference call back to Joe Kaveski.

Thank you very much, Nick. And again, thank you all for joining the call.

Today, I would like to make a few brief comments concerning our 2008 results and then provide you with an update relative to the progress in our primary divisions and technologies as well as our progress towards reducing costs. Following my comments I'll turn the call back over to Nick Berchtold, our Chief Financial Officer, to provide you more clarity and an in-depth look at our financial results. Then we will open up the line to field any questions that you may have today.

So to begin, as for our 2008 results, our fourth quarter was disappointing as our legacy pool business demonstrated that the Company is not immune to the current global economic crisis. Increases in our new, energy-efficient EFO products barely overcame the $4 million year-over-year decline in our pool business, and we saw many significant national account orders for EFO products begin to be delayed towards the end of the third quarter and definitely accelerating into the fourth quarter.

These results coupled with the potential of a going concern opinion by our auditors solidly supports our need to accelerate the transformation of the Company into a turnkey lighting energy solutions provider servicing and focusing on the existing building market.

That being said, the Company did make significant progress in 2008. The Company had year-over-year growth of almost 50% in the sale of our energy-efficient EFO products. We grew in our commercial businesses worldwide, and we initiated the installation of a new marketing and sales organization and substantially reduced our fixed and variable costs, and our fixed costs -- our overhead costs -- reduced almost $2 million year-over-year from 2007, and we expect to see comparable results in 2009.

Let's look at our US and rest of the world commercial buildings businesses.

Starting in Q4 we established a new, dedicated sales and marketing organization to focus exclusively on the lighting energy solutions business and national accounts to existing building markets. We hired Gerrit Reinders, who is joining us today. He's a seasoned energy services and green building sales executive to lead this team.

Today this team consists of seven experienced energy solution sales and sales support personnel focused on selling these turnkey lighting energy solutions as well as solar solutions that include significant content of Energy Focus products and IP. We expect the size of this team to continue to grow in 2009, and I can't tell you how delighted I am that in just a few months this team has built an exciting sales pipeline with many of our new and existing large customers.

In our US commercial new construction business we saw an 11% growth in 2008, and I am confident that we're going to continue to see this grow in 2009. I want to point out that this is the first time that this business has grown in many years, reversing a multi-year trend. This was the direct result of excellent sales leadership by Steve Gasperson, who not only manages our pool business but was promoted to oversee the US commercial and new construction sales organization. Steve you have done an outstanding job of reorganizing and growing this sales team and reengaging our commercial sales rep agencies.

Furthermore our new construction markets worldwide, led by Michael Morrison, saw record increases with year-over-year growth of 30%. I believe this growth is the direct result of Michael's expanded efforts to harvest work in the Middle East and emerging Asian markets.

Moreover, growth in all these divisions will continue to be driven by our product innovation. Our LED products that were released in 2008 and those coming in 2009 are well-positioned to capitalize on the opportunities created through the recently passed American [Reinvestment and Recovery] Act of 2009, the stimulus, and our compassed countries' renewed emphasis on energy-efficient green buildings.

For instance, we're seeing exciting traction on our 10-year LED dock light. FedEx has made this the standard for their new and retrofit facilities in not only their freight division but also their ground division. We're seeing some of those orders that were delayed being released. They are significant. And we anticipate that this will continue in 2009.

We have released our new LED globe light, which is designed for cold storages. This globe light was featured as part of a Department of Energy study and demonstrates superior performance in terms of energy savings and maintenance, and with a tremendously very fast payback.

We're now introducing a new e-illuminator LED light engine that combines high-powered, high-illumination LEDs with our proprietary and patented [TT fiber] to fill the needs of accent and cold lighting, and the exciting part is it's at one-third of the total install cost of other LED-based product technologies. I invite you next time you are in Las Vegas to just go visit the New York New York and you'll see its performance directly.

We have also introduced a new LED landscape lighting line for lighting exterior commercial buildings. We recently applied -- installed this -- excuse me -- at a regional distribution facility developer where we replaced 175-watt and 225-watt HID metal halide lamps with our 26-watt LED landscape lights. I've got to tell you, the outcome is unbelievable. It's a green solution that provides for better aesthetics, significantly reduced energy costs; and for all practical purposes this lighting now is permanent for life at this facility. And best of all, the project's simple payback was about 2.5 years.

We will be shortly releasing a complete family of ceramic metal halide and LED track lights to replace MR16 technology. Frankly, I've got to tell you, I'm jazzed by the initial response from some of our largest and more technically competent customers.

Now let's look at our military and R&D business.

Our military business came into its own and grew over 200% in 2008, and these significant results were delivered, achievements were made, and exciting advancements are underway -- the successful completion and now subsequent extension of our DARPA VHESC solar cell contract that delivered a prototype that demonstrated the effectiveness of optical splitting and coupling to create a very high-efficiency solar cell that is almost four times the system efficiency of conventional solar technologies. We fully anticipate a Phase III contract to work with our partners to commercialize the VHESC technology starting in mid 2009.

Furthermore, as a result of our solar and advanced lighting R&D, we believe we have the special processes, technology, and trade secrets for optical coatings to significantly improve the efficiency and while substantially reducing the cost of conventional solar technologies. We're now working with leading solar technology companies to fine-tune their products. In essence, we seek to unlock the affordability of off-grid solar lighting.

As a result of this work, we have been invited to join the Ohio's Wright Center for [Phovoltaic] Innovation and Commercialization, which is a public/private partnership involving university brain trust and industry to expand on the Ohio's already substantial PV infrastructure.

We have also been selected for three SBIR contracts that we believe offer significant commercialization opportunities -- circadian rhythms for the military to basically stimulate our Navy's body clock. I got to tell you, I have seen prototypes, first-generation, of this technology, which basically changes the color of light, and it is phenomenal.

We're basically now involved and contracted for creating explosion-proof LED fixtures, and we have been selected for an ultra-high output LED lights for the Army.

We believe that many of these SBIRs are why we're now a finalist for the [T5] replacement project for the Virginia-class submarines, and we expect an award some time in early second quarter of 2009.

Furthermore, our R&D team has been aggressively preparing and submitting proposals related to the American [Reinvestment and Recovery] Act of 2009. The Company sees this as a great opportunity to contribute and harness our unique saving technology and IP. Currently the Company has over $12 million in outstanding proposals with significantly more to be submitted within the next 60 days. We're now beginning to see stimulus opportunities materialize, and I believe we are in a great position to participate.

Also, we're excited that we have emerged from the red tape wilderness, and now have a five-year contract with the General Services Administration. This contract allows Energy Focus products to be purchased quickly by anyone in the federal government without competitive bidding. Our GSA listing is significant in light of our anticipated Q2 release of a world-class LED parking garage fixture and the recent announcement by the GSA of their intent to upgrade LED technology into all of their parking garage facilities.

Now before I turn over the call to Nick Berchtold for a review of our financials, I'd like to say one final comment about the Company. Energy Focus has made a dedicated effort to strengthen the corporate governance leadership. Our most recent announcement has been the addition of Mr. David Gelbaum onto our Board of Directors. Mr. Gelbaum's addition is both timely and welcome as we begin to integrate and commercialize our energy-efficient lighting and solar technologies to ultimately realize our vision of providing a technically feasible, financially viable off-grid lighting system for commercial buildings.

So Nick, I would like to turn it over to you. Thank you.

Thanks Joe. Now I would like to provide you with an overview of the financial results obtained during the fourth quarter and on a total-year basis for 2008. Specifically, I will be reviewing revenues, gross profits, selected balance sheet items, earnings per share, and the expected going concern opinion.

So let's first discuss revenues. The fourth quarter of 2008 continued to remain challenging due to the ongoing deterioration in the global economy including the near collapse of the housing and construction markets combined with the worsening credit crisis.

From a numbers perspective, fourth-quarter revenues were $4,140,000, which was a 23.9% decline over revenues in the fourth quarter 2007 of $5,440,000.

Revenues for the total year 2008 were $22,950,000, which was effectively flat versus 2007 revenues of $22,898,000.

However, fourth-quarter 2008 EFO-related lighting revenues were $2,165,000 compared to fourth-quarter 2007 EFO revenues of $2,079,000. This equates to a 4.1% increase over prior-year numbers.

Further, EFO-related lighting revenues increased to $10,888,000 for the total year of 2008 compared to $7,011,000 for the total year 2007. This equates to an increase of over 55% over prior-year levels.

Still further, revenues recognized from our R&D business during the fourth quarter and total-year 2008 were $342,000 and $1.7 million, respectively, versus comparable-period 2007 revenues of $189,000 and $542,000, respectively.

As Joe stated, these revenue increases related primarily to the delivery of certain R&D-related services to the Very High Efficiency Solar Cell consortium being funded by the Defense Advanced Research Projects Agency.

Next let's discuss gross profits.

Gross profit was a negative $169,000, or a negative 4.1% of revenues, for the fourth quarter 2008 versus $544,000, or 10% of revenues, for the fourth quarter of 2007. However, this fourth-quarter 2008 gross profit figure includes a December 2008 noncash charge to the inventory reserve in the amount of $1,071,000. Excluding this inventory reserve adjustment, fourth-quarter 2008 gross profit was $901,000, or 12% of revenues.

On a total-year basis gross profit was $5.5 million, or 22.4% of revenues, for total-year 2008 versus $6.3 million, or 27.4% of revenues, for total-year 2007. Again, excluding the December 2008 noncash charge to the inventory reserve, gross profit was $6.6 million, or 28.6% of revenues, for total-year 2008.

Related to the first quarter 2009, we do expect profit margins to continue to be pressured by ongoing global economic conditions. We also continue to make every effort to counter these economic forces through ongoing fixed and variable cost reduction initiatives, continued acceleration of new product introductions, and continued expansion of the solutions-based sales and marketing organization.

As Joe had mentioned previously, the Company's national accounts and solutions-based sales organization is currently comprised of 17 members possessing a total of approximately 211 years of energy solutions and business development experience.

And now I would like to turn over to the balance sheets.

The Company continues to focus intensely on cash and working capital management. First, cash and cash equivalents. Our cash position decreased $1.9 million to $10.6 million during the fourth quarter of 2008, which compares favorably to a $2.1 million decrease in the fourth quarter of 2007 despite incurring a 23.9% reduction in year-over-year quarterly sales.

On a total-year basis, cash and cash equivalents decreased $7.4 million excluding the proceeds from the March -- the Company's March 2008 PIPE transactions versus a $7.6 million decrease experienced in 2007.

Next let me turn to inventory. As previously discussed in the gross profit section, the Company increased its inventory reserve calculation of the fourth quarter of 2008 to incorporate a provision for the rapid change in technological innovation being experienced throughout the lighting industry as well as to take into consideration the uncertainty surrounding today's economic climate. Based upon the Company's analysis, we recorded a noncash charge in amount of $1,071,000 in December 2008 to account for Management's estimation of the impact of these two items which may have an impact on the salability of our current technology

Let me turn to external debt. During 2008 the Company reduced its outside, third-party debt from $3.2 million at 12/31/2007 to just under $2.2 million at 12/31/'08 for a total reduction of more than 31% of its outstanding debt at December 31, 2007.

Let me next discuss asset impairment. As a publicly traded company, long-lived assets are reviewed whenever events or circumstances indicate that the carrying value may not be recoverable. In this regard, an impairment loss will be recognized based upon the amount by which the book value of the asset exceeds fair market value as determined by a quoted market price of the present value of cash flows.

In this regard, the Company performed in impairment test of long-lived assets at 12/31/2008 first utilizing a market capitalization methodology to calculate fair market value of consolidated equity as of the test date. This analysis determined that the fair market value was less than our carrying value. This provided the Company with an indication that certain long-lived assets may be impaired.

The Company then analyzed the fair market value of its fixed and other long-term assets and determined that its goodwill was impaired as defined by FAS 142. Our results were reviewed with both are certified public accounting firm and an external valuation company.

Accordingly, the Company recorded a noncash impairment charge for goodwill in the amount of $4,305,000 in December 2008. In this represents the entire carrying balance of goodwill on our balance sheet as of that date.

Let me now turn to earnings per share. For the fourth quarter our audited financial statements recorded or showed a net loss of $7,776,000 for the quarter, which equated to earnings per share loss of $0.55 per share. However, if you remove the $5.4 million of one-time, noncash adjustments incorporated -- or including in inventory and goodwill, our pro forma fourth-quarter loss of 2008 was $2.4 million, or an earnings per share loss of $0.16 per share. This correlates back -- correlates to the 2007 earnings per share loss of $0.31 per share.

Correlating to the full-year results, our full-year net loss was $14,448,000, which equates to a $0.0102 per share loss. Again removing the one-time inventory and goodwill adjustments of $5.4 million, our adjusted net loss for the year 2008 was $9,072,000, equaling an earnings per share of $0.64 loss per share. This corresponds to a 2007 full-year loss of $0.98 per share.

And lastly, I would like to discuss the potential going concern opinion. The Company does expect its independent public auditing firm to issue in opinion raising doubt as to it's ability to continue as a growing concern throughout 2009. This opinion stems from the combination of the worsening global economic crisis, the significant losses the Company has incurred from 2005 to 2008, and other related factors.

Management acknowledges that the Company's level of historical cash utilization is not sustainable for the Company to remain a viable entity in this environment and continues to aggressively transform the business into a turnkey, comprehensive, energy-efficient lighting solutions provider.

Further, we continue to aggressively reduce costs as evidenced by the nearly $1.9 million decrease in operating expenses excluding the loss on the impairment charges in 2008 versus 2007 levels. These cost reductions have been achieved while simultaneously realigning and expanding our domestic and global sales and marketing organization.

Management further intends to reduce costs in the first quarter of 2009 through additional fixed overhead and services-related cost reductions and will continue to aggressively reduce costs further as changes in global economic conditions dictate.

In conclusion, I'd like to thank you for the opportunity to speak with you today, and now I will turn the conference call back to Joe Kaveski.

Thank you very much Nick. I think at this time we would like to open up the lines, operator, to questions from our shareholders.

(Operator Instructions) Craig Irwin.

Good afternoon. Congratulations on the really well-managed cash consumption in the quarter. You guys are really obviously using discipline in your operations as you build the business for the future.

Thank you for recognizing that Craig.

I was hoping you could give us a little bit more color on the outlook for 2009. I know it's very challenging to really predict in the environment that everybody's in right now, but you had some pretty strong growth in your EFO products last year. Do you anticipate continued growth, maybe at a tapered-back rate in 2009?

Great question Craig. And gosh, I wish I had the crystal ball, but let me offer maybe or reinforce what I have said. We are absolutely going to see growth in our commercial sales businesses. You know, we have done a lot to be able to launch this solutions organization, and yes, I definitely expect that to grow.

Unfortunately, I don't believe that the pool industry is going to rebound this year. In fact, the latest industry data would suggest that the multicolored pool light sales are actually down substantially over last year. So we have committed that -- and we're monitoring the situation very closely, and I wish I had that crystal ball, but beyond what I just stated it is still a little too cloudy to offer any further commentary.

Okay. That's more than fair, more than fair.

So you've obviously shown a lot of competence in managing your cash, and $10 million on the balance sheet leaves you in a nice position compared to some of the other companies out there. What are your priorities for investment with this cash over the course of this year?

I'm going to turn that one over to Nick.

Our priorities for cash over this year will continue to be the realignment and the strengthening of the global sales and marketing organization and the continued realignment of the remainder, the rest of our business, around that sales and marketing organization.

Again, we have brought through -- under the Gerrit Reinders' organization 211 years worth of combined experience, under the Steve Gasperson organization the realignment of our entire distribution and sales network including new reps, different types of reps. So our cash is surrounded -- or is going to be used for the alignment of this business into a sales and marketing generating maniac -- for lack of a better term.

I second thought.

And then just if we could -- I mean in the past you've talked about some of the SBIRs really in dollar terms, what you could potentially see over the course of the next year. Can you frame out really what the opportunity is under some of these different SBIRs for you in the near-term? And then the longer-term potential for things like the Virginia-class submarine lighting system that you mentioned?

Great Craig. I'm going to send this one over to Roger Buelow, who is our Chief Technology Officer.

So maybe I'll talk -- I will address the SBIRs directly. You've got three that Joe mentioned. We got one that's from the Army in which [we've already been] selected, and two that are through DARPA. All three of those are in Phase I, and the two Phase I's from DARPA are both contracts for $100,000, and the Army is $70,000.

And the nice thing about SBIRs are that if you succeed [and] you've got (inaudible) history of success, they can grow into Phase II, which would [mean] quite a bit more. So for instance in DARPA Phase II, it would be $0.75 [million].

And our history has been one of success. Every SBIR we've [received a] Phase I on, we've have gone on to receive a Phase II on. That's been a total of four so far, and now we've got these three Phase I's that we're working on.

Okay, okay, excellent. And then if I could change just to the solar side, obviously it sounds like you're making good progress there. Can you update us potentially on the outlying -- on the outlook for future funding for your projects there and potential commercialization timeline for products with your partners?

Craig, this is Joe. And I'm going to take that one and basically just share that we believe it is pretty significant, especially with the new administration. The results that we demonstrated, I mean, a difference maybe from working with the DOE is that you actually have to produce something. That's very significant and we did. And it's a great technology, and we believe that, again, we will see a continuation via a Phase III contract here very, very shortly -- we are anticipating within the second quarter of this fiscal year. So we're pretty jazzed about it.

Excellent. Thank you very much for taking my questions.

[Seth Gilthorpe].

Good afternoon. I wonder if you could just expand a little bit on this cash question -- and with a very conservative eye. Congratulations for all the things you're doing. But with a very conservative eye, try to anticipate the kind of cash burn or what the cash flow might be for this year?

Seth, we anticipated that that was probably the number-one question that's on everyone's mind here. You know, in terms of being able to really look out with that crystal ball, that is very difficult. And beyond really what I have just said, that we expect to see our growth in our energy-efficient products again. We expect to see great growth on solutions as it's been launched and it should produce.

You know, to go beyond that, I really don't have the visibility. But as soon as I do, I will provide it.

Thanks.

Seth, I know you just -- I don't know if you're still on the line. But the other thing that I do want to reiterate is that we have placed a major emphasis on reducing our fixed overhead costs as well as our cost of goods sold. Again, I'd like to stress that we made a $2 million improvement over 2007, and I truly anticipate that 2009 will show a comparable reduction there. So, thank you.

Walter Schenker.

Hi guys. Let me just start by saying I think this is -- give or take -- my 25th Energy Focus conference call. And I would (technical difficulty) asked if there was an archive -- which there probably doesn't exist -- the Management team should be forced to sit and listen to the last 24, because everyone of which is somewhat marked by a lengthy discussion of new products, new opportunities -- some of which are very large -- and disappointing financial performance.

When I opened my file up because I was curious, the thing that came out was a year ago a presentation made by you, Joe, the front -- big bold type -- sense of urgency. This is a year ago spring, at which point we had discussions in which you said -- and I'm taking this out of context and paraphrasing -- the key here is not new products; the key here is getting sales.

In fact you made a presentation at a conference, and I -- afterward I said, gee, all you talked about was how we're going to drive sales and how we have to drive this Company into profitability. I realized -- there is a question coming. I realized that, especially in the fourth quarter and into this year, there has been some somewhat unusual -- obviously very unusual -- economic things, but this Company is less than a rounding error in the worldwide lighting markets. And so the question is, if we really have all of these products we've talked about over the last five years, if we really have all of these opportunities, why can't we sell any products?

Yes, Walter, I believe that the announcement that I made concerning the kind of repositioning of the Company's focus to a turnkey lighting energy solutions provider, less about a singular product focus but more about the impact that we provide our customers, was the latter part of July of last year.

Having said that, I also basically stated that we wanted to make 100% sure that it was the right thing to do, and so we have very pragmatically gone out to a lot of the major customers within targeted industries to basically see the receptivity of it, and we are absolutely convinced, now more than ever, that it was the right direction and the right move, and we have invested accordingly significant dollars not -- and in addition reduced our SG&A to be able to deliver upon that.

As we look to our businesses, though, we have grown in our commercial business in a declining economy, and we will continue to do that relative to our commercial business there. And it's at the point right now where we have aligned this organization with a heavy emphasis on sales and marketing.

Having said that, this Company does have very unique and valuable IP that creates value in the markets that we were going after and intensifying our efforts, and so we will continue to try to bring to market new products that frankly aren't out there on the market today to the level we've got them. So....

Okay. Well again, the presentation I'm talking about was prior to July. It was last spring because we didn't talk about the total lighting products. And it just seems to me that while we don't talk about the super markets and many channels and many new, interesting products, it's -- continues to be somewhat hard for me -- again, after six years -- to understand how with all of the products we have we cannot make any meaningful progress.

Again, we were supposed to do $14 million at that point this past year in EFO-type products. Why we can't make more products? And we have changed the team a number of times now, and yet we still don't make product -- progress, so maybe -- I don't know what the answer is, but I have had this discussion with various people in Management many times, and it continues -- I'm expressing frustration. I am done. Thank you.

(Operator Instructions)

Do we have any further questions?

At this time, sir, there are no questions in queue.

Okay. Well, I guess if there's no further questions, again, I would like to thank everyone for their participation on the call today, and we look forward to speaking with you to discuss our Q1 results here shortly. So thank you very much, and have a great evening.

Ladies and gentlemen, this does conclude today's conference call. You may now disconnect.