Energy Focus Inc (EFOI) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for holding, and welcome to the Energy Focus Inc. fourth-quarter and 2009 earnings call. Today's conference is being recorded, and at this time I would like to turn things over to Brion Tanous. Please go ahead.

Thank you very much, Kevin, and welcome, again, to Energy Focus's fourth-quarter and fiscal 2009 earnings call. Before we begin, I would like to remind you that forward-looking statements in this release are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements include statements regarding the business outlook for 2010 and thereafter, the potential growth of Energy Focus' sales based upon its energy savings over alternative lighting technologies. Investors are cautioned that all forward-looking statements involve risks and uncertainties. Actual results may differ materially, and results are unpredicted. Risk factors that could affect the Company's future include, but are not limited to, a slowing of the US and world economy and its affect on Energy Focused markets; failure to develop marketable products from new technologies; failure of EFO or other new products to meet performance expectations; higher than anticipated expenses; unanticipated costs of integrating acquisitions into Energy Focus operations; delays in the manufacturing of products; increased competition; other adverse sales and distribution factors; and greater than anticipated costs and/or warranty expenses. For further information about potential factors which could affect Energy Focus's financial results, please refer to the Company's SEC reports, including its annual reports on Form 10-K and its quarterly reports on Form 10-Q. These forward-looking statements speak only as to the date hereof. Energy Focus disclaims any intention or obligation to update or revise any forward-looking statements.

With that, I would like to now turn the call over to Chief Executive Officer, Joe Kaveski. Joe?

Thank you, Brian, and thank everyone again for participating in Energy Focus' fourth-quarter and year-end earnings call for 2009. Today I would like to make a few brief comments concerning our 2009 results and then provide you with some insight into our 2010 anticipated financial performance.

Before I begin though, I would like to thank our many shareholders for their overwhelming participation in our successful 2009 rights offering. As you will hear during this call, your help has provided the much-needed financial support that has successfully transforming our Company towards significant growth and profitability.

To begin and as we discussed with our shareholders during our 2009 rights offering, 2009 was a bad difficult year for the Company. Our sales ended down nearly 38% compared to 2008 levels, and the Company's net cash out flow was approximately $9.5 million, which included significant one-time expenses related to our rights offering, acquisition and divestiture efforts. In a nutshell the Company's overall financial performance reflected the overall depressed market conditions that exist across the world.

However, 2009 was a pivotal year in the transitioning of our Company into a fully integrated lighting energy solutions provider. Our new focus on providing comprehensive lighting solutions for existing building market, specifically in the public sector buildings, is right for the times, and it is clearly the foundation for sustainable growth and profitability. During 2009 the Company significantly reduced its fixed SG&A costs by over 18%. We successfully completed the rights offering. The Company secured an adequate construction bonding facility, which is a prerequisite to contract with public-sector customers. The Company rationalized its manufacturing facility, we focused our lighting technologies towards energy-efficient general illumination lighting products for existing buildings rather than specialty lighting products for pools in the new construction marketplace.

We secured $6.5 million in new military LED lighting and solar R&D contracts. The Company sold our German decorative lighting business, and of course, we acquired the Stones River Companies, thereby establishing a sales and delivery beachhead into the existing building public sector market. With our transition and the integration of SRC nearing completion, I am delighted to report to you that our strategy is working and our 2000 overall results will demonstrate this.

In the first quarter of 2010, the Company has already announced $14.4 million in new lighting contracts for work that is expected to complete in 2010 and that we secured $1.5 million in new cost recovery R&D contracts. Better yet today I'm delighted to announce the Company has secured three new additional orders totaling $2.1 million that we expect to complete in 2010. One of these contracts is to upgrade the lighting, install controls, and add solar skylights to a large Fortune 500 manufacturing facility. The other two contracts are with large national energy services companies to upgrade the lighting in two major school districts in the Southeast. In all three of these contracts, our Company audited the existing facilities, inventoried their lighting systems, proposed an improved lighting system design, and now that we have the contracts we will procure the materials and oversee the turnkey installation of the improved lighting systems. And what is really exciting is that more contracts are coming.

Our engineered sales proposal pipelines continues to grow. The American Reinvestment & Recovery Act stimulus money is beginning to trickle into the market and finding its way into lighting upgrade projects. As a result, the Company is receiving more requests for lighting upgrade proposals, most of which are coming from the public sector.

Furthermore, the Company has recently shored up its balance sheet by securing funding to replace our Silicon Valley Bank line of credit, which expired at the end of 2009.

So to recap, in just the first quarter of 2010, the Company has secured contracts totaling $16.5 million, which we expect to complete in 2010. This is really exciting considering that this represents more business than we secured during all of last year. Clearly the Company's strategy is working. So, as we look forward, I would like to offer some guidance as to our expected 2010 financial performance.

For the first quarter of 2010, the Company expects revenues to exceed $7.5 million in sales, which is roughly 3 times our sales recorded in the first quarter of 2009, and our net cash outflow from operations will be less than $1 million, which represents at least a 74% reduction from our net cash outflow during the first quarter of 2009. Furthermore, the Company expects total revenues generated during 2010 to exceed $35 million to further reduce our non-value added operating costs and to be net cash flow positive from operations in 2010.

So, in conclusion, the Company is off to a great start. It is clear that our strategy to reposition the Company is working, and I remain excited and bullish about the current and future success of Energy Focus. So with that, I would now like to turn the call over to Nick Berchtold, our Chief Financial Officer, who will provide you further details and clarity on our financial results. Nick?

Thanks, Joe. And I would also like to welcome all of our participants to today's conference call. As Joe mentioned earlier, our Company did make tremendous progress in repositioning itself for future growth and profitability despite a highly recessionary global economy, particularly within those markets that our legacy businesses have traditionally served.

To reiterate some of our successes, we continue to drive significant costs out of our business versus prior year levels. We successfully executed multiple financing arrangements. We consolidated North American manufacturing operations. We successfully executed our divestiture of our German business units. We successfully executed the acquisition of Stones River Companies, and we successfully exited our lending relationship with Silicon Valley Bank and replaced that debt with secured loans, which closed in the first quarter of 2010.

Our 2009 financial overview does reflect a year of challenges within our markets but also the clear beginning of our evolution into a turnkey energy-efficient lighting solutions provider. And now I would like to provide you with a brief overview of total 2009 results. Specifically I will be providing you with an overview of revenues, gross profits, operating expenses, net income and earnings per share, some more granularity about the Stones River Companies acquisition, selected balance sheet and working capital items, our auditor's opinion, and then finally, 2010 financing activities.

However, before I move into the financial overview, I would like to mention that the details within our consolidated statements of operations and consolidated statements of cash flows have been recast to include only continuing operations as of December 31, 2009. Continuing operations within these statements are defined as Energy Focus Inc. and Crescent Lighting Ltd. There was no statement of operations or cash flows reported for the Stones River Company affiliate for 2009 due to the absence of activities between the execution of our acquisition on December 31, 2009 and the date of our consolidated financial statements. Results from our Company's discontinued operations are separately reported in these statements.

Our balance sheet, on the other hand, is presented on a consolidated basis and does include the impact of both the Company's discontinued operations, as well as the assets acquired during the Stones River Companies acquisition.

So let's first discuss revenues from continuing operations. Although 2009 continued to remain challenging due to the global recession, particularly within the housing and new construction markets, the Company did show modest fourth quarter growth on a year-over-year basis. Specifically fourth-quarter revenues were $3,618,000, a 3.2% increase over revenues in the fourth quarter of 2008. As Joe mentioned, revenues from continuing operations for the total year 2009 were just under $13 million, which was down 38% versus 2008 revenues of $20 million. Of this reduction in revenues, it is worthy to note that $754,000 related to unfavorable exchange rate issues.

Revenues for the total year 2009, including discontinued operations, were approximately $14 million, which was down 39% versus 2008 revenues of $23 million.

So let's now discuss gross profit. Gross profit for the full-year 2009 was $2,040,000 or a decrease of 50% compared to 2008 levels. Total gross profit as a percentage of net sales did decline to 16.3% for the full-year 2009 compared to 20.5% for the full-year 2008. This decline was due primarily to the fact that our markets continued to deteriorate at a rate faster than our cost reduction initiatives could overcome.

However, we did successfully relocate 100% of the North American manufacturing and assembly operation into our lower-cost Mexican manufacturing facility during the last half of 2009 and more recently, relocated our Solon, Ohio distribution services during the first quarter of 2010. As for 2010 trends, we have begun to see gross profit margin improvements as our gross profits measured as a percentage of revenues have increased 5% thus far this quarter, due largely to the changing dynamics of our business, as well as a result of our manufacturing consolidation and fixed overhead reduction efforts. We expect these favorable trends to continue as the economy recovers, and we recognize the ongoing benefits of our rationalization activities.

Next, related to operating expenses from continuing operations. Operating expenses for the full-year 2009, excluding impairment and restructuring charges, decreased $2,065,000 or 15% versus 2008 levels. Excluding one-time acquisition-related fees of approximately $435,000, our operating expenses decreased $2,500,000 or 18% versus 2008 levels. Contributing factors to this significant cost reduction include fixed overhead-related reductions, advertising sales and promotions reductions, research and development projects, development cost reductions, and related services and professional fee cost reductions. In this regard, we expect to continue to obtain additional benefits from ongoing cost reductions throughout 2010. The culmination of all of these economic and transitional factors is that our net operating loss from continuing operations for the full-year 2009 was $9,814,000 or $0.62 loss per share versus $12,673,000 loss or $0.89 per share loss in 2008.

Excluding the 2008 goodwill impairment charges of $3,195,000 for continuing operations, the net loss was $9,478,000 -- excuse me, $9,478,000 or $0.69 per share loss for the full-year 2008. The loss from discontinued operations for the full-year 2009 was a negative $1,201,000 or $0.08 per share loss versus $1,775,000 loss for the full-year 2008.

Now I would like to turn to the acquisition of the Stones River Companies. On December 31, 2009, the Company acquired 100% of the member interest of the Stones River Companies. The Company acquired approximately $4,700,000 in assets, including Accounts Receivable, fixed assets and other intangible assets. Of this total $672,000 of the purchase price was recorded on the Company's consolidated balance sheet as goodwill.

Purchase price consideration was paid in the form of cash, shares of Energy Focus Class A common stock, and a convertible note, as well as some other contingent considerations. The acquisition has been accounted for as a stock purchase and accordingly has been included in the accompanying consolidated financial statements of the Company as of December 31, 2009.

And now I would like to speak about a few selected balance sheet items. First, cash and cash equivalents. At 12/31/2009 total cash was $1,062,000 versus $10,568,000 at December 31, 2008. Cash on hand reported at December 31, 2009 does exclude $2.5 million of cash collateralized for performance and payment bonding, which is categorized within our balance sheets as other assets. Total cash flows during 2009 -- excuse me, total cash outflows during 2009 were $9,506,000 versus total cash inflows of $2,156,000 during 2008.

the full-year impact of depressed global economic conditions which severely impacted our businesses; the elimination of our third-party lines of credit with Silicon Valley Bank and Sparkasse Bank which relates to our German affiliates; the impacts of the diligence, purchase price, closing and bonding securitization cash flows associated with the Stones River Companies acquisition; and lastly, the impact of reduced year-over-year proceeds from various financing activities entered into by the Company.

From a working capital perspective, Accounts Receivable decreased from $2,617,000 at the end of December 2008 to $1,664,000 at the end of December 2009, excluding accounts receivables acquired through the Stones River Companies acquisition. Although Accounts Receivable was severely and adversely impacted by the recession, the Company's continued laser focused on working capital improvements again showed significant gains as the Company's days sales outstanding metric improved from 67 days at the end of December 2008 to 31 days at the end of December 2009.

From an inventory perspective, inventory was valued at $3,770,000 at the end of 2009 versus $5,539,000 at the end of December 2008. Inventory turns improved to 3.12 and continued to show -- and as the Company continues to intently focus on managing its inventory investment.

As we mentioned earlier external debts, the Company eliminated $2,204,000 in outside third-party lines of credit with both Silicon Valley Bank and Sparkasse Bank during 2009. A portion of this production was offset by the Company's entry into letter of credit agreements with selected employees and other associated members. These agreements have a 24-month term and include detachable warrants to purchase the Company's common stock. Issuance of these warrants are subject to shareholder approval.

And now to discuss our independent auditor's opinion. Consistent with 2008, the Company's independent public accounting firm has issued an opinion raising doubts as to the Company's ability to continue as a going concern. This opinion stems from the Company's historical operating performance, the ongoing global recession, and the Company's historical inability to generate cash flows to meet obligations and sustain operations. Although the Company is very optimistic about its future operating performance and ability to generate working capital needs, there can be no assurances that the Company will be successful in satisfying those needs. It is with great pleasure, however, that I can announce to you the successful execution of two financing arrangements that were both completed in the first quarter of 2010.

On March 17, 2010, the Company entered into a purchase agreement with an investor whereby the investor agreed to purchase 350,000 shares of the Company's common stock together with the warrants to purchase equivalent amounts of shares subject to SEC requirements. The investor also agreed to purchase additional shares of stock at the Company's option over the next 25 months.

Secondly, on March 30, 2010, the Company entered into an agreement with an investor under which it sold a secured and subordinated promissory note in the principal amount of over $1 million. The Company secured the full amount of this financing with the pledge of its United States gross accounts receivable and selected equipment as well.

Although we cannot guarantee that similar external financing opportunities will continue to exist in the future, I'm thrilled to be able to inform you that Energy Focus did continue as a going concern throughout 2009 and is very well positioned for dynamic growth in 2010 and beyond.

So, in conclusion, I would like to thank you for the opportunity to speak with you today, and we will now turn the call back over to Kevin, our operator, who will now open up the lines for questions.

(Operator Instructions). [Theodore Brown].

Thank you for taking the call. Gentlemen, a pleasure to hear your good words and your ideas that 2010 will be a great year. I would like to have a little bit more information about the filing of the 8-K filing which had to do with Lincoln Park. I assume you made some comments about that in your closing. But if you could talk a little bit about the need for doing that? And also, the number of shares that we are going to have outstanding when, let's say, nine months from now, what do you -- what you kind of predict to be the outstanding in about nine months, go ahead.

Number one, thanks for joining the call, and number two, thank you specifically for your participation in the rights offering. The Lincoln Park Capital transaction that we are speaking of right now, basically the need for that was -- at the end of last year, we found that our capital requirements were slightly higher than what we had anticipated due to basically the pricing of the bonding facility necessary for the new SRC acquisition. So the Company had to go basically sit some of its funds over at the bonding company in order to get the facility that we needed.

Having said that, the LPC transaction is actually akin to a very small pipe. Initially we will receive $375,000 from that, and what it allows Lincoln Park Capital to do with the Company's permission is to buy in small chunks off a shelf. The Company is in 100% total control from this point forward of actually the amount of shares that are bought and when they are bought. And so to that end, they could actually buy approximately -- if we allowed them and I want to again share this -- if we allowed them, they could actually buy up to 50,000 shares per month.

Now having said that, again I want to reiterate that the need was really to basically get a small amount of money for the Company to replace what we -- or not to replace, excuse me, -- the basic -- yes, it is replace -- what we had to shift over for the bonding facility to our surety company, number one, and to replace some of the funds that were basically lost when we terminated the Silicon Valley Bank line of credit.

Now nine months from now, let's say, that the Company just basically allowed them to purchase the remainder of these shares, which we are going to be very miserly about. But let's say that we just opened up the spigot. That would be a total of 500,000 additional shares at the end of nine months. But again, whether we allow any more shares to be purchased off-the-shelf is 100% in the Company's control at this point.

And what is the number right now, 15.7 million shares?

21,370,000 shares.

Okay. Good. All right. Great. And I assume that they are very bullish about you, too, because otherwise they would not have made an arrangement which in some ways does make the Company look good.

We think we share your view there in that particular regard. Everyone is very excited about it. So thank you, again.

[Larry Saunous].

Larry Saunous from Connecticut. I was wondering if you could just talk a little bit more about what you're seeing in terms of type supporters and what we need in terms of, especially away from the Stones River, your other business, and what you see as a level of sales that could allow you to be better than breakeven?

Well, from an order perspective, we are actually seeing increasing sales for our LED-based products. Whether those products are actually going into military vessels or whether those products are actually being sold by independent representatives to large customers, through our own national account sales organization, and through lighting retrofit companies similar and including our own SRC where they are primarily being installed in large transportation facilities, distribution warehouses, and in what I would akin to schools, hospitals and commercial office buildings. We believe that what we have seen in the first quarter being the SRC sales contribution there that that will continue percentagewise as we look towards year-end in that particular regard. And again, we provided guidance of $35 million there.

Yes.

I'm not sure if I miss the question other than to say that we also have provided guidance that we fully intend to be net cash flow positive from operations in 2010, which is a significant departure from previous years, actually generating versus burning cash from operations.

Right. Well, okay. My concern, my interest is strictly what can we get on a sustainable cash generating basis and eliminates the need for pipes, etc.

Yes, if I can add to that, it is the management's feeling that absolutely so, and the fundamentals are there. Meaning that where money is really being spent today in the marketplace relative to buildings and lighting technology is the public sector, and that is increasing as we move forward every day now. Stimulus money is coming on board and the like. So we have that sales and delivery vehicle into the existing building market, and we feel very good about our ability to grow and sustain.

(Operator Instructions). [Seth Josberg].

What I'm curious about is a little expansion on something you just touched on, and that is the synergistic relationship between the Energy Focus products and the contracts that SRC will execute on. In other words, what kind of product revenue on the EFO side of things will be generated by the execution of these contracts?

So if they sign -- I just don't know how to understand that or measure it or think of it even. So maybe you could just kind of explain how much of the product content of an SRC contract will be from Energy Focus products? Maybe that is the way to think of it.

Thank you for asking that question. There's probably a couple of different parts to that, but let me maybe paint an example here. With the $16.5 million in contracts that we have announced up to today, probably less than 10% of the products that are utilized in those projects is actually Energy Focus product itself. And the reason for that is quite simple.

Historically even our LED-based products have been designed for what I call specialty applications. Meaning that we are great at lighting artwork, or we are great over a fish counter because we don't cook the fish. But it is not the lighting systems that provide general illumination for those stores. However, there is fundamental IT embedded in those products and the knowledge in our Company where we showed our shareholders, including you during the rights offering that we basically have a laser focus on leveraging our IP and our knowledge to create the equivalent of a near plug-and-play four-foot linear florescent that could save up to 80% more savings than the best florescent lighting systems that exist in the marketplace today. That is huge. And when you paint the picture that in the United States there is over 70 billion square feet of non-residential -- meaning commercial and industrial lighted space in over 5 million buildings -- and the majority of that lighting technology is this florescent tube that our technology will be replacing, the market opportunity is just absolutely astounding.

Now today we are seeing accelerated sales in our Gen 1 product, which is an LED tube replacement of a linear florescent lamp that is just -- does wonderful things in, for instance, cold spaces and parking garage facilities. We have also demonstrated the Gen 2 product, which is under development right now and at least a year out, that is basically one LED versus 300 and has embedded control technology within it. And so, as we move forward and I am sorry it has taken me so long to get to this, but, as we move forward, I believe that we will see well beyond 50% of the products used in these contracts to be Energy Focus technologies.

And will Stones River in the process of doing that sort of be impartial? I mean, on the one hand, you want to sell your product, but on the other hand, you want them to be able to deliver an absolutely superior energy saving solution.

I'm glad you put it that way because they are under marching orders right now to basically sell to the customers what creates the best economic value. It actually also is great for our product development folks because it really forces them to focus on developing products that do create the most economic value in the marketplace.

And so from that particular regard, they have been given full permission to go buy other manufacturers' technologies that create the maximum energy or maximum economic value, even if that means it displaces a product that we may have.

Now having said that, again, we are going to win either way. Right? Because even if I end up buying another manufacturer's product, I'm still making a margin on that. Not only on the product but the installation of that product. I would prefer it to be my own product because I will make more margin on it. But I'm going to win either way, and that is the exciting part of being in the lighting design and retrofit business.

And then if I could ask one more question and I will quit. Are there -- and this is getting way ahead of myself in even speaking of this or asking this -- but are there other companies like Stones River Companies in the commercial lighting space. They are energy services companies, but they play in a different market. Are there other companies like that that might one day be also synergistic to Energy Focus?

The answer to that question is yes, I absolutely. To what Stones River was prior to the acquisition, I have counted about 115 what I would call legitimate lighting services, lighting retrofit companies across the United States. However, I cannot think of one of those companies that has the technology edge that we have now brought to Stones River, and that is a key differentiator in terms of creating economic value for the client and the types of solutions that you can design and the state of the art of the technology that you bring to bear.

So I think we are very different from all of the other manufacturers today in the fact that we have the high-technology product that actually is going to derive those needed energy savings for business in our environment as we move forward. And we have got the channel.

[Jay Emmons].

Congratulations on your really good news.

Well, thank you, Jay. We appreciate it. We appreciate your continuing support.

You are welcome. A quick one for you. With the new financing with Lincoln Park and their ability to buy stock over the next 25 months, I assume that is at market prices currently -- prices that -- (multiple speakers)

That is correct.

Okay. No discount or anything like that?

Actually it is a -- I'm looking to John right now. John, the weighted average here --

Yes, it is based upon market, but it is, for example, it looks backward over the previous 10 days and takes an average of the lowest three days and so forth. But it tracks the market. (multiple speakers) -- very slight.

And they are absolutely prohibited from shortselling and hedging.

Good. Great. I'm glad to hear that. Well, I'm looking forward to the rest of 2010.

Thank you.

With that, ladies and gentlemen, we will conclude the question and answer session, and I will hand back to management for any additional or closing remarks.

Well, thank you very much. And again, I would like to conclude the call today by thanking you for joining us, and restating that our strategy is working and the evidence is the great start that we have had in 2010 that we have forecasted to continue through the year. And so with that, we look forward to offer you some further guidance during our next earnings call.

So thank you, again. We will give you an update. Have a great evening.

Thanks, again, for joining us, everyone. That will conclude today's call. Once again, have a good day.