Energy Focus Inc (EFOI) 2010 Q3 法說會逐字稿

Good day everyone. Welcome to this third-quarter 2010 Energy Focus earnings call. Today's conference is being recorded. With us from the Company we have a Brian Tanous with Investor Relations; Joe Kaveski, Chief Executive Officer; Nick Berchtold, Chief Financial Officer; and John Davenport, President. At this time, I'd like to turn the conference over to Mr. Brian Tanous. Please go ahead sir.

I'd like to welcome everybody to Energy Focus' third-quarter earnings conference call.

On this call, the Company's Chief Executive Officer, Joe Kaveski, will give a business update on the Company's solutions, products and military businesses, as well as provide an outlook for the fourth quarter and full fiscal year 2010. The Company's Chief Financial Officer, Nick Berchtold, will then address the Company's third-quarter financial results. We also have President John Davenport on the call with us this afternoon. Following prepared remarks, we will open it up for questions for the remainder of this call.

Before we get started, I'm going to read a disclaimer about forward-looking statements. This conference may contain, in addition to historical information, forward-looking statements within the meanings in the federal securities laws regarding Energy Focus. Forward-looking statements include statements about plans, objectives, goals, strategies, future events and performance and underlying assumptions and other statements that are different than historical facts. These forward-looking statements are based on current management expectations and are subject to risks and uncertainties that may result in expectations not being realized and may cause actual outcomes to differ materially from the expectations reflected in these forward-looking statements. Potential risks and uncertainties include change in demand for the Company's products, the impact of competition and government regulations, and other risks contained in the statements filed from time to time with the SEC. All such forward-looking statements, whether written or oral, made on behalf of the Company are expressly qualified by these cautionary statements. Such forward-looking statements are subject to risks and uncertainties, and we caution you not to place undue reliance on these.

With that, I'd like to turn the call over to Mr. Joe Kaveski.

A special thank you to all of our veterans, and thanks to our callers and Internet participants for joining the new Energy Focus 2010 third-quarter earnings call.

I am pleased to announce that Energy Focus sales continued to triple that of last year's sales. As I stated during the last call, Energy Focus is in a significantly better place and with a brighter future than where it's been over the last several years. The evidence of this is the Company's continued positive momentum and improving financial performance.

Over the next few minutes, I'd like to share with you my thoughts on our third-quarter results and then provide you with some insight into our year-end anticipated financial performance. So to begin, our third-quarter results are very encouraging and continuing the trend of producing the best year the Company has achieved in over a decade. In our third quarter, we generated more than $9 million in sales, which is three times our net sales from continuing operations during the third quarter of last year. Our solutions business is fully integrated into our operations, performing very well, and represents about 55% of our total sales.

In spite of slower international sales, our third-quarter overall product and US military sales are up over 50% compared to our third quarter in 2009 and up over 30% comparing this year-over-year basis. This is a direct result of increased sales to the US Navy, increased commercial product sales, and increased sales to lighting retrofit companies serving the existing building market.

I'm also delighted to report that the Company had net cash generation from operations of $500,000 in the third quarter of 2010, yielding a year-to-date net cash from operations of $155,000. This is a full quarter ahead of our previous guidance and is dramatically improved from our cash utilization of $6.6 million during the first nine months of last year.

The Company's overall gross profit margins continue to improve as our third-quarter 2010 margins increased nearly 10% as compared to the Company's third-quarter margins last year. And, on a this-year basis, our third-quarter 2010 margin increased 3.1% as compared to our second-quarter results. We expect this trend to continue as we lessen our absorbed factory costs, increase our content of EFO products into our solutions agreements and leverage our buying expertise to further reduce our cost of goods sold.

So that you can see this more clearly, the Company has added additional tables to our 10-Q starting this quarter. These tables provide much more detail on each of our business units. For example, as you'll see in our 10-Q, gross profit margin for our Pool and Commercial Products group was 37.9% in the third quarter of 2010 versus 29.7% in the third quarter of 2009. These figures, which exclude unallocated manufacturing overhead in both cases, show a very significant gain of over 8%.

In our third quarter, the Company secured an additional $2.8 million in new Lighting Solutions contract. This brought our Solutions contracts to $21.8 million as of the end of the third quarter.

However, today, I'm delighted to announce that we have already received several new contracts totaling $5.6 million for our fourth quarter. We have previously announced $1.5 million last month, and we are now adding another $4.1 million which we've received [this much]. This will bring our contracts through the end of the year on the Solutions side to at least $27 million.

Included in this new $4.1 million of work is over $2 million to upgrade the lighting at a large Southeastern University, over $1 million to upgrade the lighting at a military base, and the remaining contracts are to upgrade lightning at a community college and an elementary school district. In all of these projects, our solutions experts have completed audits of the existing facility, prepared an inventory of their lighting systems, created and improved lightning design, and will now procure the materials and be responsible for the installation of the new energy-efficient lightning refurbishments that pay for themselves out of the savings they generate from the existing energy budget.

So from a financial perspective, Energy Focus is making very good progress towards achieving our 2010 forecast. As I stated in our last earnings call, the acquisition of SRC has provided Energy Focus a foundation for sales growth for our existing products and for our future EFOI highlighting projects that are being specifically designed and developed for the existing building marketplace.

So, to that end, I'd like to provide you with an update on our research and development efforts. The Company announced $1.4 million in new military contracts in our third quarter. We now have secured a total of $3 million in new contracts for the year. In addition to these products that we have developed, qualified, and are currently selling to the US military, we are especially pleased that these new contracts complement our efforts to develop and commercialize our next generation Intellitube energy-efficient lightning system.

Furthermore, we've launched and already secured orders for a new hazardous location GlobeLight. The light was developed under a US government DARPA contract for the U.S. Navy and is now being sold in the commercial and industrial sectors. As I mentioned in our last call, the light targets the heart of a $300 million market opportunity and is typically used in refineries grain elevators, coal plants, pharmaceutical plants, and oil rigs, to name a few.

By far, our new GlobeLight is the highest performance, lowest cost, longest lasting LED Class I Div 2 lamp on the market, as it was designed to exceed the US military specifications. Also, we are now shipping a 100 lm per watt LED lamp that is plug-and-play compatible for a 4-foot linear florescent tube lamp. Within the next month, we will be upgrading the entire lightning systems in two manufacturing facilities with this new lamp.

So now, as we look to the future, I'd like to provide you some specific guidance. We continue to expect our total year sales, as previously forecasted, will exceed $35 million. Due to seasonality in our businesses, we have forecasted our fourth-quarter sales will exceed $8.4 million, which is still 2.3 times more than our fourth-quarter 2009 sales results. We're also reaffirming our guidance that we anticipate the Company to be overall net cash flow positive from operations in 2010. In 2011, the Company's internal target for revenue continues to be in excess of $45 million for the year.

We believe the Company will continue to grow organically through the expansion of our solution market coverage and customer base. We also anticipate increased product sales across all of our business units, and we remain open to acquisition where acquisition is accretive. The Company expects to increase its overall gross profit margins further by injecting an increasing amount of EFOI products into our solutions contract and further reductions in our cost of goods sold. I anticipate providing you with a more formal revenue and cash flow guidance for our 2011 fiscal year during our next conference call.

So in conclusion, clearly macro indicators, such as rising energy prices, the environment and government mandates, coupled with stimulus money increasingly finding its way into our projects, are key elements that will continue to create growing demand for our energy-efficient lightning products and our lightning solutions. This company is on the right track to nearly triple its sales this year and poised for significant growth next year.

I remain excited about the current and future success of Energy Focus and remain confident that the Company's strategy of providing products and turnkey lightning solutions specifically designed for the US military and the existing building market will realize the returns that our shareholders are anticipating.

So with that, I'd like to turn the call over to Nick Berchtold, our Chief Financial Officer, who will provide you further insight into our financial results. Nick?

I would also like to welcome our participants to today's call.

As Joe mentioned, our Company's third-quarter financial results continue to reflect tremendous topline revenue results versus 2009 levels and similarly showed continued and very significant cash flow improvements.

Specifically, we achieved the following notables during the third quarter -- consolidated revenues from continuing operations of over $9 million, which is a 199% increase in revenues from 2009 and resulted in a total of $26.4 million on a year-to-date basis; consolidated gross profits of 20.5%, which is a 3 percentage point increase versus second-quarter 2010 gross profit margin levels. As Joe mentioned, $2.8 million in new solutions contract were obtained during the quarter, which will be primarily completed in 2010. Lastly, cash generation, net of the impacts of proceeds from financing activities of approximately $0.5 million, leading to total cash on hand of $2.7 million, and positive cash flow from operations on a year-to-date basis.

As mentioned during previous calls, I'd like to remind you that the consolidated statements of operations and consolidated cash flows presented in our Form 10-Q have been recast to include only continuing operations as of September 30, 2010. 2009 financial results from the Company's discontinued operations are separately reported.

So let me turn over to revenues. Our third-quarter 2010 revenues were $9 million and represented a 199% increase over third-quarter 2009 revenues of $3 million. Breaking this figure down further, our Solutions subsidiary contributed $4.4 million, or 49% of the total revenue figure. Our US Products business unit continued to also show strong performance by generating more than $2.8 million, or 31% of total revenues. What's particularly positive and reassuring is that this represents a 69% increase over 2009 levels, and we saw improvements in all channels of the Products business unit. Likewise, our research and development sales organization posted strong performance by generating $939,000 in contract-based revenues during the quarter, versus only $16,000 in the comparable quarter of 2009.

So let me next discuss gross profit from continuing operations. As we mentioned previously, third-quarter 2010 gross profit increased to $1.9 million, or 20.6%, compared to $323,000, or 10.5%, for the third quarter 2009. On a sequential 2010 quarterly basis, our gross profit margins increased from 17.5% to 20.6%, largely resulting from manufacturing and distribution rationalization benefits we achieved through our US Products business unit. Further, our gross profit continued to benefit from the reduction of non-solutions-based unabsorbed manufacturing overhead.

To put this in perspective, the Company achieved a 52% reduction in unabsorbed manufacturing overhead for the third quarter and a 30% reduction in unabsorbed manufacturing overhead on a year-to-date basis versus the prior year. So, we have significantly reduced our unabsorbed manufacturing overhead.

Now, I'd like to turn briefly to operating expenses. Our third-quarter 2010 operating expenses were $3.3 million, which represents a 13% increase over the third-quarter 2009 operating expense level of $2.9 million. However, after removing non-cash expenses of $321,000 related to equity and acquisition amortization expense, our third-quarter 2010 operating expenses were only 2% above prior-year levels when including the additional overhead assumed by our acquisition of the Stones River Companies' business unit.

Now, I'd like to turn over to earnings per share. Our third-quarter 2010 net loss from continuing operations was $0.07 per share, versus $0.17 per share for the third quarter 2009. Excluding the previously discussed non-cash expenses, our third-quarter 2010 net loss from continuing operations was $0.05 per share.

So now I'd like to turn briefly over to the balance sheet. First, our cash and cash equivalents increased $649,000 from our June 30, 2010 levels to reach $2.7 million with proceeds from financing activities contributing only $149,000 during the quarter from the sale of shares of common stock to a private equity investor. Next, our Accounts Receivable was maintained at $6 million on a consolidated basis versus only $2.9 million at December 31, 2009. In this regard, the Company continued to tightly manage its working capital and showed continued improvements in its Accounts Receivable collections versus prior year and prior quarters. Third, our inventory continued to become more efficient in our utilization as we decreased our total inventory position to $2.8 million versus $3.8 million at December 31, 2009.

So, in summary, I'd like to reiterate that we are very pleased with our continued progress, as reflected in our third-quarter results, and I look forward to speaking to you again when Energy Focus reports its total year 2010 results in March. So thanks again for joining today's conference call. Now I'll turn the call back over to Jamie, who will open it up for questions and answers. Thank you.

(Operator Instructions). Robert Smith, Center For Performance Investing.

Good afternoon guys. Congratulations on moving in the right direction. I hope this continues. I did hear correctly that you're estimating $45 million for the coming year?

2011, that's correct sir.

Okay. Let's go for it. What is the opportunity the fluorescent that you mentioned, the LED fluorescent?

You are referring specifically to an LED-based (inaudible) product that leverages Energy Focus' fundamental IP from a couplings extraction and coatings perspective, and it's designed to be a plug-and-play replacement with a 4-foot linear florescent. The opportunity is just absolutely enormous. If you have read the Canaccord Adams recent report on LED lightning technology, they suggest that, in the commercial and industrial space, that fluorescent lightning represents almost 75% of all lightning fixtures within that commercial and industrial space, which is over 70 billion square foot of lighted square feet.

If you were to just replace the existing fluorescent replacement lamps that are consumed yearly with our LED Intellitube product itself, that would represent an annual lightning opportunity of over $20 billion, utilizing their statistics.

Are you first to market, or do you have company, or --?

There basically are what I would call Generation One products that utilize a strip of LED to replace basically fluorescent. They, in our belief, have pretty much maxed out the lumen per watt efficiency characteristic, and they are extremely costly. They are designed to be a replacement to 4-foot linear fluorescent lamps.

Today, we currently offer one of those products. In fact, we are now shipping and selling one of those devices with a 100 lm per watt efficiency, which is absolutely outstanding. It's best in class. Having said that, what we are most excited about though is our Intellitube product which is under development right now which, rather than using hundreds of LEDs, uses one LED to create the same or better lighting quality of an existing 4-foot linear florescent lamp at a significantly reduced cost with a maximum amount of energy savings and with an option of embedded control that will bring for it new functionality that could not and currently does not exist, excuse me, in traditional linear florescent -- things that ultimately will enhance revenue, increase safety, increase productivity of building occupants. So we are very, very excited about that.

Is there a timeline to marketing this product?

It is still in development right now. If I were to suggest a timeframe, we're talking about probably somewhere in late 2011 or early 2012.

So the $45 million has no contribution [abilities]?

That's correct, not from that specific product. However, I'd like to reiterate though that we are now selling our 100 lm per watt LED tube utilizing multiple LEDs into the market there. We're very excited about that.

What is the backlog figure now?

Nick, do you want to offer any thoughts on that?

Our backlog currently is approximately greater than $5 million through year-end with obviously more continued contracts on the way, but right now it's in excess of $5 million.

That's much reduced isn't it, or not?

No. You have to understand there are two different metrics that we measure. There's pipeline, and then there's backlog. A backlog is a signed contract, versus a pipeline is an opportunity or quote log. Our quote log -- our pipeline continues to be very, very significant, but right now stated backlog with signed contracts in place is $5 million. Again, we expect to sign another $5.6 million before year-end, so very significant.

Just lastly, I didn't understand the line under operating expenses of R&D being a negative figure -- I mean a positive figure, so I'm not clear on that.

Yes, the reason for that, Robert, is R&D has different sources of income. It has topline revenue, and it has cost reimbursements based on the types of contracts that the Company enters into. When you see that it's a negative number, what that actually means is that, when you take into consideration the cost recovery that the business is generating from its contracts, it is actually making money at the operating expense level. On top of that, there are topline revenues produced by cost of goods sold, so it's generating revenues and income from multiple sources. What you're seeing is that we received more in cost recovery this quarter than we generated in costs.

I'll step back in the queue. I have further questions, but I want to give others an opportunity. Thanks.

Thank you for your questions.

(Operator Instructions). Bill Gibson, Anderson & Strudwick.

On the retrofit projects you are working on now, are any of those incorporating EFO lightning, or is it pretty much -- is this something you're holding back extra?

What I have previously stated is that the EFOI product content on the Solutions contract right now is less than 10%, although it's growing right now. As you can imagine, as Energy Focus begins to release its Gen 2 4-foot LED linear near fluorescent placement, EFOI content will grow dramatically because, in the contracts that exist today, linear fluorescent lamps represent about 80%-plus of the product content. Currently, those are being sourced from external manufactures but as our product comes online, we will no longer be buying those other versions. Unless customers ask for that linear fluorescence, we will be replacing it with our Intellitube LED-based product.

I would think this would help you on the acquisition front as well, the Intellitube. Is that -- or is it too early for that to even enter negotiations with someone?

Well, I love your thought, and I will share with you that the previous owners of that [are] SRC certainly shared your opinion. We believe that it is very significant. So --

Then just one last question -- is there any update on the solar work?

The update, Bill, I guess is that we are currently under a Phase III contract for the very high-efficiency solar cell project. It was a two-year contract. That contract will expire, the Phase III, which is all about how do you produce it in mass quantities and cheaply, but that contract will expire -- excuse me Nick -- I think the middle of next year?

Yes.

Yes. So that's where that one stands. We'll see where the US government wants to go next with that particular technology. But it's very exciting. To think you can have a solar technology that is more than 40% system conversion efficiency, that's rather large.

Let me put on my wild optimist hat for -- is it possible that this reaches commercialization capability about the time the Intellitube does?

I guess anything is possible although clearly in our short-term planning we have not factored that in.

Okay, thanks.

Ship Saye, AWH Capital.

It's Austin Hopper, AWH capital. Thanks for taking my question. You have obviously one very large shareholder, Quercus Trust. They own about 5 million shares of stock and they have been a seller. Just any communication with them in terms of their intentions and continuing to sell stock? I was hoping you might comment on that. Thank you.

Sure. What I can share with you is that we talk to all of our shareholders, but we really can't speak for any of our shareholders in terms of how they want to basically hold or keep their stock. What we have and work from is the public information that was filed in the 13-G stating that, for liquidity reasons of the Quercus Trust, they were looking to sell 500,000 shares. We believe that, based upon their Form 4 filings, that they are nearing that 500,000 amount.

Thank you.

(Operator Instructions). Robert Smith, Center For Performance Investing.

In offering the projection for 2011, how would you characterize the basis of the projection? (inaudible) how much would you think would be coming from military as far as commercial -- as opposed to commercial. How do you get to the number?

Robert, I think that's one of those items there that we would like to basically present to all of our shareholders with more detail and clarity during our fourth-quarter call.

That's fair. All right. So have you touched upon basically all R&D efforts that you wish to at the moment, or is there something you could say further about the effort?

I guess I'd like to reiterate what I've communicated earlier in previous calls, in that you are seeing now the results of an organization that is becoming highly focused and highly aligned in its efforts. In the early years within Energy Focus, I might suggest that perhaps contracts were taken because it represented a revenue stream on a particular item, but not necessarily one that the Company could commercialize.

Right now, we have a very fine filter that we basically apply towards R&D contracts. If we cannot see the direct connection between a product that could support the US military and ultimately be commercialized for the existing building market, that's not our sweet spot anymore. So, we are very highly focused right now on the Intellitube product line. That's a game changer.

So that will provide you with what kind of a tool in the marketplace? In other words, you're getting these contracts for low single-digit numbers. Will you have any opportunity to tackle much bigger work? On contract basis, I mean?

The answer to that is we believe yes. It is going to represent, again, the lowest cost, highest performance, most energy-saving (inaudible) longest-life plug-and-play replacement for a 4-foot linear fluorescent lamp. Again, currently, in our Solutions contracts, a large percentage of the material we are acquiring from other manufacturers such as Philips, GE and the like. That product becomes ours, and that margin that those other manufacturers are getting becomes ours. That is a very significant item for growth and margin improvement as we move forward.

So the IP for this is in-house now?

Yes. The IP is in-house.

So you're planning against many bigger entities, so to speak. I'm sure everyone is working really diligently to get to where maybe you feel you are with a step ahead. But so this timeframe of about a year to come to the marketplace, do you -- this as best I could say -- do you have the luxury of being there before someone else is there?

Yes. We believe so. I can't say it enough times. I am bullish on our technology. It's a game-changer.

Where is it being generated? Is it John Davenport's work with his crew, or --?

Well, right now, it is a collaborative effort within the organization from our research and development team as well as our product management team right now.

Okay. I certainly wish you well.

Thank you Robert. I appreciate your call.

That does conclude our question and answer session. At this time, I'd like to turn the call back to you, Mr. Kaveski, for additional and closing remarks.

Thank you, again, a very special thank you to the veterans that have joined us today in our great country. Thank you to our participants on the call, and especially our associates that are working so hard to deliver the results that we are all looking for. We had a great quarter, and we are extremely optimistic about the future of Energy Focus and its position in helping existing building owners and the US military lower the cost of owning and operating their buildings.

So with that, thank you very much, and we look forward to visiting with you again, I believe it's in March, with our fourth-quarter earnings call year-end results call. Thank you again. Have a great evening.

Again, that does conclude today's conference. Thank you for your participation.