Energy Focus Inc (EFOI) 2011 Q1 法說會逐字稿

Good day everyone and welcome to the Energy Focus' first-quarter 2011 earnings release conference. Today's program is being recorded. At this time for opening remarks I would like to turn things over to Mr. Brian Tanous. Please go ahead, sir.

Thank you operator. I'd like to welcome everybody to Energy Focus' fiscal 2011 first-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 second quarter.

The company's interim Chief Financial Officer Eric Hilliard will then address the company's first-quarter financial results. We also have president John Davenport on the call with us this afternoon.

Following prepared remarks, we'll 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 meaning of 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 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, and such forward-looking statements are subject to risks and uncertainties and we certain caution you not to place undue reliance on these.

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

Thank you, Brian. And thanks to everyone for joining Energy Focus' first-quarter 2011 earnings call. Today, I'd like to offer you some brief comments on our first-quarter results, and then provide you some insight into our anticipated second-quarter performance.

So to begin, our first quarter revenues, at $5.5 million, were clearly below our first-quarter results in 2010. However, we did exceed our $5 million forecast in the first quarter. And as we discussed during our last call, we forecasted lower revenue due to the timing of some of our solutions contracts. Furthermore, we used $2.5 million in cash in our first quarter. This was slightly less than our $3 million forecast. This cash usage was the result of lower sales and extended payment terms associated with our early byproduct sales promotion.

The positive news is that we are beginning to see resolution to the contract timing issues, and as a result cash inflows are in increasing. Also, we achieved some significant accomplishments during our first quarter.

Specifically, our overall gross profit margins improved nearly 5 percentage points when compared to our first-quarter results of last year. We believe this improvement was the result of our continuing focus on reducing our material costs, increasing EFOI product content into our solutions projects, and further reductions in our manufacturing costs, resulting from the consolidation of our Solon manufacturing operation into our Maquiladora in Mexico.

Also, we have already received several new government contracts for R&D and Navy orders for products totaling $2.5 million. We were awarded a $600,000 development contract from NASA to create a high-performance LED solution as a retrofit replacement for a 1000-watt metal halide exterior fixture. We've already demonstrated a working prototype that uses less than half the energy and achieved superior optical performance.

The company received a $1 million contract in the Ohio Third Frontier program to develop a solar powered wall pack retrofit fixture for existing buildings. We achieved a $475,000 increase to our very high efficiency solar cell contract for optics and coding technologies that may also be used in our IntelliTube products. And our military team received a $446,000 order from the US Navy to retrofit lights on 2 destroyers.

Finally, we introduced an LED retrofit kit for wall packs during the first quarter. Our new retrofit kit was designed specifically with existing buildings in mind as it offers a very low first cost, superior lighting performance, breeze of installation and typically a less than 2-year simple payback.

Additionally, it uses an innovative thermal management system that makes the product possible, and for which Energy Focus was awarded a utility patent. We are already utilizing installing these kits into our solutions projects. Initial indications and orders from distributors, building owners, and lighting retrofit maintenance contractors are very encouraging.

Now as we look to the future, I'd like to reaffirm our year-end forecast of $35 million in sales, and to be net cash flow positive from continuing operations. For our second quarter, we are forecasting over $8 million in sales and cash utilization to be less than $1 million.

Currently, cash is tight; however, as I mentioned earlier our revenues are ramping and we're beginning to receive cash from those revenues. Finally, I'd like to mention that we expect our gross profit margins to continue to improve throughout the year.

Now earlier this week Energy Focus received the ASTRUM award at the MDB Bright Lights conference in New York City. I am mentioning this award because it recognizes companies on the tipping point. That is, companies with technologies that have high commercial potential as evidenced by their substantial patent portfolios. We believe that the MDB Bright Lights conference got it exactly right.

So in conclusion, I remain bullish on Energy Focus, and look forward to the rest of 2011 and beyond as we realize the potential of our IntelliTube and other energy-saving technologies. With that, I would now like to turn the call over to Eric Hilliard, our Chief Operating Officer and interim Chief Financial Officer, for further details on our first quarter results.

Thank you very much, Joe. And good afternoon everyone. I'd like to take you through a review of our first-quarter 2011 earnings results. Our first-quarter revenues of $5.5 million are a decrease of $2.9 million versus $8.4 million in the first quarter a year ago. The principal driver for the decline in our first quarter revenues was due to contract timing in our solutions business.

However, we have received $3.4 million in new contracts, for which we have begun recognizing revenue. Moreover, we saw a substantial increase in revenues in March continuing into April.

Gross margins for the first quarter were $1.2 million. A decrease of 17% or $236,000 versus the first quarter of 2010. This decrease in gross profit dollars is a direct reflection of reduced sales volume. However, our gross margin as a percent of sales increased 4.5% to 21% of sales in the first quarter of 2011 versus the prior-year period, when gross margins were16.5% of sales. This improvement in gross margin percentage for the quarter was driven by lower costs in our solutions, US products, and government businesses.

Operating expenses for the first quarter were $3.8 million, a decrease of $1 million from $4.8 million in the first quarter of 2010. Included in our 2010 results was a non-cash charge of $1.4 million for the revaluation of equity instruments. Excluding this non-cash charge, our operating expenses would have been an increase of $400,000. This is a result of increased investment into IntelliTube, new products and channel development for the existing building market.

Our first-quarter net loss from operations narrowed to $2.7 million versus a net loss of $3.4 million in the first quarter of 2010.

Finally, we ended our first quarter with cash and cash equivalents of $1.6 million, as compared to finishing our first quarter of 2010 with cash and cash equivalents of $1.8 million. During the first quarter we did utilize $2.5 million of cash and cash equivalents.

In summary, the first quarter of 2011 resulted in decreased revenues and margin dollars; however, increased gross margin in efficiency as a percent of sales. Control in the cash spending is related to operating expenses and utilization of cash from operations while we continue to invest in our IntelliTube technologies.

And with that I would like to turn the call back to you Joe, and thank you.

Thanks. Eric. And now at this time I'd like to open up the phone lines and invite our listeners the opportunity to offer comments and ask questions.

(Operator Instructions)

Will go first to Alan Snider.

Hi gentlemen. Couple of questions if I may. Would you be attending the Lightfair show?

We are not exhibiting at Lightfair, however we will have staff on the ground, basically attending the fair and meeting with customers and prospective suppliers.

That's fine. The next question is, could you address the situation with respect to the shares of that Quercus Trust and David Gelbaum. How is -- can you comment on what has transpired and what you anticipated what effect this is having on the price of the shares in your opinion?

I'd be delighted to Alan. I obviously, we think it's not having a positive effect on our share price. We are doing some things as a company to help with the situation. First and foremost we have filed an S3 at the Trust's request and expense, and this actually could help enable a large block sale versus continuing dribbled sales via Rule 144. And like we would do for any of our other shareholders, we have met and will meet with potential investors that have expressed an interest in the Trust position.

And I guess the last thing that we've done which I believe is significant is, we absolutely have put a focus on increasing our visibility in terms of the investment community In just the beginning of this year we have already attended, I believe that total is four conferences. The Ross Conference, the Jefferies Conference, the Kaufman conference, and then here on Tuesday the MDB Conference to basically demonstrate the Intellitube technology, talk about the real value in the company, and hopefully help generate some interest in our stock as well.

So those are just a few top of mind things, but overall we are concerned. We're working on it. And we do think that it is having an impact.

That's fine. Another question if I may.

Can you tell me the status with respect to Naval orders. Are these more or less -- are you anticipating any near-term or timeframe with additional Naval orders of any consequence or is this something that you just have no control over -- or no foresight into what might transpire down the road.

Sure. I think this is a great question. And I guess maybe I would just start by saying that there is absolutely a very high level of interest with the US Navy to re-equipping the fleet with LED lighting .

This is evidenced by a couple of orders that we just received per $400,000 to LED lighting for two destroyers. Our goal is to re-light the entire fleet, and we believe that we are the company that is well equipped and positioned to do this. We are the only company that we know of that today has six certified product families between 20 to 30 SKUs already certified by the Navy.

It is a -- the US Navy has extremely high barriers to entry from a technical perspective, and of course our Intellitube technology, which we are very bullish on, obviously, and have been well received by the Navy as evidenced by our contracts to replace T5 lighting in the Virginia class nuclear attack submarines, has been very well received and absolutely offers the lowest cost and highest performance solution for Navy vessels as well as commercial buildings.

Just one last thought. Having said all that, Alan, again it is the government. We are still kind of looking to see how the economy and potential cuts in the Defense -- Department of Defense budgets may or may not affect their moving forward with great haste to convert the fleet. However, we believe that we will see a substantial increase in our 2011 sales.

I've actually -- I want to make a point of saying this. We are out of the stage now, kind of, per se, giving them a new idea -- you might call it research into a new technology and then convincing them that they ought to change their specification. That is behind us now. We are actually shipping product. Now we are getting some R&D contracts that are for very advanced, what I would call lighting technologies or strategies that you would apply into military fixtures.

There is one called Circadian Rhythms, for instance, which stimulates or basically the body's circadian rhythm which affects alertness and productivity and your sleep cycles.

But we are at the stage where we are actually shipping products. Having said that, again we believe we are going to see a substantial increase in 2011, and be a really nice foundation for 2012 and beyond.

We're looking forward to that. That sounds great. Another question relates to the solar project you've been involved with, having gotten some additional funding recently. Is there any anticipated approximate completion date for that project so that it could ultimately go commercial?

Yes, Alan. Just to restate where we are -- we are in phase three of a government-funded project was that was funded, I believe, to $100 million, called VHESC (Very High Efficiency Solar Cell). Phase three is less about art and science and more about how do we produce the technology very, very cheaply for commercialization.

Having said that, the program was scheduled to complete in the June timeframe of this year. We just received a $475,000 extension that will bring us roughly to the end of the year. We are currently, as a company, really evaluating our options for commercializing this solar technology. We could be well named or -- this is a consortium of other companies -- and we believe that we are well positioned to be named the commercialization entity, should we choose to go down that path.

I'm sorry -- so there a number of companies that might be candidates to get the commercialization. Are we just one company or a number of companies?

There is about -- John help me with this -- I guess about less than a half a dozen what I would calls --

There are about three or four viable candidates. Right now they are looking to us as their likely choice as the commercialization candidate. That decision has not been finalized, but it will be a couple of months, probably by the next quarter call. So we will give you an update on that.

That's one of the things that is factoring into how we approach commercialization of solar. I would remind you that we have our first solar commercialization project underway. We were funded earlier this year by the state of Ohio to develop this outdoor, self-standing solar LED light which combines really our LED lighting -- low energy consuming LED lighting technology -- with solar.

We're going to start using -- start that with using more conventional solar but it could very well benefit from our energy-efficient solar technology.

WIth respect -- I'm sorry, with respect to the VHESC program, if you were to be officially designated, would there be immediate implications or positive ramifications for that announcement?

We need to understand what the nature of that is. That won't be commercialized this year. There is -- although we are in what Joe described as the government's view of the commercialization phase, it's really creating technology by coding technology that we're working for that is cost viable. That doesn't mean that you have products. So there will be a product development phase and that is likely to begin in 2012.

But if you were designated, as I said, so would then -- you would then be hooked up with a larger company or companies?

That is one of the possibilities. We will give you more insight as we have that ourselves.

Okay. And the opposite side; if you don't get that certification or that qualification, what does that mean in terms of moving forward with it? That you're just a party to the development but you don't go beyond that point? Is that --

No. We would participate on a -- because we're named of the patent, we participate on a royalty basis. So there were these something coming from it either way.

And Alan, I like to make one other point ,and that is that, in terms of our R&D efforts today and what we do, we are very focused. If we cannot see a clear path from either a product being developed or a specialty technology or coding coming out of that, that we couldn't commercialize in the existing buildings, we are taking a pass. And VHESC is a clear example, of although it's in a solar space, I mean, there were many inventions in terms of coatings, constructs and optics that clearly have relevance and importance towards our Intellitube technology, so we benefit from that if you will.

I understand. I appreciate that. And I just want to go back to the Quercus Trust/Gelbaum shares. If that were to be finalized somehow. It's hard to anticipate the reaction in the marketplace, but I think a lot of shareholders are fully aware of the potential or assuming pressure on the stock, and so you are in a position now you're not going to have I assume any buyers of the security in any quantity until this thing is cleared up. So I just assume that you are making as valiant an effort to get this thing rectified and completed.

I can assure you that we are. We clearly understand the implications.

Okay, it must be painful for you as well as it is for the shareholders. I assume it's sort of a no-brainer. Two last questions.

The Cree Company announced yesterday a new LED. It's like a thousand lumen and they said it was a major item for them. How does that affect you? Or is it beneficial to you? What effect in any way does it have on Energy Focus?

I'm going to kick this off and then I'll see if John has any additional comments. But to us, it's absolutely excellent. Our whole approach, which is radically different from the rest of the industry, is to basically develop this plug and play replacement for a 4-foot linear fluorescent lamp that, first and foremost, offers a great return on investment to building owners in helping them lower the cost of owning and operating their building, number one. And great optical performance.

Having said that, what makes our ability to produce this product cost-wise in terms of lower than anybody else can do it is the fact that our design uses one very high-powered LED. Which basically shines into a very special engineered plastic rod that effectively emits light just like a fluorescent lamp would, very diffusely, and uniformly down the tube.

Having said that, the advances in these higher powered LEDs basically allow this construct to go from maybe a four-foot limitation today to a five-foot, and maybe an eight-foot, so it just opens up the market for us --

It's extremely positive .

Very positive, and then the other point that I would like to make is I think one of the firms that has published a lot of research on the LED clean tech space is Canaccord Adams. And just a couple of months ago Canaccord Adams came out and said that they anticipate a 30% price reduction in the LED itself, the chip itself, in the second half of this year. That is great for us. We do everything but manufacture the LED itself.

And the LED represents the highest cost component of Intellitube. So again we are driving, quicker than we thought towards a product that offers a great ROI over the standard incumbent, best-in-class, florescent solution. That's number one.

Number two, tying back to the higher powered devices. Canaccord Adams also suggests that one of the early markets to transform is the exterior lighting. Having higher powered devices to compete against metal-halide technology is absolutely needed and excellent. So everything that we are seeing that is going on in the LED space is really just creating opportunity for Energy Focus.

That's exciting. That really sounds great. I appreciate that answer, and I have my the final question -- I'm hogging all the time here. Given your that cash position, where there is a diminishment of cash, are you -- have you addressed this at this point ? Do you have any lines open to you where you had need you could easily access them, or is this something you are addressing or could you briefly address that situation.

So again kind of going back, cash is tight. No doubt about it. But I would like to reinforce something that I've said many, many times and it is factual. And that is that, the solutions business is different from a typical contracting business if you will. Because by and large it took if they pay-when-paid type of scenario here.

So when we receive money then our suppliers expect to get paid their money. So that helps out in terms of not having to have as much working capital as you would think a company our size would need.

Having said that though, we are, as I mentioned, we are beginning to see as we expected the ramp in sales and we are beginning to harvest the cash out of those sales. And so, sure I'd like to have more cash but you know the situation is actually improving. And we even in the $2.5 million dollars in the first quarter utilization, we had a significant payout it in payables. You know all this factors in, but I hope that provides you some insight.

Yes it does, Joe. I appreciate it. I have, as they say, no further questions. And I do appreciate you time and I wish you every success.

Terrific, So maybe we have time for more questions, I hope?

Yes, we will go next to Tom Sheehan.

Hi guys how are you?

Good afternoon, Tom. Great to hear from you.

Great to hear you. I love your technology -- let's just start there. And it looks like we should all do whatever we can to get you quicker access to cash. My question is related to Lighting Science Group and Nexxus lighting, two of your peers, that appear to have some pretty aggressive global expansion plans. And I wonder if you might be able to share with us, Joe, if you have any plans yourself for global. I don't think just a London office really qualifies you as global. But if you have anything you can share with us, we would greatly appreciate it.

Sure. I guess it's a couple of folds. You know, we are a little bit different in terms of our strategy as a lighting manufacturer. The firm that you mentioned basically have focused their attention at what on the surface would appear to be an initially more right portion on the market, but yet fraught with competition.

What I'm speaking specifically to is a replacement for the A19 incandescent lamp. Where a current A19 lamp is maybe 12 lumens per Watt, if you will. Having said that ,it also represents a very small -- or not a very small part -- but a smaller part of the actual market opportunity.

What I mean by that is the US government suggests that there is over 70 billion square feet of lighted space -- nonresidential lighted space -- 25% of that is technologies such as the A19 lamp, the PAR30 lamp, spotlights, exterior lights. And 75% is basically what I would call linear fluorescent. The linear fluorescent is the much larger part portion of the market opportunity and that's where we have clearly set our sights. And we've done that because of the market opportunity itself, but also because -- and I might be a little bit biased -- because we have a better approach, and that's Intellitube.

Having said that, it's also a market -- these existing buildings -- where the value driver is not necessarily a low first cost, but rather a better return on investment. So we evaluated getting into the retail sector, if you will. And we just decided that we believe that consumers are going to be slow to buy a $10, $20 light bulb when they have a alternative that may be anywhere from $0.50 to $2.00 on a compact fluorescent.

And it's a space that clearly is dominated by the major manufacturers, GE, Philips and Sylvania, and we clearly see that they are focused on that market as well.

So having said that, that's a little bit about our strategy in terms of why we're focused on Intellitube and that linear fluorescent. It is the absolute highest performance, lowest cost way to get LED lighting into an existing building and offers a great return, where we're projecting. So having said that, in terms of globalization, we actually do have a subsidiary, a wholly-owned subsidiary, based out of the UK, that does cover the rest of the world.

They cover the construction marketplace. They were an early adopter into decorative LED. And now we are transitioning them into the existing building market, where they are basically focusing on what I would call large energy services companies and lighting retrofit companies that are into these existing commercial buildings where the customer will value the superior economic returns of our Intellitube technology.

So at this point in time that is the strategy that we are actually actualizing today to transition rest-of-world into the existing building market to leverage, as a sales channel for our Intellitube technology. We do have discussions in-house on how we go beyond that internationally, but it is just those discussions and strategies are just really too early to bring forward at this point in time.

Thanks Joe. Keep those discussions humming. And there's a lot of smoke and mirrors involved with your competitors and talking about all of the work they are doing in China and other areas, and I really appreciate the response. Thank you.

Thank you very much, Tom. Operator do we have another caller?

Yes will go next is Bill Hardy.

Hi guys. Greetings from Dallas. My question, Joe, has to do with a balance sheet question. At the end of 2010 you had accounts receivable of $6.236 million to be precise. Given that the payment of contract has been delayed, what is that balance sheet figure at the end of the first quarter of 2011.

The accounts receivable balance was $3.604 million.

Okay so in other words, it's actually gone down.

Yes it has.

Well, that speaks to the fact that there is not a surplus there to contribute to the second quarter. You see what I mean? I'm looking for -- how do you stimulate revenue coming into the second quarter without a carryover balance of accounts receivable that would have increased during the first quarter because contracts were not paid in a timely fashion or --

Sure.

There was something mirroring that -- I would have expected that the accounts receivables would've gone up and then you could work those down during the second quarter.

Bill I understand your question, and I think it's a really good question. And a large part of the answer lies in the solutions contracts that we received. What I mean by that is that, once we actually receive a contract, the first thing that we do is just quickly finalize engineering and basically we procure materials, which are delivered to basically the job sites let's say, in anywhere from 15 to 45 day timeframe.

Basically in the time that we deliver those materials, we are able to recognize revenue, number one. And we're if we haven't already done so we are basically able to issue a bill itself. And so a large portion of these solutions contracts, which tend to be very large in nature, a large portion of them, revenue is recognized in a receivable recorded, literally within 30-plus, 30 days of the contracting received.

Okay, so then the second quarter is going to be driven by the number of contracts you can get, and those will be turned over fairly rapidly. And is there any way you have to tell us investors how those contracts are aggregating through the first six weeks of the quarter?

Well I've already basically said that in the second quarter we expect to go from $5.5 million to over $8 million. We've also basically announced that we've already received $3.4 million worth of new solutions contracts.

So at this point, coupled with the fact that we feel very confident, and we've announced publicly that our revenues will continue to basically ramp, that is kind of -- the information that we've been provided to our investors that you can see already.

True. Okay, I guess I was looking for some bright ray of hope that would indicate that there is a backlog of accounts receivable to be mined, but I can understand what you're saying. Thank you for your answer.

Thank you very much, Bill.

We move next to Blake Tobias.

Good afternoon Blake

Good afternoon. Hi, Joe. Great series of questions from Alan there. I've learned a lot. So thank you Alan and thanks for your answers Joe. Just one quick question about Intellitube.

My understanding is that represents a fairly significant goal for the company. I'm wondering in terms of Intellitube what do you see as the significance in terms of the bottom line, and when do you see that, Joe, if you could respond.

Sure. Well a couple things about Intellitube. First of all we know the technology works. I mean it is fundamentally what is sailing in the Virginia class subs now, and it's embedded into sailors' berth lights. So it's technology works great. Clearly the US military has expressed a preference for it.

Now what we've also said is that we expect that we will be releasing a commercially, by the latter part of this year, the first part of next year. I will share with you, as I've shared with other investors publicly, is that Intellitube's price is highly dependent upon the cost of the LED. And over the next 2 to 5 years we're going to see the price of the LED go way down as we have already seen that, and we'll see the output of those chips go way up.

Why that's important is because areas of the country that have very high utility rates, like the West Coast, Texas, New England states, the economic equation or value brought by Intellitube at an initially higher price, will be there where it provides them a great return on investment.

For types of buildings that can tend to be lit longer than other ones. So hospital versus a school district will be -- hospitals will be the earlier adopters, especially in the high energy rates. So it will not be a product that, coming right out of the chute, creates tremendous economic value across all markets. Basically it will, for many markets, and as the price of that LED comes down, subsequently over the next couple of years, then it becomes a product that will create more economic value than a linear fluorescent across, what I would call, all margins.

So this year Intellitube, we've stated, is not going to be a major factor in terms of revenues, but we're very optimistic towards 2012 and beyond. And also what I would mention relative to revenues is gross profit margins. Today, in our solutions business which last year was approaching $20 million in sales, anywhere from 40% to 50% of those sales was product content. Within that product content there was really two main items. Fluorescent lamps and ballasts that we procured from the major manufacturers .

As Intellitube comes on line, we will begin to replace those fluorescent tubes with our own product, Intellitube, and as a result of that we've got a great launch pad -- captive customer for the product itself -- as well as, we will be keeping the manufacturing margin of the major lighting product, which currently today GE, Sylvania and Philips are benefiting from. So not only will it have a significant impact on the revenues, but also on the margins.

Great thank you, Joe. Appreciate it.

Thank you very much.

We'll go next to Peter Field.

Thank you. Good afternoon gentlemen, thanks for taking my call. I have a very mundane question, the answer to which I think I know, but it would reassure me if I could have some confirmation from you. In the 10-K, you had a note about collateralized assets where you talk about that $2 million of cash collateral related to the surety bond program. And I think that that's been satisfied elsewhere. I just want to confirm it is not part of the remaining $1.5 million dollars of cash and cash equivalents that you have on the balance sheet right now.

Great question. And I'll give you some reassurance. It absolutely is not part of the $1.5 million. It is actually on the balance sheet called collateralized assets, so it is separate from cash.

Just for everyone's benefit, our solutions business, we basically provide turnkey lighting upgrades into existing government facilities as part of, or as a prerequisite if you will. To be able to do that, we have to provide performance and payment bonds during the term of the installation, and about a month or two after those contracts. When we got into this business it was 2009, and so you kind of get a picture of the financial markets at that particular point in time, as well as coupled with our historical -- let's say five-year financial loss -- it was very challenging to be able to get bonding. We were very fortunate to align ourselves with a company that was willing to go with us. This company had actually served the previous owner for many, many years. But one of the consequences was is that we had to literally take $2 million of our cash and sit it over at our bonding company.

This was always done to initially get the bonding itself, and through our discussions with the surety company, it's always been the goal that as our financial performance improves, that basically collateral will be coming back to the company. And so we are working towards that end. But that explains it, but that is not part of the cash, if you will.

Great thank you very much. Mission accomplished. Keep up the good work.

Thank you very much; have a great evening.

We hear now from Thomas Murphy.

Good afternoon, guys.

Good afternoon, Thomas.

First of all I appreciate you going through so many questions. This is definitely a marathon Q&A and I think the insights you are able to provide are very helpful. The question I have is with regard to the total naval retrofit opportunity. I think your shareholders kind of view that as the Holy Grail, so to speak, for the year and beyond.

I was wondering if you could comment on whether or not you and the rest of the executive team kind of view that as the Holy Grail, and also if you have put a number on the total opportunity for the naval fleet in terms of revenue.

Sure. Thomas, that is a really good question and to answer it is -- the Navy is very important to us. But ultimately it is not the Holy Grail. The Navy is very important to us for many reasons. The first one is your last question. It is a very nice market. A conservative to re-equip the US fleet with the LED lighting, and I might just (inaudible) for a minute and tell you that on non-nuclear vessels, it's been shared with us that electricity is north of $0.55/kWh, and that fluorescent tubes don't last their standard life as they would in just a stationary building because of vibration.

There is a major driver for them to want to do LED lighting, and that's why they've been working to develop it for so long. Our conservative estimate is about a $300 million opportunity that could be harvested, should the Navy turn on the switch in a relatively short period of time. Three years. Maybe five. Having said that, so it's a great opportunity with high barriers to entry, but a customer where we have demonstrated time and time out that we can perform, and have delivered these advanced lighting solutions that exceed their specifications Mil-spec.

So number one is the market opportunity. Number two is basically we view a Navy vessel really is a large building, if you will, and we see it as an opportunity to actually have someone else pay for our product development. Everything they were doing right now for the Navy has a direct connection to a product that we will be or are selling in the commercial market.

So product -- having our product development paid for is absolutely huge. Ultimately though, that brings us to the last thing which was your question. To us, the Holy Grail is the commercial building market, the existing building market. And I guess the best way I could paint you, or explain why it's the holy Grail is that 70 billion square feet, 75% of it lighted with linear fluorescent, where the driver for a customer to upgrade his lighting in that building is purely economic.

He wants to free up the cash flow that he can apply towards his core business. And the fact of the matter is; there is no other approach available to an existing building owner that provides a lower first cost than basically simply going and taking out the fluorescent tubes and at least initially [jumpering] the ballast out of the circuit and putting in a new intelligent LED tube.

The contrast of that is basically to pay a higher first cost for a whole new LED fixture that would require a licensed electrician to take out of the building or to take out the existing fixture and put in this new fixture, so you pay a higher wage scale for the individual versus just replacing a tube, number one, and it takes longer.

And so as a result we can we can match in every way the performance of an LED fixture, an entire fixture replacement with Intellitube. We can bring forth features that I haven't heard the other fixture manufacturers really talking about, which is a direct result of some of the research we've done for the Navy.

But yet, again, do it with at least twice ROI or one-half the simple payback of anyone else. And so that's why we're very excited, and that's why it represents the Holy Grail for us.

Great. I appreciate the explanation. Thanks, guys.

Thank you very much. I know we're running long, could we -- is there another question operator.

Yes our last question will come from Gary Cavanaugh.

Good afternoon Gary. Good afternoon. Very, very interesting, and very much appreciate your patience in answering all these long questions. I have many, many questions I'll try to keep it short. My first one is maybe a little bit of an odd question but it seems like it's pretty important when you're focusing on the commercial, in the commercial areas.

I think most of the commercial areas use warm white, although I suppose some of them could use cool white. How do you adjust the coloration of the Intellitube to match, or maybe if it's already, matching very closely with what the -- what is required in the commercial atmosphere, where they don't want to change the color of clothing or whatever things that are on the shelf. Can give us a little idea on that?

I would love to, and in fact, I would like John Davenport, our President, who really along with Roger Buelow, spearheads our technology efforts to give it a stab for you.

Well sure. Color is important for various markets. For example the US Navy color temperature is 4100-degrees K and it's got a very stringent and narrow specification, which of course we meet or we couldn't be sending products along. That color is governed in -- a couple of ways it can be done. One way, which is what we are doing primarily now is with the LED itself. The choice of phosphor that goes with the LED determines the color.

We sell products, LED products, that run the gamut. For example, we sell products to museums where we very closely match the color quality and low color, yellow temperature of incandescent. We do that because that's what museums are used to, and what they desire, and in fact the home environment is like that. No problem. We also have high color temperature applications which we tend to use outdoors -- 6500 degrees K. Those are very useful because they take advantage of the color sensitivity of the eye, which at night in particular is more sensitive to the higher color temperatures. The blue end of the spectrum if you will.

Intellitube offers one final and really important difference for adjusting color. We can actually, because we have, we deliver the light to be Intellitube rod, that rod can mix colors, so we can have a multicolored-dye deliver light in whatever proportion we would like.

So we can take the same light bulb and to we can actually change the color in the environment that you have. So one SKU, if you will, can service a school at 4100K, a commercial installation at 3500K, or even work in the home at 3000 K, simply by it self-adjusting to that environment. Really very, very -- it's a breakthrough kind of approach to lighting, we think.

I'm sorry.

I just wanted to couple one other thing to this, and that is our ability to actually change the color of the lamp through Intellitube has tremendous applications in the Smart Grid environment. Where we can actually, since each lamp has its own IP address, you can actually reduce the light levels in buildings through the Internet. But not only can you reduce the light levels, you can actually change the color of the lamp to be more blue-green in spectrum, if you will, more akin to the sun. And the net result of that is we can dim to lower levels, without an impact, per se, on the occupants within that building, and actually get more energy savings as a result of that, so it's a tremendously important feature for a Smart Grid demand/response application.

That's a wonderful differentiator. Is that something -- it does have IP address, so it simply it's simply hooked up to a local area network and then its addressable, and when the load is required to come down it complies to that demand?

So the answer to your question, to all of those, is yes. It basically, Intellitube has an embedded system on a chip that is part of a wireless mesh network. It's an open protocol. One of the protocols we have is called ZigBee. You can do it though your existing building management system or it could be accessed through the ISO, through the Internet.

So your electric contracts with the electric company, you could actually dispatch -- let them dispatch to your lighting, or to the lighting in the building, and by doing that you maintain the visible coloration as good as possible under that scenario where you are actually reducing the power output with the LEDs. Is that -- am I getting that correct?

You are getting it correct.

Now what you are talking about here speaks to my next question, and that's Return on Investment. And I'm sensitive to what you had said earlier about areas having higher power co-op, obviously getting a quicker ROI, but could you speak to that a little bit?

I know that the ROI is probably going to improve over time as technology improves. Some of the people talk today about some of the new lighting from Cree and whatever hopefully help to do that, but the price is too high. But could you kind of speak to what your theory is on where this is going?

And by the way, I really think this is a very wise choice, picking on commercial, especially now understanding what we're talking about here, the specifications of these fixtures. I'm saying that the differentiator, is that a clear differentiator from your standpoint as everybody else doing it?

Well I've yet to see the real evidence of everybody else really focusing on that. They are focusing on LED fixtures is what we see as the primary alternative to a linear fluorescent lamp.

In terms of the ROI, the return on investment --

In terms of the ROI, you basically have different, let's call them simple paybacks or ROIs for different markets, so for instance, in the private sector, in a decent economy a simple three-year simple payback is pretty much a good target to go for. And of course, you know, as large companies manage their earnings today through the reduction in CapEx they want actually a quicker simple payback.

On the other hand, on the public sector buildings they can be well north of that. And in fact Johnson Controls, one of the largest energy services companies, gave a presentation last year, and they showed a table where they showed the typical simple payback in their government contracts anywhere from 3 to 10 years. So different markets have different desires.

Having said all that, our existing LED-based products today typically have a three-year simple payback or less. And that's really what our focus is that, but probably it's more importantly than that, it's to be linear fluorescent, and make it a great ROI compared to the best-in-class linear fluorescents today, and that's why we're very excited. We see it. We see it.

Let me just -- This is John. I'll tell you one thing about this wall pack that we introduced. That wall pack pays for itself in less than two years. That single product can generate $100 -- $100 of electrical energy savings in a year. That is what we're looking for in our products that's what makes them work.

That's Great. You talk about Johnson Controls. Do you have a package that intefaces with any of their systems for power reduction or I can't remember what they call it now, there's a term for it. Anyway, when the utility wants you to cut back and they give you a better rate for doing -- for being in that class.

Quite simply in the HVAC industry most of the existing building management or energy management systems now are being designed to an open protocol. In the case of the building management industry, JCI, Siemens, Honeywell, Trane, all of those basically have a open protocol standard called BACNet -- it's an industry standard. And inherent to where we are going with this product is plug-and-play compatibility into existing BACNet systems, as one example of compatibility with open protocol systems.

Oh, I got you. Okay. One more question I wanted to ask you in terms of the government jobs that you have gotten. Do you have any percentage of wins on the contracts that you have bid that you would be willing to share with us?

I'm going to let John, since he's been at this a lot longer than I have, he's best equipped to answer that question.

Yes we're very, very fortunate. We have an extremely high percentage of wins. When I was at GE and doing contracts with GE lighting, if we got 50% we thought that was fantastic, and that's actually above the industry average. We are typically in the 80s. We are over 85% here. So it is, I think that it's a real tribute to Roger and the entire technology team. In terms of the professionality of the contracts and also the timeliness of the proposals, feeding both into what we desire to accelerate commercially as well as needs for the US government. This energy conservation megawatt works in both sectors. So it's really been a very, very good.

Do have a services component to your business? I thought I remembered that maybe I'm wrong.

Well, what we have is, we acquired a company at the end of 2009 called Stones River Company, and they are a premiere lighting design and implementation of lighting for existing buildings. So their capability is to go into existing facilities, basically audit all of the existing lighting, create a cost profile from an energy and operating cost, and then develop an improved design with a financial pro forma that ultimately a building owner can make a decision on. And then we actually oversee and procure the materials and install it for them. So it's a comprehensive approach to implementing these solutions for our customers. And very, very successful I might add.

(Inaudible - multiple speakers)

That's correct. Yes, sir. That's correct.

Well guys have been very, very patient and I really appreciate. And if there's anything else you want to add, I would be most happy to listen but I do want to take any more of your time here myself.

Well thank you very, very much for your call in your questions today. So I guess operator what I'd like to do is to conclude our call today. But before I do, I would really like to thank everyone who participated for your time and your interest in Energy Focus. I'd be remiss if I didn't recognize the tremendous contribution of all of Energy Focus's employees worldwide, whose ongoing commitment and dedication to serving their customer needs will ultimately, I believe, give our shareholders the return that they deserve. So with that I'd like to thank you again and wish you a good evening. Thank you everybody.

Thank you that concludes today's conference. Thank you all for joining us.