Energy Focus Inc (EFOI) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Energy Focus, Inc. second-quarter 2014 earnings release conference. Today's call is being recorded.

At this time I would like to turn the conference over to Mr. Frank Lamanna. Please go ahead, sir.

Thank you and good afternoon. Welcome to Energy Focus' second-quarter 2014 earnings conference call.

Today James Tu our Executive Chairman; Eric Hilliard, our President and Chief Operating Officer; and myself will report on our results for the second quarter of fiscal year 2014. The news release with our earnings results has been posted to our website under the investor section.

As a reminder, today's discussion will include forward-looking statements including predictions, expectations, estimates or other information that might be considered forward-looking. These forward-looking statements are subject to numerous risks and uncertainties. We encourage you to review our most recent filings with the Securities and Exchange Commission including our 10-K and 10-Qs for a complete discussion of these factors and other risks that may affect our future results or the market price of our stock.

We are not obligated ourselves to publicly release any revisions to these forward-looking statements in light of new information or future events. Now I'd like to turn the call over to James.

Thanks, Frank. Good afternoon everyone and thank you for your participation in our second-quarter 2014 earnings call.

I'd like to start the call by thanking all our employees and shareholders for your continuing dedication to and support for the Company over the past quarter and the past year. Energy Focus couldn't have possibly achieved its transformation plan over the past year without your collective efforts. Today I would also like to express our warmest welcome to our new investors from our recent equity offering just consummated on Monday this week.

As we mentioned in the press release our second-quarter results clearly demonstrated our continuing progress towards our goal to achieve rapid sustainable, profitable and organic growth. During the quarter as we stated in the press release sales grew 36.2% organically from first quarter of 2014. And excluding the government R&D service revenues, which we don't pursue anymore, for our restructuring during the second half of last year, sales grew 25.8% organically from the same period a year ago when our gross margin was at much lower level.

If we exclude the R&D contract services that we no longer pursue our product sales during the quarter grew 70.7% over the second quarter of 2013. Meantime our gross margin reached 32.5%, the highest level the Company has achieved in many years. And we reduced our operating loss drastically to $562,000 from $1.1 million the first quarter of 2014 and from $1.7 million in the second quarter of 2013.

At this point we believe that we are on our way to achieve EBITDA positive in the second half of 2014 as our sales continue to improve. And we are continuing to improve our margin towards our 35% long-term goal.

Now I'd like to turn the call to Frank Lamanna, our CFO for more specifics on the financials. After which I will update with you briefly on the progress we made in various businesses.

Thank you, James. Good afternoon, everyone.

Before I discuss the financial results for the second quarter of 2014 I would like to inform everyone that sales, gross profit and operating results that I will discuss will exclude the results of our pool products business, which was sold in November 2013. We have eliminated all net sales and expenses associated with the pool business on a historical basis and classified those activities as discontinued operations.

For the second quarter of 2014 Energy Focus had net sales of $6.7 million, an increase of $1 million, or 18.5% compared to $5.7 million of net sales from continuing operations in the prior-year second quarter. In the second quarter of 2014 product segment sales increased 51.7% to $5.6 million while the solution segment sales decreased 42.9% to $1.1 million as a result of shifting our focus from turnkey LED ESCO solutions to turnkey LED commercial solutions.

Within the product segment commercial sales increased 17.1%, government sales increased 125.8% and R&D services sales decreased 96% due to narrowing our focus on those projects that result in material LED lighting product opportunities. Excluding the R&D services sales the products segment sales grew 70.7% from the prior year's second quarter.

Second-quarter 2014 gross margin was 32.5% of net sales as compared to last year's second-quarter gross margin of 21.9%, a 10.6 percentage point improvement. Gross margin increased by 3.6 percentage points over the first quarter of 2014.

In the second quarter of 2014 products segment gross margin improved to 35.7%, or 7.6 percentage points as compared to 28.1% of sales in the second quarter of 2013. Our improvements in gross margins are a result of our continuous efforts to improve our operational efficiency as well as the growing economies of scale from the sales volume increase.

The solution segment gross margin improved in the second quarter of 2014 by 5.8 percentage points to 16.3% of sales as operational execution improved. For the first six months of 2014 gross profit was $3.6 million, or 31% of net sales compared to $2.1 million, or 21% for the same period in the prior year.

Operating expenses were $2.7 million in the second quarter of 2014 compared to $3 million in the same quarter for 2013, or a decrease of 8.2%. During the first six months of 2014 operating expenses were $5.2 million compared to $5.1 million in the first six months of 2013.

For the second-quarter 2014 net loss from continuing operations was $622,000 compared to a $1.2 million net loss in the first quarter of 2013. In the first half of 2014 net loss from continuing operations was $4.7 million compared to a net loss from continuing operations in the first half of 2013 of $2.6 million.

Included in the 2014 first-half net loss were one-time expenses of $2.7 million which were related to the conversion of convertible notes. Excluding these one-time charges the net loss from continuing operations was $2 million.

Finally, I would like to discuss Energy Focus' balance sheet. Cash and cash equivalents at June 30, 2014, were $1.6 million compared to $2.9 million at December 31, 2013. And cash used in operating activities decreased by 17.6% as compared to the first six months of 2013. Furthermore, we reduced our long-term debt obligations by $3.8 million due to the conversion of convertible debt in the first quarter of 2014.

In an effort to further strengthen our capital position, on October 11, 2014, Energy Focus completed its public offering raising an estimated $5.3 million net of expenses. These funds will be used to fund our aggressive growth plans including expanding our geographical and vertical sales presence, building up inventory to shorten delivery leadtimes, improving the efficiencies of our operating infrastructure and to strengthen our balance sheet.

Giving effect to the equity raise on our June 30, 2014 balance sheet, cash and cash equivalents increased to an estimated $6.9 million and working capital improves to $9.4 million while our shareholders' equity increases to $10.8 million. This initiative coupled with our recent move from the over-the-counter bulletin board to the NASDAQ is an indication that we are continuing to focus our efforts on building a solid financial foundation as we transform Energy Focus into a leader in the LED lighting market. Now I'll turn the call back to James.

Thanks, Frank. Now I'd like to update with you briefly on our progress in building our sales pipeline during the second quarter of 2014.

Our sales pipeline across all verticals including military and maritime, ESCO and commercial and industrial continue to grow during the quarter. Specifically over 120 U.S. Navy ships are now ordering our LED products up from fewer than 20 at the end of last year. We are witnessing not only broader but also stronger adoption of our LED lighting technology in the whole Navy ESCO system from the top decision-makers to the ship levels.

We sold a record $2.7 million of our military IntelliTube products during the quarter and we believe that the sales pace is on track to double within the next few quarters. We are working on a number of marketing and sales initiatives that we believe will accelerate our penetration to this $350 million market over a few short years. We are the only approved LED lighting vendor but we also can leverage our technology leadership and proven success into the broader $4 billion commercial marine market.

In the ESCO market, we have completely re-oriented our focus on product sales to the federal ESCO channel, rather than solution sales to local ESCOs, to avoid potential channel conflict. By serving the ESCOs as well as the lighting retrofit service companies we will lighten up only to become a leading LED tube lighting provider for the ESCOs but also the vendor for LED tubes in the industry.

During the quarter we won one of the largest LED lighting retrofit projects for product sales in the ESCO industry's history with 57,000 LED tubes. We are now already working with 6 out of the Super 16 ESCOs in the country. And our pipeline of opportunities in the ESCO channel has grown multiple times over the past six months.

We continue to add sales personnel diligently and we are scheduled to open our DC office by early fourth quarter. It is our expectation that we will start seeing growing contributions from the sale ESCO channel in the second half of this year with accelerating growth momentum into 2015.

In the commercial markets we focus mainly on the following five verticals: national retailers, property management companies, hospitals, universities and parking garages. Each of these five verticals represent multibillion-dollar opportunities for us in the US. And outside of the national retailer vertical where we are now building a sales team to focus on the top 150 national retailers, we currently focus on Northeast, Midwest and mid-Atlantic regions where the return on investments for LED retrofit projects is most attractive due to either higher power rates or better rebates, or a combination of both.

During the quarter we also continue to make exciting progress in expanding our sales reach to more large commercial accounts. We have made numerous sales contacts in the five verticals we are pursuing. And now we are in active final discussions with several large accounts for initial orders that we expect to start contributing to our sales in the third and fourth quarters of this year.

As we announced in press release on June 30, we have become a preferred LED lighting vendor for the largest private held property management company in the world with 500 million square feet of space in 4,000 buildings in the US. We are now actively pursuing the clients in select metropolitan areas.

As another example of our initial success in the commercial market we announced we have been selected by Wayne State University to retrofit its existing T12 fluorescent lighting with 35,000 of our LED tubes. Wayne State is the first university in Michigan and one of the first in the whole country to embark on an all LED lighting retrofit plan.

The ultimate size of this opportunity alone is likely over 100,000 tubes. Much like our success in the Navy and in the ESCO channel, such early wins provide us strong testimonials and referrals for us to penetrate and lead in a specific vertical.

Again we believe that we are blazing trails in LED light tube adoption by selling and serving the end customers directly with the highest performance and lowest cost LED products that our target clients simply could not obtain from traditional lighting distribution channels. This focused and direct distribution business model we are pioneering in the lighting industry is only possible through a concerted effort by possessing proven LED technology know-how, developing and designing leading edge technology LED technology products, launching products well ahead of the curve, having the products available and selling them directly to clients with the most compelling solutions when it comes to return on investment.

Now as we have transitioned our solutions team out of the ESCO channel to serve the commercial clients we now are able to provide the most comprehensive and compelling LED lighting retrofit solutions to the commercial markets. We will continue to enhance our capability to provide a complete and leading LED lighting lifecycle solution to the end clients. And we will have more exciting developments to share with you once the additional products and services that are now under development materialize.

Last but not least as Frank laid out, we initiated a series of capital market ventures during the second quarter to enable us to become a fully investable and more visible publicly traded company. As you have seen from our press release over the past two weeks, with shareholders' approval we have affected a 10 to 1 reverse split and with the underwriters' exercise of overallotment we have successfully raised an estimated $5.3 million of capital net of fees in our most recent equity offering. And we began trading on the NASDAQ Capital Markets on August 7.

These accomplishments we believe will not only equip us with ample working capital but also significantly broaden our investor base to better reflect the value of the Company as we continue to grow in fast pace. With that I will turn the call back to the operator to open it up for questions.

Thank you. (Operator Instructions). Philip Shen, ROTH Capital.

Hey, guys. Thanks for taking my question. You guys are making great progress here especially with the Navy.

Can you talk to us about what kind of growth you see ahead and over what kind of timeframe? You guys are in 120 ships now and there is also the Sealift Command available, what kind of penetration, or how would you describe the penetration of that addressable market in 2015? How much penetration could we get?

I'll have Eric answer that question.

Thanks, James. Okay, I'll try to answer your question as best I can for you.

Our penetration so far has been very rapid, as you heard from James, from 20 ships to an 120 ships in 2014. That doesn't mean that we outfit the entire ship, it means that we are starting to get traction on the United States Navy on a larger platform base.

So with the total number of ships, public information that we ascertain out there from James finding addition that there is roughly 290-ish ships in the United States Navy fleet. There's another complementary of that ships in the Military Sealift Command and we are just penetrated into 120. We expect the penetration to continue forward every quarter and into 2015 and we continue to gain ground not just on the platform but taking a better position on that platform month-over-month, quarter-over-quarter, etc.

Within the 120 ships that you have -- you are involved with now -- what degree of the addressable market on each ship, or the addressable sockets on each ship do you think you have already enabled?

I'm not looking at it from a ship-by-ship basis, per se, as much as the general market itself. We believe for the Navy at this point we are getting close to a flat percent-ish addressable market that we have penetrated into. So we have a lot of bandwidth here to continue forward on and replicate our results and grow.

Great. Thanks. In terms of the ESCO space, James in your marks you talked about in the quarter you guys won one of the largest tube contracts for the ESCOs. I believe I heard 57,000 tubes.

Can you talk to us about your backlog and your pipeline actually? And perhaps talk about the number of -- do you have a number of other of those types of opportunities that are in development now that we could start to see in the quarters ahead?

Sure. We didn't obviously specify exactly how much pipeline, how much sales pipeline we have right now. But as I have mentioned in the earlier presentation, we have seen multiple times growth over the past six months.

An approximate number would be from a low few million dollars to over tens of millions of dollars at this point in terms of our sales pipeline. Obviously not all the sales pipeline would turn into sales. But we have a good percentage of win over the past few quarters when we just started focus on a federal ESCO product sales.

So I think that the best way to characterize the growth in this particular vertical is that we will see something very significant in the next -- especially in 2015. But also starting to see contribution, meaningful contribution, over 10%, 20% of our sales in the next few quarters.

Great, thank you, James. One more and I will jump back in queue. And this is for you James.

Can you talk to us about the innovation that you see in the financing space for energy efficiency and what you guys are doing? Talk to us about the opportunities ahead and how you hope to enable them.

Sure. As I mentioned that we are working on additional services, products and services to complete our total LED lighting retrofit package to our commercial clients. And as you can see from the solid space being able to provide the financing facilities is an important motivator for the commercial clients to move forward with an energy efficiency upgrade.

We can see that already in the ESCO channel, obviously, when schools, hospitals, municipalities use ESCOs as a financing mechanism. We are working on such a solution with multiple potential financing partners to provide a complete lifecycle solution from design to product sales, installations, measurement and validation and financing. And it is still too early to tell.

We are in a few pilot projects for this particular market. But we believe that once we have this complete ability this will unlock a very significant portion of the commercial markets. So I hope we have something exciting to announce in the next two quarters.

Okay. Thank you, James. Thank you, Eric. I will jump back in queue.

(Operator Instructions). David Herdman, private investor.

Yes, hi guys and great report. Better than I expected actually.

Eric, I did have a question for you about the maritime bulbs. They were not going to be the military IntelliTube, they were going to be a more commercial tube and I was wondering, you hadn't gotten it approved yet.

I guess it's a different kind of approval for the maritime industry. I was wondering if that had come through?

Okay, thanks for the question, David. Yes, the lamp that we are going to provide to the maritime non-military, it is certainly not going to be the military base because it doesn't have to be that heavily specified, so you are correct in that statement.

As far as getting it certified, I think what you're referencing is the ABS certification for maritime fleets. And I do believe we are completing that here real soon and be available for the fourth quarter.

Very good. Thank you. That should do it for me.

Richard Greene, Centerpoint Advisors.

Good afternoon, gentlemen. Congratulations on the progress you've made in the last quarter. It seems like all the hard work with the restructuring is starting to pay dividends.

You mentioned the verticals that you are focused on but I noticed recently on the website that there's a couple of verticals that maybe you can talk about albeit them in perhaps the embryonic stage. But there is a reference on the website about the oil and gas space area.

And then I did read some third-party research talking about the role that LEDs can play in the agribusiness. Can you comment on that and see whether it is an element of opportunity there that you think is meaningful enough to you don't want to be too scattered in your focus but do you think it's meaningful enough that that's a market you would -- another vertical you would want to pursue?

Sure, Richard. I'm going to have Eric talk about the oil and gas opportunity, which is part of the military maritime market. And then I'll come back and talk about the agricultural opportunity.

Okay, great.

Richard, let me try to help answer the question here. Oil and gas, we were referring to those platforms that are offshore, obviously. We see that as a vertical market that is one that Energy Focus is going to pursue.

We believe we have a good product offering that stems from our military heritage, the ability to go out into the U.S. Navy and have high quality sustainable products that can survive at sea, sea salt, air, etc. We also are able to get the certifications required for maritime fleet, the prior question was for the ABS.

So this allows us to take a current suite of products that we are using on maritime fleets and in the U.S. Navy and penetrate a market that we feel we can have great success in. So yes, we are going to be moving into that marketplace and that channel.

Can you just give me a sense what the size of that market is?

We are still doing a lot of the deep analytics but it's a very sizable market. When you go out there there are thousands of these types of apparatus at sea, plus there's an additional market that services those markets. And we learn everyday how the market functions but there are actual refinery ships next to these oil rigs that refine the oil at sea and then transfer yet to other cargo ships that come and bring that refined oil to land.

It's just really a unique market, it's very exciting. We are looking forward to moving into this as a vertical and expanding our maritime business even further as it is. As James was saying earlier in the call, it's a $4 billion addressable marketplace and we are very excited to be playing in that marketplace.

Great. Thank you.

Yes, Richard to add onto what Eric said, our approach to the market is that once we decide to enter a market we must have done enough study and project development so that we are sure we could be a leader in that particular vertical. If we don't have that kind of confidence and belief then we will avoid getting into a new vertical because we are still a small company.

We want to be very focused on expanding our resources and being able to penetrate particular vertical is very powerful as we have been doing in the Navy channel, as you can see, and now in the federal ESCO channel and in some select commercial verticals. Very very early stage but being a channel leader is a lot more profitable than being everywhere.

So that's our main marketing approach and sales approach come up which really differentiates us from many other LED lighting providers which usually tend to do too many things, having too many products to too many markets. I will give you a quick example. In our commercial line we have about 30 SKUs as opposed to most lighting companies having hundreds or even thousands and having a very concentrated SKU gives us the flexibility to launch new products ahead of the market because we are focusing on a much narrower band of products.

So I believe that is one of our major advantages in the market. But also related to your question about agricultural markets, we obviously are watching that market very closely in terms of the possibilities there and the market there. It's a multibillion-dollar market as well.

We have not put that in our verticals to focus on. There has been multiple studies that with different lighting spectrums you can improve plant and even animal agricultural growth. And so there's definitely a role for LED lighting to play.

At this point we are not focusing on that vertical. And I don't think you will see us being in that vertical in the next two quarters.

But it will eventually be one of the verticals that we get in, I believe. Because it is part of the commercial industrial market but also it uses mostly florescent lights at this point which we aim to replace.

Okay, I think that makes a lot of sense. It's still out there, you will get the low-hanging fruit first, that you know it's there and then continue to look for opportunity. Thank you very much.

Absolutely. Thank you.

Ted Brown, private investor.

A couple of comments here. You have really come a long long way and there's been an awful lot of arm twisting and convincing on this way to get where you are, I am sure.

Can you tell me a little bit about the nature of the buyers in this recent underwriting? Because the character of the buyers, I don't care about their names, but do you have some really substantial smart people?

And the second question that I would like to poise is in the past a lot of our old investors thought that we had a lot of protection in patents and otherwise and I don't hear that talked about anymore. Do we have some real edge in selling? Do we have some protection on the products that we are vending and I would love to hear about what kind of competition we give people.

Sure. We are happy to have you along the way as we transform the Company. You have a couple of questions, actually.

The first one I'd like to address is in terms of the capital raise, our new investors. Obviously we like to believe that all our investors are smart investors, so that's taken for granted.

Most of them are institutions and they are actually pretty global. They are organizations from Canada and from UK as well. So we believe that this is a very good beginning for us to approach the capital markets and more institutional investors and now we are trading on NASDAQ with the right stock price to start with, so we are very excited about this new start, in terms of getting additional investors to follow Energy Focus.

The second question relates to new product development. Absolutely, we are continuing to develop our products with 79 patents right now. And we are in the middle of preparing more patent filings.

And the difference now is that as opposed to what we had before is that all the products we are going to be focused on our end markets today, which is the commercial industrial markets including -- it's a broader institutional market that includes commercial industrial and the Navy and the ESCO, really anything else out of the residential market and then outdoor market. So all our product developments are focused on penetrating the broader commercial and industrial market with, as we said, the highest performance, and lowest-cost product.

We believe that we are leading the market even today at 130 lumens per watt tube and we are on our plan to launch 150 lumens per watt product in the next few months. In addition to that we are developing products that can fit into our market with more versatility, with the ability to improve the return on investment by driving down the cost but also increasing the flexibility of the technology.

We don't have anything to offer at this point because it's under development. But I think in the next three to six months you will see more exciting new product development that we announce.

Related to your question about competition, I think we have said before that we like to be ahead of the curve. We like to be able to launch products at least six months ahead of our competition.

They are everywhere. They could be large lighting, established lighting companies to start to Asian manufacturers.

But we believe that at this point we are so focused on our market and in a very narrow band of SKUs, we are staying ahead of the curve. And all our product development efforts are concentrated on enabling us to stay ahead of the curve, to drive down the investments needed for our clients and to drive up the return on investments on these lighting retrofit projects.

Thank you.

Thank you. And with no additional questions I would like to go ahead and turn things back over to Mr. James Tu for any additional or closing remarks.

Thank you, everyone, for your participation. We very much look forward to talking to you again in our third-quarter 2014 earnings call. Have a good evening.

Thank you. And again, ladies and gentlemen, that does conclude today's conference. Thank you again for your participation.