Energy Focus Inc (EFOI) 2017 Q4 法說會逐字稿

Good day, and welcome to the Energy Focus Fourth Quarter 2017 Earnings Call. Today's conference is being recorded.

And at this time, I'd like to turn the conference over to Mr. Michael Port, CFO. Please go ahead, sir.

Thank you, operator. Good morning, and thank you for joining us for the Energy Focus Fourth Quarter 2017 Earnings Conference Call. Today, our Chairman, Chief Executive Officer and President, Ted Tewksbury, and I will report on our results for the quarter. The news release and our annual report filed with the Securities and Exchange Commission on Form 10-K have 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 and our actual results may differ materially from these statements. We encourage you to review our most recent filings with the SEC, 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 obligating ourselves to publicly release any revisions to these forward-looking statements in light of new information or future events.

Our prepared remarks this morning will include non-generally accepted accounting principles or GAAP measures to explain the impact of our restructuring costs on our GAAP operating results. A reconciliation of these non-GAAP measures can be found in this morning's press release.

Now I'd like to turn the call over to Ted.

Thanks, Michael. Good morning, everybody, and thank you for joining the call today. Before we dive into the detailed financial results, I'd like to take a moment to recap the big picture and why Energy Focus is uniquely positioned to be the leader in LED retrofit solutions for commercial and industrial applications. The primary reason customers do LED retrofits is economic. The energy savings are substantial, ranging from 50% all the way up to 75% or more with the aid of sensors and connectivity. We believe this will drive virtually all commercial and industrial clients to eventually adopt LED lighting. It's just a matter of time. In addition to the economic advantages, but less well-known, LED lighting is more conducive to human health, productivity and wellness than other light sources. In fact, the spectrum of LED has more closely resembled natural sunlight than conventional fluorescent or incandescent lighting. So the case for LED retrofits is compelling. But not all LEDs are created equal. What sets Energy Focus apart is that we offer a premium product for applications where performance, quality and wellness really matter. Our tubular LEDs are rugged, reliable and military tough. What's good enough for the U.S. Navy, is good enough for the most demanding commercial and industrial applications.

Our products meet the tightest specifications and tolerances for correlated color temperature, color rendering index and the efficacy and lumens per watt. We offer the longest lifetime, backed up by a 10-year warranty. Big commercial customers, who invest in an LED retrofit project, want that investment to last. Our industry-leading lifetime lowers the total cost of ownership and minimizes maintenance costs. We deliver the industry's lowest optical flicker, UL certified at less than 1%. Flicker can cause headaches, eye strain, seizures and interfere with concentration. That's one of the primary reasons why our ultralow flicker lamps are preferred by leading health care facilities and school systems. These attributes fulfill an unmet need for a premium-quality LED tube, and give Energy Focus a unique competitive advantage in the $16 billion commercial and industrial retrofit market.

Despite these technology strengths, at the time the Board of Directors appointed me CEO back in February of 2017, the company was in a dire situation. The Navy retrofit business, which accounted for nearly 80% of the company's revenue in 2015, had entered a steep decline due to market saturation, excess inventory, new competitors and price erosion. While the company had begun to diversify into the commercial and industrial market, it lacked the sales channels to effectively reach these customers. The new product pipeline and product management were not structured to achieve continuous innovation and sustained profit margins. The company had been making significant investments ahead of opportunities that did not materialize, growing operating expenses 25% in 2016, with revenue declining 50%.

In my first earnings call with you 1 year ago, I announced a bold turnaround plan consisting of 3 initiatives: first, reduce operating expenses by approximately $10 million year-over-year; second, put in place a nationwide sales force to drive top line growth; and third, build a robust new product pipeline to continuously deliver innovative new products to market. Over the past year, we achieved essentially all of these objectives as well as many more. Today, Energy Focus is a new and revitalized company. While the top line is only just beginning to reflect these operational improvements, they are the key to unlocking revenue growth in 2018 and beyond.

Let me take a moment to highlight some of the major 2017 achievements before turning the call back to Michael to elaborate on our financial results. In 2017, we brought in an entirely new and accomplished executive team, including a new CEO, a Chief Financial Officer, a Chief Technology Officer, Vice President of Operations and a Senior Vice President of Sales and Marketing. We sharpened the company's focus on being the retrofit technology solutions leader, with the mission of empowering our customers to run their facilities with greater energy efficiency, productivity and wellness. We exited money-losing businesses and low value-added activities, such as energy audits, installations, lighting as a service and generic buy resell products. We are now able to offer a much greater range of products, services and value to our customers, but we do so by leveraging a broad network of ecosystem partners.

We closed down our New York, Virginia and Minnesota offices, and reduced headcount by over 50% from 150 down to 74. We cut our annual operating expenses by $9.4 million, enabling us to reduce our net loss by 33% year-over-year. We killed uncompetitive, undifferentiated products in development and focused our valuable and limited engineering resources on those with the potential to be world's first and world's best. As an example, we launched RedCap, the industry's first integrated emergency battery backup tube late in the fourth quarter, and we shipped our first units for revenue. RedCap is a game changer, making the installation of emergency battery backup as easy as changing a light bulb.

We formulated our next-generation product road map, including connected lighting, with the objective of delivering at least 2 new product categories in 2018 and an average of 1 per quarter thereafter. We built a nationwide sales organization consisting of 6 highly experienced regional sales managers, directing over 30 top-tier lighting sales agents. This sales network multiplies our effective sales headcount by over 100, and is already generating increased sales leads, quoting activity and backlog.

We grew our commercial and industrial sales to the highest level in the company's history, led by health care and education customers who highly value Energy Focus' industry-leading ultralow [flicker]. We reduced our gross inventory by 34% to less than $10 million. We also worked with our Navy distributor to help them deplete all of their inventory, enabling us to ship our first Military Intellitubes to the Navy for revenue in 3 quarters. We implemented disciplined processes for sales forecasting, inventory management, performance management and new product development, which have enabled us to instill a performance-driven culture of ownership and accountability. This has enabled us to earn a reputation both internally and externally for doing what we say we're going to do.

It was a prolific year for Energy Focus, and I applaud all of our incredible employees for their accomplishments in repositioning the company for success. As a result of their efforts, the company is a much more streamlined, innovative and focused Energy Focus. With the new product engine in place and our cost structure optimized, the path to profitability is now all about revenue growth.

Change of this magnitude takes time, and I've repeatedly emphasized the inherent cycle times required for product development and sales. Large retrofit projects frequently go through a lengthy sequence of energy audits, analyses, budgeting, vendor selection and committee approvals before culminating in a purchase order. As a result, sales cycle times can range from 6 to 12 months or more. I had not expected to see revenue contributions from our new agency channel until the first quarter of 2018. But was pleasantly surprised to see 18% of our Q4 sales contributed by the agencies. While sales visibility remains limited, we entered the first quarter of 2018 with the highest backlog since the fourth quarter of 2016. These leading indicators give us confidence that we are at the beginning of a sustained revenue ramp, driven by our new agency sales channel, the RedCap adoption cycle and other new products layering on later in the year.

With that, I'll turn it back to Michael to elaborate on our financial results for the quarter and for 2017 overall.

Thank you, Ted. Total net sales for the fourth quarter were $4.7 million, down 34% compared to the fourth quarter of 2016. For the quarter, sales of commercial products represented 64% of net sales, while sales of military products represented 36% of net sales. This compares to a fourth quarter 2016 product mix of 46% and 54% for commercial and military sales, respectively. Our net sales in commercial products decreased 9% compared to the fourth quarter of 2016, reflecting the timing of our customers projects and installation schedules.

As we've discussed in previous earnings calls, during 2017, our distributor to the U.S. Navy was able to satisfy significantly all current demand out of their existing inventory balances, resulting in a quarter-over-quarter decrease of 56% in net sales of our military products compared to the fourth quarter of 2016.

Our fourth quarter 2017 gross margin was 34% compared to a negative gross margin in the fourth quarter of 2016. The fluctuations in quarter-over-quarter gross margin percentages are primarily driven by a year-end excess inventory reserve adjustment as required by U.S. GAAP. The fourth quarter 2016 gross margin was negatively impacted by a net $3.3 million write-off of inventory we deemed excess at December 31, 2016. During 2017, we initiated strategic efforts to liquidate inventory previously identified as excess, resulting in a net favorable adjustment of approximately $800,000 to our gross margin for the fourth quarter of 2017.

As you will note from our year-end 2017 balance sheet, we currently have reserves against our inventory of $4.2 million, a decrease of $1.4 million from the year-end 2016 inventory reserves. We continue to explore opportunities to further liquidate inventory previously identified as excess.

Our fourth quarter 2017 operating expenses were $3.5 million compared to total operating expenses of $6.7 million for the fourth quarter 2016. Excluding the restructuring and impairment charges of approximately $300,000 and $900,000 in 2017 and '16, respectively, our fourth quarter operating expenses decreased by $2.7 million, representing a 46% decrease from the prior year.

Our fourth quarter 2017 net loss was $1.9 million or $0.16 per share. This compares to a net loss of $7.8 million or $0.67 per share in the prior year's fourth quarter.

Now I'll discuss our full year results. Our total net sales for 2017 were $19.8 million, down 36% compared to 2016. Sales of commercial and military products represented 77% and 23% of net sales, respectively. This compares to a 2016 product mix of 48% for commercial products and 52% for military products. Year-over-year net sales of our commercial products increased 3% compared to 2016. And as Ted mentioned, our 2017 commercial net sales of $15.2 million represents record commercial LED sales for the company. The mix is even more impressive as that it was accomplished during our restructuring initiatives when we had almost 100% turnover in our internal sales force, while transitioning from a direct sales model to the agency model.

Throughout the year we've discussed the challenges we faced in our military market, and it's no surprise that our military net sales declined 71% in 2017 compared to 2016. We remain committed to evaluate and competitively bid on future military orders not only for our Military Intellitube product, but for our other military product lines, including berth lights, fixtures and Globe.

As a direct result of our restructuring initiatives and our focus to improve operating efficiencies, we maintained a comparable gross margin percentage of 24.3% in 2017 compared to 24.8% in 2016. Total operating expenses, including restructuring and impairment charges for the year, was $16.1 million compared to $24.5 million for 2016. If we exclude restructuring and impairment charges from both years, our year-over-year operating expenses decreased by $9.4 million or 40%. Let me take a minute to put this significant accomplishment into perspective. Within a 10-month period, we cut our operating expenses almost in half; added experienced members to our management team; changed our sales strategy to an agency model, meaning a national sales presence; and defined an innovative product road map of next-generation LED products to drive long-term growth. As we enter 2018, we feel that we are well positioned to leverage our current operating expense level to support further revenue growth.

Our net loss for 2017 was $11.3 million or $0.95 per share compared to a 2016 net loss of $16.9 million or $1.45 per share. Again, I'd like to point out the significance of this achievement. Through the hard work and efforts of all Energy Focus employees, we were able to reduce our year-over-year net loss by $5.6 million or 33% in a year in which we experienced a net sales decrease of $11.2 million or 36%. From a balance-sheet perspective, we maintained our focus on managing our cash and inventory balances. We maintained our spending discipline to limit our fourth quarter cash burn to $1.2 million, which was our lowest operating cash consumption in 8 conservative quarters, and in 2017 with a cash balance of $10.8 million.

We've continued our disciplined purchasing approach by decreasing our inventory balance by $5.2 million since December 31, 2016. Given the continuing volatility in military sales and a timing uncertainty of commercial sales growth, it is challenging for us to provide quarterly revenue guidance at this time. Once our revenue achieves a more predictable growth rate, we will provide further guidance.

With that, I'll turn the call back to the operator for questions.

(Operator Instructions) We'll go ahead with our first question from Craig Irwin of Roth Capital Partners.

So Ted, an impressive operating result. You guys have clearly got everything operationally that you can control in a very good place over the last year. The one thing that I know is harder to control is revenue. Now the agencies are showing some pretty good traction, pushing revenue now for you. But can you talk about potential investments in new products and things you see as opportunities? Your recently announced, I guess, emergency lighting product is a nice positive. But can you frame out for us the actions that you think are a priority for '18 to drive product revenue?

Sure, yes. Thanks, Craig. We don't have a whole lot of control over revenue in 2017 because the sales pipeline was built by the previous sales organization. We do have control over future revenue by virtue of the operational actions and the new product pipeline that we're putting in place today and in 2017. It's just that there is a delay, and I've tried to be very transparent about the 6- to 12-month time it takes to develop new products, some times longer. And then on the sales side, the time from initial engagement with the customer until the time you get a purchase order, which can be 6 to 12 months. So we're working on revenue, but we're working on future revenue, and we hope to see that in 2018. Now as far as what we can do today to make that revenue materialize, it's 2 things, which I hope I emphasized sufficiently in the prepared remarks. One is selling more of the products that we already have. And to do that, we needed to have a nationwide sales force so that we could reach all of the commercial and industrial customers, and I'm very comfortable right now that we have not only the right number of people, but very high-caliber experienced salespeople, and most of our regional sales managers have upwards of 3 decades of sales and, specifically, lighting sales experience. So in conjunction with the 33 agents that we currently have, we have the right people to drive sales with existing products as well as new products. Now on the new product front, that's been divided into recently introduced new products, which will contribute to 2018 revenue, and then there's future products in development, which will later on -- either late in 2018 or in 2019. In the first category, you've got RedCap, and we're seeing very good customer traction with RedCap. We only had a small amount -- a couple of hundred units shipped in the fourth quarter because the product wasn't launched until the end of the quarter. But we are very optimistic about sales of RedCap based on the customer traction we're seeing, and we expect that to drive 2018 revenue growth. The next in line as far as new products are categories that we will introduce around the time of Lightfair. So we have 2 products that we will roll out at Lightfair, and I don't want to talk about those in advance because we've got a bad track record of pre-announcing, and so I want to keep that one up my sleeve and I don't want to talk -- tip off my competitors. The third category, are the advanced connected lighting products. We have a new CTO, Laszlo Takacs. He is doing an outstanding job with redefining our product road map. We've got some really, really exciting connected lighting products that we'll be hopefully announcing and maybe even launching towards the end of this year. But overall, the way to think about our new products is in 3 categories: we've got our advanced tubes, with advanced specifications and features; we've got fixtures and we've got the other connected lighting and smart lighting products. I know that was a long-winded answer, but that's how we're going to drive 2018 revenue.

That's encouraging, and I know there's a lot of work that's gone into that plan. So one of the things that I learned at Strategies in Light last week is that you share a supplier with General Electric. GE is primary OEM producer of tubular LED bulbs. Obviously, they're one of the gorillas in the market. The fact that Energy Focus is in there sort of suggests that maybe you have an interesting cost structure versus others in the market and don't share the extreme turmoil that, that GE is seeing these days. A lot of uncertainty on the part of GE's customers as far as continuity of further supply. Can you say whether or not the uncertainty about some of the other suppliers in the tubular LED market is translating to increased attention, increased interest in areas you focus given the strong brand recognition out there?

I can't say with any certainty whether or not that's the case. Craig. It very well could be, but I am not aware of that at this time.

Okay, okay. And then last question if I may. So in the fourth quarter of '16 you wrote down $3.3 million in inventory. Obviously, calling that obsolete, but this quarter, you were able to sell almost a quarter of that out into the market. Does this mean that maybe there's a reason for optimism about some product lines that you thought might have been no longer sellable into the market? Was there maybe something that we should read as a potential positive in that for the longer term?

Craig, this is Michael. I think that the message that we should take from that is that -- and we've talked about it before that it -- really, in 2016, we had built up a substantial amount of inventory that exceeded what for U.S. GAAP purposes was a measurement of what we considered currently sellable. Our products, in terms of obsolescence, they're still usable. We -- there will always be improvements in terms of energy efficiency and other improvements that we can make, but our basic tubes will be still sellable, but we just had too much of it. And as a result, as I mentioned, we still have about $1.4 million of inventory that we've identified as being reserved. We are looking at making some strategic sales and some strategic opportunities to move that inventory. But I don't think it will have a major quarter-over-quarter impact moving forward as we work hard to get that down and in control.

We'll go ahead with our next question from Carter Driscoll of B. Riley FBR.

So could the -- you comment on maybe some of the geographic regions where you're starting to see either better sales leads, maybe not fully translatable into revenue yet? But if I recall correctly, last quarter, very heavy geographic concentration kind of in the Midwest and specifically in Ohio and Texas, if I recall for C&I. And I think you called out both the Coasts and even the Southeast U.S. Maybe you can just elaborate on both, some of the new states that you're seeing some penetration and then maybe end market, obviously, kind of K through 12 and health care have been the primary end markets for C&I, but maybe any adjacent or lateral opportunities?

Yes, as far as geographies, you're correct. We've always historically had a lot of strength in Ohio, and the Midwest. And then, more recently, in Texas, we've got a large energy service company that's one of our biggest customers in Texas. And they contributed a significant amount of revenue this quarter. We've also built out the southeast Florida, there's a lot of health care facilities there as well, and seeing very good early leads and a buildup of the pipeline there. California has been very strong. And then, the northeast is probably the biggest opportunity that we have where we've seen a little bit of time delay on the northeast, but that's one of the primary focus areas because of the high energy costs, the large concentrations of schools and hospitals. And so that's we think a big potential opportunity for us. As far as the end markets, if you look at commercial for Q4, it splits up roughly into 1/3. About 1/3 of it came from health care, other 1/3 came from education, and then the remaining 1/3 went through agencies and distribution into a wide variety of commercial and industrial subsegments. And that's the piece that we haven't had access to before. So that's new and it's broad-based. Unfortunately, now that we're working through the agencies, we don't have as much visibility and granularity on specific end customers as we did when we were direct, but as long as it's growing, we're happy.

Right. Do you get that type -- just as a follow up to that, did you get that type of granularity in arrears? I mean, do you solicit down within the agency sales, and try to [back] maybe some burgeoning opportunities laterally outside of education and health care?

Yes, yes, very much so.

Yes. I mean, our -- this is Michael, Carter. Our structure is that the regional sales managers work very closely with the sales agents. We just don't sign the sales agents and send them out into their territories. Our sales -- our original salespeople are committed to not only educating the agencies in the value proposition of the Energy Focus products, but also working with them to get out in front of customers, introduce customers. It goes both ways to have a good partnership on the agency model. And so we're actually seeing a lot of interest and a lot of traction in that regard as well.

You'll see increasing customer diversification going forward, and I expect that, that 1/3 from the other category to start to grow and it -- we'll be able to give you more granularity in future calls.

Okay. And do you have a different target for what you think the agency sales could be as a percent of total revenue by, let's say, year-end?

Yes. So in Q4, as I said, we're already up to 18%. The target is 60% for all of 2018.

And compensation, I'm sure it's fairly industry-wide structured for the agents. Is there an end-of-year true-up for, or is that done on a quarterly basis for any potential hurdles?

The agents are paid commissions based on their sales. There are no target true-ups for achieving an excess of certain amounts at this point.

Okay. And how do you feel about your balance sheet position currently relative to still limited visibility on the revenue side? Do you feel you have sufficient capital availability right now? And what potential levers could you use, at least maybe from a customer perspective? Could you ever enter in a relationship where you could finance using their balance sheet, some forward purchases? Or is that something you haven't contemplated?

Well, right now, we're pretty -- I'm not saying I'm ever comfortable with the amount of cash that's has been on the balance sheet, I'd like to have more. But given the level to which we've reduced our cash burn, which is down -- close to $1 million now quarter, and $10.8 million on the balance sheet, I have a reasonably high level of confidence that we're going to be able to reach escape velocity and get to breakeven before cash becomes a problem. But having said that, we had a board meeting yesterday, and every board meeting we talk about cash and financing options and so forth. And so if and when the time comes when we do need to raise capital, we've got a number of options to do that.

Okay. I here's last question. You talked about pricing environment. Obviously, you don't play in the commodity space or big-box retailers that face that outsized pressure. Do you have an idea as your sales composition changes, what you would face in terms of industry-wide price pressure on an annual basis or a bracket you could share?

Well, actually on the ASP erosion side, most of our challenges have been in the Military segment where we had 2 new competitors who came in with products which we don't think meet the high-quality standards of ours, but apparently were good enough. And we saw, as we've discussed in past calls, some fairly significant reductions in the pricing of those Navy products, which has led to a fairly drastic decline in our gross margins for that business. On the commercial side, I am actually less concerned because of some of the differentiations that I spoke of in the prepared remarks. We are the only company that is able to offer a combination of performance, quality, ruggedness that I outlined. We have less than 1% flicker, which is really a must-have for many of the schools and hospitals. And then the 10-year product life is something that very few companies have. So on the commercial side, I think we can continue to maintain healthy margins and price stability going forward.

Maybe my last question is, you were talking about new product development and categorize tubes, fixtures and connected devices. Fair to assume that the -- what you introduce at Lightfair will be in that second bucket, even if you can't give specificity?

Well, what we will show at Lightfair will not be in the connected lighting bucket. It will be some of the intermediate products between RedCap and connected lighting, which we expect to have similarly market entrants towards the end of the year. And if I could, well I've got you on the line, just to go back to your previous question about price erosion. One of the other initiatives that we've launched in this company which is new, is that every new product that's introduced, including RedCap and every new product from now on going forward, as soon as that product is introduced, it goes into a cost-reduction initiative. So that we don't get stuck as we have in the past, with its uncompetitive high-cost structures as we did on the Military Intellitube and some of the military products. So that's become a part of our process, and then we're also doing cost reductions on those older products like the Military Intellitube, so that we can continue to win that business and grow the military.

So as a follow up to that, what -- from kind of first iteration of a product down to whether it's a successful -- successive product launch within that family, what you think an average cost down could be?

Could be -- well, I mean, it depends on the initial starting point. In the case of the Military Intellitube, we're looking at 30% to 40% cost reduction.

And we'll go ahead with our next question from Colin Rusch of Oppenheimer.

Could you talk a little bit about how we should think about normalized gross margins as we enter into 2018?

Well, I think if you look at where 2017 ended up, even though we had some gives and takes, I think moving forward to where we were at 2017 is a pretty good projection of where we can be, putting aside some of the cost opportunities and ASP conditions that Ted just talked about.

Okay. Perfect. And then in terms of incremental operating margins, how should we think about incremental sale expenses as you grow revenue? Obviously, timing is a little bit uncertain, but -- are your sales teams incentivized on a percentage basis? And how can we think about the operating leverage as you grow sales?

Yes. So in my prepared remarks, I think in terms of our base operating expenses, I think we can -- we're pretty well positioned to leverage those expenses to be able to support sales -- increased sales. So to your point, the main piece that becomes variable after that is commissions. And depending on the structure, the commission percentage will range between 3% and 7% depending on the structure of the contract and the product and the sale.

And your next question comes from Amit Dayal of H.C. Wainwright.

One question on backlog. In your press release, you talked about entering 2018 with a much stronger backlog compared to what you've seen over the last 12 months. Could you give us any more color on what's driving the strength here? And what sort of levels are you seeing in terms of numbers around this?

Yes. I'd rather not disclose numbers at this stage. As I did say in the prepared remarks, we're entering the first quarter of 2018 with higher backlog than we had since the fourth quarter of 2016. And I would remind you that throughout 2016, we had a contract with our military distributor, whereby they were required to purchase $3.1 million worth of Military Intellitubes every quarter, of course that's what led to our inventory [closeout]. But whereas after that contract, our backlog would have been much lower throughout 2016, and after the claim that this is the highest beginning of quarter backlog that we had in a much longer period of time. So that's extremely encouraging. Now where is it coming from? It's coming from a variety of sources, including our traditional tubular LEDs as well as RedCap. But what's really the driving force behind it is the agencies. We've got, as I mentioned, 100x more feet on the street, calling on customers, than we had 1 year ago. And as a result, that pipeline is filling up, the sales funnel is filling up. And that's exactly what we want. That -- what we have -- I know there's a lot of frustration around our inability to provide guidance and forecasting. The reason for that is the small numbers that we got traditionally in the funnel. Now that we're starting to increase the number of opportunities, we'll have the opportunity to average out some of that volatility and give you better forecasting.

Understood. And just around the guidance, Ted, for 2018, can we expect sort of year-over-year improvements on a quarterly basis from a revenue point of view?

I think that's well said, Amit. That is my goal. I cannot give you -- it's very difficult for me to give you absolute numbers, but what I'm directing my team here to do is show continuous incremental improvement on the top line and on EPS every quarter. That's my goal. Now that's not guidance, but that's the closest I can give you the guidance.

Right. And how does sort of the Military segment play out in terms of your expectations for 2018? Are you focusing the same amount of resources in the channel? Are you lowering your efforts over there? Like how are you dealing with trying to grow that business?

We've already dramatically reduced our resources focused on the military. We already have the products that the military needs and wants. And as we've said before, we firmly believe that we have by far the most rugged, highest-quality, military-certified product on the market. And we continue to compete for that business aggressively. As I said, we are doing continued cost reductions on those products. That said, we've been very conservative as far as our forecast there. It's because of the uncertainty and -- with the relaxation in military's requirements and their willingness to settle for lower-quality products has cast a cloud on our ability to forecast that market.

And -- Amit, this is Michael. Remember, a lot of times those bids come out for relatively large quantities at one point that you either win or lose. So it's very difficult for the new competitors in the market to really be able to forecast because of the magnitude and the significance of either winning or losing one contract or one bid within the year.

Right. Understood. Just one last one for me. On the connected lighting front, will you be able to leverage your existing agency channel to move these products through the market? Or will you have to sort of create an organic team to do this?

Well, absolutely, absolutely, we will be using the existing agency channel.

And we'll go ahead with our next question from Mr. Mark Miller from The Benchmark Company.

In terms of your anticipated sales growth in 2018, you mentioned RedCap and 2 other new products, what percent of the sales growth roughly is going to be coming from new products?

Mark, the anticipation right now, one, it's not only the new product introduction, but it's also the pull-through that it'll have on the impact of our other product lines. So while we're excited about all of the other introductions that we have, really, it's just -- it's rounding out the portfolio of the Energy Focus products to make us that much more attractive, the value proposition that much stronger. So I don't think we're looking at it as a significant increase in revenue for any one particular product, but it's to raise the level of sales across-the-board with that introduction.

And just to elaborate on that answer. We sell RedCap in what we call a kit, so code requires that you have one emergency battery backup up in the ceilings, or in our case in tube, for every 5 to 10, sometimes more conventional tubes. So we sell RedCap together with 5 or 10 tubes, so the pull-through effect that Michael alluded to is quite literal. Every time we sell a RedCap, we pull on 10 conventional tubes. So it is a bit difficult to break it out by individual products.

And I was -- you mentioned that the sales were roughly 1/3 health care at least in commercial, 1/3 education and other areas. Is that roughly the composition of your backlog?

I just don't know...

It is a -- we do have some military products in the backlog that might skew that a little bit, but I think that's fairly representative as well.

No. That was for commercial.

Oh, I am sorry.

Yes.

Yes. So I think it still follows, and I apologize. In terms of looking at the total there is some military in there.

I think that's about right. I mean what's happening here is that we're seeing growth in that new category that's outside of health care and education. So that may be a little bit larger, but again, it's roughly in thirds.

Any examples of these new areas in terms of specifics? What new areas are these you're talking about besides education and health care?

Warehouses, offices, small retail facilities. I wish I could claim one of the big-box retailers. I'm not able to do that quite yet, although we're hopeful that it will come through. And that's -- and the rest are factories, and things like that.

And we'll now take our next question from James Liberman from Wells Fargo Advisors.

I wondered if it's premature to talk about some of the other opportunities within the government sphere which would be upgrading of lighting and buildings around the country, are they defense or nondefense, they were just still very complicated by uncertainty over a budgetary issues, et cetera.

Well, that's a great question, and some of those other government opportunities are also being opened up to us by the agencies, who have the right relationships with the ESCOs and with those government agencies. Just to give you an example, in Q4, on the military side, we talked about roughly $1.7 million in revenue, 88% of that was ship retrofits. There was another 8% that came from bases -- military bases, and that's an area where we've struggled in the past getting access, but the agencies are giving us the kind of access to get into those opportunities. So we do expect the government sales opportunities to continue to grow.

And we have no further questions at this time. I'd like to hand it back over to Mr. Ted Tewksbury for closing remarks.

Thank you for joining us today and for your continued interest in Energy Focus. As a reminder, Michael and I will be at the ROTH Conference in Orange County, California, and we hope to see some of you there. In the meantime, thanks again and enjoy the rest of your day.

And this concludes today's call. We thank you for your participation. You may now disconnect your lines and have a wonderful day.