Energy Focus Reports Loss

SOLON, Ohio, Aug. 11, 2016 (GLOBE NEWSWIRE) — Energy Focus, Inc. (EFOI), a leader in LED lighting technologies, today announced financial results for the second quarter ended June 30, 2016.

Second Quarter 2016 Financial Highlights:

• Net sales of $7.1 million consisting of $3.3 million in commercial sales, which reflected a reduction of $814 thousand for product returns and related credits, and $3.8 million in military sales, compared to $16.2 million in the prior year’s period, consisting of $2.1 million in commercial and $14.1 million in military
• Gross margin was 35.4% compared with 45.8% in the prior year’s quarter, due to lower aggregate net revenues and product mix that was more heavily weighted in commercial products sales, as well as the revenue reduction and related credits and inventory adjustments, which decreased gross margin by 3.8 points
• Net loss of $3.9 million, or $(0.34) per share, compared to net income of $2.1 million, or $0.21 per diluted share in the second quarter last year
• Cash balance of $25.4 million at the end of the quarter with no debt

Second Quarter 2016 Operational Highlights:

• Military & Maritime: Penetration rate of our military Intellitube® on the U.S. Naval fleet reached approximately 35%; provided maritime-grade lamp products, which are compliant to the American Bureau of Shipping (“ABS”) standards, to multiple Military Sealift Command (“MSC”) vessels; shipped additional products to the Royal Australian Navy; obtained the first order from the Royal Canadian Navy
• Healthcare: Continued shipping tubular LED (“TLED”) products to one of the largest hospital systems in Northeast Ohio with additional interior and exterior products developed to retrofit the system’s non-fluorescent sockets in the coming quarters
• Public Sector: Retrofitted 21 public school districts; received orders from 10 municipalities and government agencies
• National Retailers: Received initial orders from a regional shoe retailer with 150 stores; specified as the TLED provider to retrofit a national footwear retailer with 1,125 stores
• Higher and Private Education: Received initial orders from five colleges including a private Ivy League university in Connecticut and public universities in Minnesota, Florida, Ohio and the fourth largest community college system in the United States, and continued shipment of products to St. John’s University and a public university in Colorado
• Product Development: Introduced seven new series of products during LIGHTFAIR International in late April for shipment in Q4, including the industry’s first 0-10V dimming integrated, network-ready, direct-wire TLED and Intellitube, first UL approved TLED-ready troffer, emergency battery backup integrated TLED, high output T5 TLED, and panel lights

“We are obviously disappointed that we did not meet our guided sales range for the second quarter mainly due to a combination of lower than expected military sales, a few commercial projects not materializing within expected timeframes, and the revenue adjustment,” commented James Tu, President and Chief Executive Officer. “That being said, we made important strides in expanding our military and commercial customer base and in product development to further our goal of establishing Energy Focus as the most trusted LED lighting brand for leading public and private enterprises to retrofit their buildings with LEDs.”

“During the quarter, we strategically amended our contract with our military product distributor that should result in a more predictable and linear sales run rate of our military Intellitube® for the rest of the year.  Energy Focus remains the only mil-spec approved provider of TLED’s for the U.S. Navy, and our market opportunity in the maritime industry has grown, through the introduction of new products and our successful penetration into exciting new accounts such as the Royal Canadian Navy. We expect that the amended distribution agreement, along with our ongoing, expanding grassroots advocacy and sales initiatives to the U.S. Navy and foreign allied navy fleets will contribute to higher military product sales during the second half of this year than we recorded in the first half,” continued Mr. Tu.

“Excluding the adjustment of $814 thousand we recorded in the 2016 second quarter, commercial sales increased 92.0 percent compared to the prior year’s quarter.  We saw an acceleration of penetration into new accounts during the second quarter and into July as we further strengthened the focus of our sales efforts on expanding our contracting partner network to support and service our growing list of end users composed of leading government and business organizations. These organizations continue to show an increasing level of interest in LED lighting retrofit, driven by ever stronger sustainability initiatives and energy savings benefits. We also obtained numerous new marquee clients across nearly all verticals, including receiving the first orders in July to retrofit back-of-the-house areas for the largest membership-only warehouse club and the third largest retailer in the U.S. While it takes several quarters if not years to retrofit large projects, our growing list of commercial clients is expected to contribute to the future growth of our commercial product sales,” Mr. Tu added.

“We continue to invest actively in strengthening and expanding our leadership team, sales organization and execution capability, as well as developing and preparing to launch additional LED lighting products during the second half of the year that not only deliver leading levels of energy efficiency, quality, performance and value proposition, but also expand our sales opportunities to each of our clients,” concluded Mr. Tu.

A further breakdown of net sales is shown below (in thousands):

(1) Reflects the adjustment recorded during the second quarter of 2016 to reduce revenue by $814 thousand for product returns and related sales adjustments discussed below.

Financial Results:

Net sales of $7.1 million for the second quarter of 2016 decreased 56.1 percent compared to the second quarter of 2015. The decrease was due to lower sales of our military maritime products for the U.S. Navy, partially offset by an increase in commercial products sales. Net sales of our commercial products increased 54.0 percent compared to the second quarter of 2015, as we continued our efforts to diversify and expand our commercial and industrial markets. 

During the quarter, the company recorded an adjustment to reduce revenue by $814 thousand to reflect the return of products and related discounts on sales of products sold during the fourth quarter of 2015 and the first quarter of 2016. We determined that certain shipments did not comply with our process to assemble finished products in accordance with the applicable standard for those orders. This operational error did not relate to the safety or quality of the products, but instead to conformity with the manufacturing standard represented with respect to the product. We also recorded an adjustment to write-down the value of this product remaining in inventory at June 30, 2016. These adjustments also increased accounts payable by $814 thousand, increased net inventories by $221 thousand, reduced cost of sales by $221 thousand, and increased the net loss by $593 thousand. We have evaluated and are implementing improvements to our sales, supply chain and manufacturing processes. We are also enhancing our communications with our clients regarding their purchasing requirements and implementing internal processes to ensure that our inventory fulfillment is in line with those needs. We have estimated an amount of the potential credits for the remaining affected clients and determined that the impact is not likely to be material to our results for the second quarter.

Gross profit was $2.5 million, or 35.4 percent of net sales, for the second quarter of 2016, compared to $7.4 million, or 45.8 percent of net sales for the second quarter of 2015. The decrease in gross profit was due primarily to lower sales and product mix, as well as the adjustment for product returns and related credits to sales and inventory described above, which decreased gross profit by $593 thousand, or 3.8 percentage points of net sales.

Net loss for the three months ended June 30, 2016, was $3.9 million, compared to net income of $2.1 million for the three months ended June 30, 2015. Lower net sales, including the impact of the revenue adjustment for product returns and related credits and inventory adjustments, and changes in product mix in the second quarter of 2016, as well as continued investments in our corporate infrastructure to support future growth for our commercial products contributed to the difference in operating results.

At June 30, 2016, our cash and cash equivalents balance was approximately $25.4 million, compared to approximately $34.6 million at December 31, 2015.  Net cash used by operating activities of $8.2 million in the first half of 2016 resulted from the net loss, adjusted for non-cash items, including: depreciation and stock-based compensation; and working capital changes, most notably an increase in inventories and a decrease in trade accounts receivable.

Business Outlook:

For the third quarter of 2016, we are expecting net sales to be between $8 and $10 million, as our military sales stabilize at a level higher than the first and second quarters of 2016, and as our commercial sales grow from the second quarter of 2016 and from the third quarter a year ago. Gross margins will be dependent on product sales mix, and operating expenses are expected to increase from their current levels as we build business development and marketing infrastructure, strengthen our leadership team and develop additional technologies and products to support continuing client, geographic, and market penetration primarily for our commercial products.

Earnings Conference Call:

Energy Focus, Inc. will host a conference call and webcast at 11:00 AM Eastern Time on August 11, 2016. To participate in the call, please dial 800-946-0744 if calling within the United States or 719-457-2656 if calling internationally. A replay will be available until August 18, 2016, which can be accessed by dialing 877-870-5176 if calling within the United States or 858-384-5517 if calling internationally.  Please use passcode 1284172 to access the replay. The call will additionally be broadcast live and archived for 90 days over the internet accessible in the Investors portion of the Company’s corporate website, under “Events and Presentations” at https://investors.energyfocusinc.com/events.cfm