Energy Focus, Inc. Reports Fourth Quarter and Full Year 2017 Results February 22, 2018 PDF Version SOLON, Ohio, Feb. 22, 2018 (GLOBE NEWSWIRE) -- Energy Focus, Inc. (NASDAQ:EFOI), a leader in LED lighting technologies, today announced financial results for the fourth quarter and full year ended December 31, 2017. Fourth Quarter Highlights: Net sales for the fourth quarter of $4.7 million compared to $7.2 million in the fourth quarter of 2016. Gross profit was $1.6 million, or 34.3 percent of net sales, for the fourth quarter of 2017 compared to negative gross profit of $1.1 million in the fourth quarter of 2016. Fourth quarter 2017 operating expenses of $3.5 million compared to $6.7 million in the fourth quarter of 2016. Fourth quarter net loss of $1.9 million, or a loss of $0.16 per diluted share, compared to $7.8 million, or a loss of $0.67 per share, from the fourth quarter of 2016. Successful market introduction of the industry’s first fully-integrated, UL Approved, emergency backup TLED. Achieved national sales penetration with the signing of 30 Sales Agents and the hiring of five experienced Regional Sales Managers to manage our Agency network. Full Year Highlights: Full year net sales of $19.8 million compared to $31.0 million in 2016, driven by a 71 percent decline in military maritime sales. Full year commercial net sales of $15.2 million represents record-level commercial LED net sales in the Company’s history and a 2.8 percent increase over 2016 levels. Operating efficiency and cost improvements resulted in full year 2017 gross profit as a percent of sales of 24.3 percent, comparable to 2016, despite a 36.0 percent decline in year-over-year year net sales. Achieved an $8.4 million, or 34.3 percent, reduction in full year operating expenses, including restructuring charges and impairment losses. Excluding restructuring charges and impairment losses of $1.8 million, year-over-year operating expenses decreased by $9.4 million, or 39.7 percent, from 2016 levels. Full year net loss of $11.3 million, or loss of $0.95 per diluted share, compared to $16.9 million, or a loss of $1.45 per share, compared to 2016. Reduced year-over-year cash burn by $10 million to $5.9 million in 2017 compared to $16.6 million in 2016. Ended the year with $10.8 million in cash and no debt. Dr. Ted Tewksbury, Chairman, Chief Executive Officer and President, commented, “When I started as CEO last February, I announced a turnaround plan consisting of three basic elements – 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 new product engine that will continuously generate innovative products to grow revenue and profits over the long term. We made outstanding progress on each of these three of these objectives in 2017. We successfully reduced operating expenses by $9.4 million excluding restructuring charges, reducing our net loss by 65 percent year-over-year, despite declining revenue. We built an agency-based sales network consisting of 30 agencies, which is already generating increases in our sales pipeline, quoting activity and backlog. Finally, we launched RedCap, the industry’s first emergency battery backup tubular LED and defined an innovative roadmap of next generation LED products to drive longer term growth.” A further breakdown of net sales is shown below (in thousands): Three months ended December 31, Year ended December 31, 2017 2016 2017 2016 Commercial products $ 3,013 $ 3,299 $ 15,217 $ 14,809 Military maritime products 1,714 3,887 4,629 16,189 Total net sales $ 4,727 $ 7,186 $ 19,846 $ 30,998 Financial Results: Net sales of $4.7 million for the fourth quarter of 2017 decreased 34.2 percent compared to the fourth quarter of 2016, principally due to lower military maritime product sales, which experienced a quarter-over-quarter decline of 55.9 percent due to our distributor’s ability to satisfy U.S. Navy demand for our products out of their existing inventory balances. Net sales of our commercial products decreased 8.7 percent compared to the fourth quarter of 2016, reflecting the timing of our customers’ projects and installation schedules. Gross profit was $1.6 million, or 34.3 percent of net sales, for the fourth quarter of 2017, compared to negative gross profit of $1.1 million for the fourth quarter of 2016. The fourth quarter 2017 gross margin was favorably impacted by a net $0.8 million adjustment to the excess inventory reserve due to the Company’s strategic efforts to liquidate inventory previously identified as excess. The 2016 gross margin was negatively impacted due to a $3.3 million, net write-off of excess inventory at December 31, 2016. Operating loss, loss from continuing operations and net loss was $1.9 million for the quarter, or a loss of $0.16 per share, compared to operating loss, loss from continuing operations and net loss of $7.8 million, or a loss of $0.67 per share, in last year’s same period. Net sales of $19.8 million for the full year decreased 36.0 percent compared to 2016, principally due to lower military maritime product sales, which experienced a year-over-year decline of 71.4 percent due to our distributor’s ability to satisfy U.S. Navy demand for our products out of their existing inventory balances. Net sales of our commercial products increased 2.8 percent, due to our ability to further penetrate our commercial and industrial markets. Gross profit for 2017 was $4.8 million compared to $7.7 million in 2016. The year-over-year decline in gross profit was principally driven by lower sales volumes and changes in mix between our commercial and military maritime products. Our 2017 gross profit as a percent of net sales of 24.3 percent was comparable with our 2016 gross profit as a percent of net sales of 24.8 percent. As a result of our 2017 restructuring initiative and our efforts to improve operating efficiencies, we were successful in maintaining our manufacturing overhead as a percentage of net sales to 2016 levels, in spite of lower sales volumes. Additionally, the 2017 gross margin was favorably impacted by a $1.4 million net inventory adjustment to the excess inventory reserves due to the Company’s strategic efforts to liquidate inventory, previously identified as excess. The 2016 gross margin was negatively impacted due to a $3.3 million write-off of excess inventory during the year. Operating loss, loss from continuing operations and net loss was $11.3 million for the year, or a loss of $0.95 per share, compared to operating loss of $16.8 million and a loss from continuing operations and net loss of $16.9 million, or a loss of $1.45 per share, in last year’s same period. At December 31, 2017, our cash and cash equivalents balance was $10.8 million, compared to $16.6 million at December 31, 2016. Net cash used in operating activities of $5.9 million in 2017 compared to $16.6 million in 2016. Net cash used in operating activities results from the net losses incurred, adjusted for non-cash items, including: depreciation and amortization, stock based compensation, the adjustment to the excess inventory reserve, and changes in working capital. Dr. Tewksbury concluded, “2017 was a transitional year as we built the engine to drive growth and profitability. Revenue is a lagging indicator due to the characteristic 6 to 12 month sales cycle times in the lighting industry. While I had not expected to see revenue from the agency channel in 2017, I was very pleased to see the first agency contributions of $1.6 million in Q4. We are also seeing enthusiastic customer adoption of RedCap and shipped our first units in Q4. As a result of these successes, we entered the first quarter of 2018 with the highest sales backlog since the fourth quarter of 2016. While visibility remains limited, we expect our 2017 foundational achievements to deliver increasing revenue, profitability and value for our shareholders throughout 2018.” Earnings Conference Call: Energy Focus, Inc. will host a conference call and webcast on February 22, 2018 at 11:00 a.m. ET to review the fourth quarter and full year 2017 financial results, followed by a Q & A session. To participate in the call, please dial 800-239-9838 if calling within the United States, or 323-794-2551 if calling internationally. A replay will be available until March 1, 2018, which can be accessed by dialing 844-512-2921 if calling within the United States, or 412-317-6671 if calling internationally. Please use passcode 3012693 to access the replay. The call will additionally be broadcast live and archived for 90 days over the internet accessible in the Company section of the Energy Focus corporate website, under “Investors” at http://investors.energyfocus.com/. Forward Looking Statements: Forward-looking statements in this release are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Generally, these statements can be identified by the use of words such as “believes,” “estimates,” “anticipates,” “expects,” “seeks,” “projects,” “intends,” “plans,” “may,” “will,” “should,” “could,” “would” and similar expressions intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include all matters that are not historical facts and include statements regarding our current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies, capital expenditures and the industry in which we operate. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. Although we base these forward-looking statements on assumptions that we believe are reasonable when made, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and industry developments may differ materially from statements made in or suggested by the forward-looking statements contained in this release. We believe that important factors that could cause our actual results to differ materially from forward-looking statements include, but are not limited to: (i) our history of operating losses and our ability to effectively implement cost-cutting measures and generate sufficient cash from operations or receive sufficient financing, on acceptable terms, to continue our operations; (ii) our reliance on a limited number of customers, in particular our historical sales of products for the U.S. Navy, for a significant portion of our revenue, and our ability to maintain or grow such sales levels; (iii) the entrance of new competitors in our target markets; (iv) general economic conditions in the United States and in other markets in which we sell our products; (v) our ability to implement and manage our growth plans to diversify our customer base, increase sales, and control expenses; (vi) our ability to increase demand in our targeted markets and to manage sales cycles that are difficult to predict and may span several quarters; (vii) the timing of large customer orders and significant expenses, and fluctuations between demand and capacity, as we invest in growth opportunities; (viii) our dependence on military maritime customers and on the levels of government funding available to such customers, as well as funding resources of our other customers in the public sector and commercial markets; (ix) market acceptance of LED lighting technology; (x) our ability to respond to new lighting technologies and market trends, and fulfill our warranty obligations with safe and reliable products; (xi) any delays we may encounter in making new products available or fulfilling customer specifications; (xii) our ability to compete effectively against companies with greater resources, lower cost structures, or more rapid development efforts; (xiii) our ability to protect our intellectual property rights and other confidential information, and manage infringement claims by others; (xiv) the impact of any type of legal inquiry, claim, or dispute; (xv) our reliance on a limited number of third-party suppliers, our ability to obtain critical components and finished products from such suppliers on acceptable terms, and the impact of our fluctuating demand on the stability of such suppliers; (xvi) our ability to timely and efficiently transport products from our third-party suppliers to our facility by ocean marine channels; (xvii) our ability to successfully scale our network of sales representatives, agents, and distributors to match the sales reach of larger, established competitors; (xviii) any flaws or defects in our products or in the manner in which they are used or installed; (xix) our compliance with government contracting laws and regulations, through both direct and indirect sale channels, as well as other laws, such as those relating to the environment and health and safety; (xx) risks inherent in international markets, such as economic and political uncertainty, changing regulatory and tax requirements and currency fluctuations; (xxi) our ability to attract and retain qualified personnel, and to do so in a timely manner; and (xxii) our ability to maintain effective internal controls and otherwise comply with our obligations as a public company. About Energy Focus Energy Focus is an industry-leading innovator of energy-efficient LED lighting technology. As the creator of the first UL-verified low-flicker LED products on the U.S. market, Energy Focus products provide extensive energy and maintenance savings, and aesthetics, safety, health and sustainability benefits over conventional lighting. Our customers include U.S. and foreign navies, U.S. federal, state and local governments, healthcare and educational institutions, and Fortune 500 companies. Energy Focus is headquartered in Solon, Ohio. For more information, visit our website at www.energyfocus.com. Contact: Energy Focus, Inc.Michael H. PortChief Financial Officerir@energyfocus.com(440) 715-1300 December 31, 2017 2016 ASSETS Current assets: Cash and cash equivalents $ 10,761 $ 16,629 Trade accounts receivable less allowances of $42 and $236, respectively 3,595 5,640 Inventories, net 5,718 9,469 Prepaid and other current assets 596 882 Assets held for sale 225 — Total current assets 20,895 32,620 Property and equipment, net 1,097 2,325 Other assets 159 33 Total assets $ 22,151 $ 34,978 LIABILITIES Current liabilities: Accounts payable $ 1,630 $ 3,257 Accrued liabilities 130 498 Accrued payroll and related benefits 394 522 Accrued sales commissions 124 325 Accrued restructuring - short-term 170 — Accrued warranty reserve 174 331 Deferred revenue 5 — Total current liabilities 2,627 4,933 Other liabilities 232 107 Total liabilities 2,859 5,040 STOCKHOLDERS' EQUITY Preferred stock, par value $0.0001 per share: Authorized: 2,000,000 shares in 2017 and 2016 Issued and outstanding: no shares in 2017 and 2016 — — Common stock, par value $0.0001 per share: Authorized: 30,000,000 shares in 2017 and 2016 Issued and outstanding: 11,868,896 at December 31, 2017 and 11,710,549 at December 31, 2016 1 1 Additional paid-in capital 127,493 126,875 Accumulated other comprehensive loss 2 (1 ) Accumulated deficit (108,204 ) (96,937 ) Total stockholders' equity 19,292 29,938 Total liabilities and stockholders' equity $ 22,151 $ 34,978 Three months ended December 31, Year ended December 31, 2017 2016 2017 2016 Net sales $ 4,727 $ 7,186 $ 19,846 $ 30,998 Cost of sales 3,105 8,258 15,025 23,321 Gross profit 1,622 (1,072 ) 4,821 7,677 Operating expenses: Product development 674 1,070 2,940 3,537 Selling, general, and administrative 2,513 4,790 11,315 20,113 Loss on impairment 185 857 185 857 Restructuring expenses 128 — 1,662 — Total operating expenses 3,500 6,717 16,102 24,507 Loss from operations (1,878 ) (7,789 ) (11,281 ) (16,830 ) Other expenses (income): Interest expense 1 — 2 — Other expenses (income) 94 11 99 18 Loss from continuing operations before income taxes (1,973 ) (7,800 ) (11,382 ) (16,848 ) (Benefit from) provision for income taxes (115 ) 5 (115 ) 27 Loss from continuing operations (1,858 ) (7,805 ) (11,267 ) (16,875 ) Discontinued operations: Loss on disposal of discontinued operations — — — (12 ) Loss from discontinued operations before income taxes — — — (12 ) Benefit from income taxes — — — — Loss from discontinued operations — — — (12 ) Net loss (1,858 ) (7,805 ) (11,267 ) (16,887 ) Net loss per share - basic: From continuing operations $ (0.16 ) $ (0.67 ) $ (0.95 ) $ (1.45 ) From discontinued operations — — — — Net loss per share - basic $ (0.16 ) $ (0.67 ) $ (0.95 ) $ (1.45 ) Net loss per share - diluted: From continuing operations $ (0.16 ) $ (0.67 ) $ (0.95 ) $ (1.45 ) From discontinued operations — — — — Net loss per share - diluted $ (0.16 ) $ (0.67 ) $ (0.95 ) $ (1.45 ) Weighted average shares used in computing net loss per share: Basic 11,858 11,696 11,806 11,673 Diluted 11,858 11,696 11,806 11,673 Three months ended December 31, Year ended December 31, 2017 2016 2017 2016 Cash flows from operating activities: Net loss $ (1,858 ) $ (7,805 ) $ (11,267 ) $ (16,887 ) Less: Loss from discontinued operations — — — (12 ) Net loss from continuing operations (1,858 ) (7,805 ) (11,267 ) (16,875 ) Adjustments to reconcile net loss to net cash used in operating activities: Loss on impairment 185 857 185 857 Depreciation 167 250 681 805 Stock-based compensation 182 284 807 1,360 Stock-based compensation reversal — — (270 ) — Provision for doubtful accounts receivable (213 ) 147 (194 ) 156 Provision for slow-moving and obsolete inventory (756 ) 3,573 (1,400 ) 3,281 Provision for warranties (309 ) 60 (157 ) 170 Loss on disposals of property and equipment 96 3 203 38 Changes in assets and liabilities: Accounts receivable (399 ) (714 ) 2,240 4,313 Inventories 1,817 975 5,151 (5,018 ) Prepaid and other assets 322 185 161 (123 ) Accounts payable (586 ) (90 ) (1,759 ) (4,035 ) Accrued and other liabilities 173 (628 ) (260 ) (1,389 ) Deferred revenue (11 ) — 5 (93 ) Total adjustments 668 4,902 5,393 322 Net cash used in operating activities (1,190 ) (2,903 ) (5,874 ) (16,553 ) Cash flows from investing activities: Acquisitions of property and equipment (8 ) (149 ) (162 ) (1,624 ) Proceeds from the sale of property and equipment — 25 97 27 Net cash used in investing activities (8 ) (124 ) (65 ) (1,597 ) Cash flows from financing activities: Proceeds from the exercise of stock options/ESPP 25 69 130 455 Common stock withheld to satisfy income tax withholding on vesting ofrestricted stock units — — (49 ) — Common stock withheld to satisfy exercise price and income tax withholdingon option exercises — — — (309 ) Net cash provided by financing activities 25 69 81 146 Effect of exchange rate changes on cash (1 ) — (10 ) 5 Cash flows used for cont ops (1,174 ) (2,958 ) (5,868 ) (17,999 ) Cash flows used for disc ops - operating — — — (12 ) Net decrease in cash and cash equivalents (1,174 ) (2,958 ) (5,868 ) (18,011 ) Cash and cash equivalents at beginning of year 11,935 19,587 16,629 34,640 Cash and cash equivalents at end of year $ 10,761 $ 16,629 $ 10,761 $ 16,629 Classification of cash and cash equivalents: Cash and cash equivalents 10,419 16,287 10,419 16,287 Restricted cash held 342 342 342 342 Cash and cash equivalents at end of period $ 10,761 $ 16,629 $ 10,761 $ 16,629 Non-GAAP Measures In addition to the results provided in accordance with U.S. GAAP, we may provide certain non-GAAP measures, which present operating results on an adjusted basis. These are supplemental measures of performance that are not required by or presented in accordance with U.S. GAAP and, for the three and twelve months ended December 31, 2017, include adjustments for our restructuring expenses. We believe that our use of non-GAAP financial measures permits investors to assess the operating performance of our business relative to our performance based on U.S. GAAP results and relative to other companies within the industry by isolating the effects of items that may vary from period to period without correlation to core operating performance or that vary widely among similar companies. However, our inclusion of these adjusted measures should not be construed as an indication that our future results will be unaffected by unusual or infrequent items or that the items for which we have made adjustments are unusual or infrequent or will not recur. We believe that the disclosure of these non-GAAP measures is useful to investors as they form part of the basis for how our management team and Board of Directors evaluate our operating performance. These non-GAAP financial measures are not intended to replace U.S. GAAP financial measures, and they are not necessarily standardized or comparable to similarly titled measures used by other companies. Three months ended December 31, Year ended December 31, 2017 2016 2017 2016 Total operating expenses $ 3,500 $ 6,717 $ 16,102 $ 24,507 Less: Impairment loss (185 ) (857 ) (185 ) (857 ) Less: Restructuring (128 ) — (1,662 ) — Operating expenses, excludingimpairment loss and restructuring $ 3,187 $ 5,860 $ 14,255 $ 23,650 Three months ended December 31, Year ended December 31, 2017 2016 2017 2016 Net loss $ (1,858 ) $ (7,805 ) $ (11,267 ) $ (16,887 ) Add: Impairment loss 185 857 185 857 Add: Restructuring 128 — 1,662 — Net loss, excluding impairment lossand restructuring $ (1,545 ) $ (6,948 ) $ (9,420 ) $ (16,030 ) Source: Energy Focus, Inc.