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Energy Focus Reports 2Q 2022 Financial Results

SOLON, Ohio — Energy Focus, Inc., a leader in sustainable, energy-efficient lighting and controls systems and ultraviolet-c light disinfection (“UVCD”) products for the commercial, military maritime and consumer markets, announced financial results for its second quarter ended June 30, 2022.

Second Quarter 2022 Financial Highlights:

  • Net sales of $1.5 million, decreased 28.6% compared to the second quarter of 2021, reflecting a $0.5 million, or 49.3% decrease in military sales, as well as a decrease of $0.1 million, or 9.6% in commercial sales, year-over-year. As compared to the first quarter of 2022, net sales decreased by 28.2%, primarily reflecting a $0.4 million decrease in military sales and a $0.2 million decrease in commercial sales.
  • Gross profit margin of 7.4% was down from 18.9% in the second quarter of 2021, and up from negative gross profit margin of (1.3)% in the first quarter of 2022. The year-over-year decrease was driven by lower sales and less favorable product mix. Sequentially, despite lower sales and negative impacts from the mix of products sold, the increase in gross profit margin primarily relates to a favorable change in inventory reserves offset slightly by the unfavorable impact of a scrap write-off.
  • Loss from operations of $2.2 million was flat as compared to the second quarter of 2021. Loss from operations improved 7.7% as compared to a loss from operations of $2.7 million in the first quarter of 2022.
  • Net loss of $2.5 million, or $(0.35) per basic and diluted share of common stock, compared to a net loss of $2.5 million, or $(0.59) per basic and diluted share of common stock, in the second quarter of 2021. Sequentially, the net loss decreased by $0.3 million compared to net loss of $2.8 million, or $(0.44) per basic and diluted share of common stock, in the first quarter of 2022.
  • Cash of $0.9 million, included in total availability (as defined under “Non-GAAP Measures” below) of $2.5 million, each as of June 30, 2022, as compared to cash of $2.7 million and total availability of $1.1 million as of December 31, 2021.
  • An April 2022 unsecured bridge financing generated $1.8 million in net liquidity after discounts and transaction expenses, and a June 2022 private placement for the sale of common stock and warrants resulted in net proceeds of $3.2 million.

Stephen Socolof, Chairman and Interim Chief Executive Officer, commented, “Despite the second quarter results, we believe our progress on cost reduction initiatives, reinvestment in our military sales channel, and building commercial sales pipeline will position us for revenue and margin improvements in the second half of 2022. We expect our cost savings initiatives will begin to contribute to the bottom line in the third quarter, while our enhanced ‘white light’ offerings and our refreshed RedCap® solution are expected in the last half of this year. Customer project timing and supply chain constraints impacted timing of certain second quarter orders, leading us into the third quarter with a healthy backlog of near-term orders. Our patented EnFocus™ powerline control system products are seeing larger order volumes, and we are optimistic they will become a more meaningful contributor in the second half of the year.”

Socolof added, “We continue to focus on value-engineering and supply chain management initiatives we expect will reduce our cost of goods and make us more competitive, and have taken another hard look at other cost-cutting initiatives. Our SG&A expenses declined year-over-year, and sequentially when compared to the prior quarter, demonstrating our commitment to expense management. While reduced sales in the second quarter resulted in continued cash burn, we anticipate the cost reduction efforts combined with sales initiatives will result in a reduction in our cash burn in the second half of the year as sales improve and cost management impacts have full-period impacts.”

Second Quarter 2022 Financial Results:

Net sales were $1.5 million for the second quarter of 2022, compared to $2.1 million in the second quarter of 2021, a decrease of $0.6 million, or 28.6%. Net sales from commercial products were approximately $1.0 million, or 65.9% of total net sales, for the second quarter of 2022, as compared to $1.1 million, or 52.0% of total net sales, in the second quarter of 2021, reflecting (i) volatility of sales to large institutional customers; (ii) fluctuations in the timing and pace of commercial projects; and (iii) lingering macroeconomic supply chain impacts as a result of the COVID-19 pandemic. Net sales from military maritime products were approximately $0.5 million, or 34.1% of total net sales, for the second quarter of 2022, compared to $1.0 million, or 48.0% of total net sales, in the second quarter of 2021, primarily due to delayed timing of orders and project funding and reduced military maritime market pipeline development over the past year. Sequentially, net sales were down 28.2% compared to $2.1 million in the first quarter of 2022, reflecting primarily a decrease in military maritime orders.

Gross profit was $0.1 million, or 7.4% of net sales, for the second quarter of 2022. This compares with gross profit of $0.4 million, or 18.9% of net sales, in the second quarter of 2021. The year-over-year decrease in gross profit was driven by (i) lower sales volume, an unfavorable impact of $0.2 million, or 16% of net sales; and (ii) an unfavorable product mix impact of approximately $0.3 million, or 20% of net sales. These decreases were offset by a favorable net impact of $0.2 million, or 11% of net sales, from our inventory reduction project, with the change in inventory reserves offset by the inventory scrap write-off. Gross profit for the second quarter of 2022 also included unfavorable freight-in variances of $0.1 million, or 7% of net sales.

Sequentially, gross profit of $0.1 million for the second quarter of 2022 compares with negative gross profit of $(26.0) thousand, or (1.3)% of net sales, in the first quarter of 2022. Despite lower sales volumes (an unfavorable impact of approximately $0.1 million, or 10% of net sales), and an unfavorable product mix impact of approximately $0.1 million, or 5% of net sales, the increase quarter-over-quarter primarily relates to the favorable net impact of approximately $0.3 million, or 21% of net sales, related to the inventory reduction project, with the change in inventory reserves offset by the inventory scrap write-off.

Adjusted gross margin, as defined under “Non-GAAP Measures” below, was (5.1)% for the second quarter of 2022, compared to 17.6% in the second quarter of 2021, primarily driven by lower sales in the second quarter of 2022 in combination with a negative product mix impact during the second quarter of 2022 as compared to the second quarter of 2021. Sequentially, this compares to adjusted gross margin of 5.0% in the first quarter of 2021. The decrease from the first quarter of 2022 was primarily driven by lower sales in the second quarter of 2022 as well as lower variable margins during the second quarter of 2022.

Operating loss was $2.2 million for the second quarter of 2022, flat as compared to an operating loss of $2.2 million in the second quarter of 2021. Sequentially, this improved compared to an operating loss of $2.7 million in the first quarter of 2022. Net loss was $2.5 million, or $(0.35) per basic and diluted share of common stock, for the second quarter of 2022, compared with a net loss of $2.5 million, or $(0.59) per basic and diluted share of common stock, in the second quarter of 2021. Sequentially, this compares with a net loss of $2.8 million, or $(0.44) per basic and diluted share of common stock, in the first quarter of 2022.

Adjusted EBITDA, as defined under “Non-GAAP Measures” below, was a loss of $2.1 million for the second quarter of 2022, compared with a loss of $2.0 million in the second quarter of 2021 and a loss of $2.6 million in the first quarter of 2021. The larger adjusted EBITDA loss in the second quarter of 2022, as compared to the second quarter of 2021, was primarily due to the gross margin reductions from lower sales and less favorable product mix.

Cash was $0.9 million as of June 30, 2022. This compares with cash of $2.7 million as of December 31, 2021. During the second quarter of 2022, the Company added to its liquidity position with $1.8 million in net proceeds in connection with the April 2022 bridge financing and $3.2 million in net proceeds in connection with the June 2022 private placement. As of June 30, 2022, the Company had total availability, as defined under “Non-GAAP Measures” below, of $2.5 million, which consisted of $0.9 million of cash and $1.6 million of additional borrowing availability under its credit facilities. This compares to total availability of $4.1 million as of June 30, 2021 and total availability of $1.1 million as of March 31, 2022. Our net inventory balance of $7.2 million as of June 30, 2022 decreased $0.7 million from our net inventory balance as of December 31, 2021. As part of our expense reduction initiative, we have decreased our warehouse space by approximately 40% beginning in the third quarter of 2022. As part of our expense reduction initiatives, we have significantly decreased our warehouse space beginning in the third quarter of 2022. In connection with the space reduction, in the second quarter of 2022, we began disposing of a substantial portion of our excess and obsolete commercial finished goods inventory that was more than 90% reserved. Additional inventory management efforts are expected to continue in the third quarter of 2022 in order to free up additional space in the warehouse.

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