AP NEWS

Energy Focus, Inc. Reports Third Quarter 2018 Financial Results

November 7, 2018

SOLON, Ohio, Nov. 07, 2018 (GLOBE NEWSWIRE) -- Energy Focus, Inc. (NASDAQ:EFOI), a leader in advanced LED retrofit technologies, today announced financial results for its third quarter, which ended September 30, 2018.

Third Quarter 2018 Highlights:

-- Net sales were $5.2 million, compared to $5.2 million in the second quarter of 2018. -- Gross profit was 25% of net sales, compared to 25% in the second quarter of 2018. -- Net loss was ($1.9) million, including a $0.3 million executive severance charge, compared with ($1.8) million, in the second quarter of 2018.

“Revenue growth remains our top priority to achieve break-even. In Q3, we achieved several important milestones that should lead to increased revenue starting next year,” said Dr. Ted Tewksbury, Chairman, Chief Executive Officer and President of Energy Focus, Inc. “First, we completed cost reductions of our legacy products enabling us to offer customers our industry-leading quality and performance at competitive prices; second, we introduced a new shipboard retrofit kit and shipped our first units for revenue; and third, sales of new products introduced since the start of our turnaround reached their highest level to date.”

Third Quarter 2018 Financial Results:

Net sales were $5.2 million for the third quarter of 2018. This compares with $5.2 million in the second quarter, and $5.0 million in the third quarter of 2017. Net sales from commercial products were $2.3 million, down from $3.0 million in the second quarter and $3.9 million in the third quarter of 2017. The changes are primarily due to a pause in the timing of a major healthcare provider’s roll outs of retrofit projects. Net sales from military and maritime products were $2.9 million, up from $2.2 million in the second quarter and $1.1 million in the third quarter of 2017.

Gross profit was $1.3 million, or 25% of net sales, for the third quarter, compared with $1.3 million, or 25% of net sales in the second quarter, and $1.1 million, or 23% of net sales in the third quarter of 2017.

Operating loss, which included a $0.3 million executive severance charge, was ($1.9) million for the quarter. This compares with an operating loss of ($1.8) million in the second quarter and ($1.8) million in the third quarter of 2017.

Net loss was also ($1.9) million in the quarter, compared with ($1.8) million in the second quarter and ($1.8) million in the third quarter of 2017. Net loss per share was ($0.16), compared with ($0.15) in the second quarter and ($0.15) in the third quarter of 2017.

Adjusted EBITDA, as defined under “Non-GAAP Measures” below, was a loss of ($1.2) million, compared with ($1.4) million in the second quarter and ($1.6) million in the third quarter of 2017.

Cash and cash equivalents were $7.1 million as of September 30, 2018, compared with $8.6 million at the end of the second quarter of 2018.

“With a sales team that now has nationwide coverage, cost reductions completed and new products ramping, we are focused on converting the sales pipeline to revenue while simultaneously developing our next generation smart lighting portfolio,” said Dr. Tewksbury. “We remain confident that our turnaround is on the right track to create shareholder value.”

Earnings Conference Call:

Energy Focus, Inc. will host a conference call and webcast on November 7, 2018 at 11:00 a.m. ET to review the third quarter 2018 financial results, followed by a Q & A session. To participate in the call, please dial 877-451-6152 if calling within the United States, or 201-389-0879 if calling internationally. A replay will be available until November 14, 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 13684558 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 website, http://investors.energyfocus.com/. To access the recording link, click on “Company” in the top menu bar of the Energy Focus corporate website, then select “Investors” from the dropdown menu.

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, currency fluctuations and potential tariffs and other barriers to international trade; (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 and under Nasdaq listing standards.

About Energy Focus

Energy Focus is an industry-leading innovator of energy-efficient LED lighting technology. As the creator of the first UL-verified flicker-free LED products, Energy Focus’ products provide extensive energy and maintenance savings, as well as safety, health and productivity benefits over conventional lighting. Our customers serve the commercial, industrial, healthcare, education and military markets.

Energy Focus is headquartered in Solon, Ohio. For more information, visit our website at www.energyfocus.com.

Investor Contact:

Jim FanucchiDarrow Associates, Inc.(408) 404-5400 ir@energyfocus.com

Condensed Consolidated Balance Sheets (In thousands) September December 31, 30, 2018 2017 - -------- - - -------- - ASSETS Current assets: Cash and cash equivalents $ 7,054 $ 10,761 Trade accounts receivable less allowances of $27 and $42, respectively 2,962 3,595 Inventories, net 6,434 5,718 Prepaid and other current assets 1,255 596 Assets held for sale — 225 Total current assets 17,705 20,895 Property and equipment, net 713 1,097 Other assets 147 159 Total assets $ 18,565 $ 22,151 - -------- - - -------- - LIABILITIES Current liabilities: Accounts payable $ 3,002 $ 1,630 Accrued liabilities 125 53 Accrued payroll and related benefits 476 394 Accrued severance 274 — Accrued legal and professional fees 196 77 Accrued sales commissions 134 124 Accrued restructuring - short-term 95 170 Accrued warranty reserve 260 174 Deferred revenue 9 5 Total current liabilities 4,571 2,627 Other liabilities 152 232 Total liabilities 4,723 2,859 STOCKHOLDERS’ EQUITY Preferred stock, par value $0.0001 per share: Authorized: 2,000,000 shares in 2018 and 2017 Issued and outstanding: no shares in 2018 and 2017 — — Common stock, par value $0.0001 per share: Authorized: 30,000,000 shares in 2018 and 2017 Issued and outstanding: 12,071,044 at September 30, 2018 and 1 1 11,868,896 at December 31, 2017 Additional paid-in capital 128,160 127,493 Accumulated other comprehensive loss (1 ) 2 Accumulated deficit (114,318 ) (108,204 ) - -------- - - -------- - Total stockholders’ equity 13,842 19,292 - -------- - - -------- - Total liabilities and stockholders’ equity $ 18,565 $ 22,151 - -------- - - -------- -

Condensed Consolidated Statements of Operations (In thousands, except per share data) Three months ended Nine months ended ---------------------------------- ---------------------- September June 30, September September 30, 30, 30, 2018 2018 2017 2018 2017 - ------ - - ------ - - ------ - - ------ - - ------ - Net sales $ 5,158 $ 5,172 $ 5,002 $ 14,989 $ 15,119 Cost of sales 3,877 3,876 3,865 11,596 11,920 Gross profit 1,281 1,296 1,137 3,393 3,199 Operating expenses: Product development 638 673 732 1,940 2,266 Selling, general, and administrative 2,543 2,421 2,393 7,611 8,802 Restructuring expenses (credits) 1 3 (200 ) (46 ) 1,534 Total operating expenses 3,182 3,097 2,925 9,505 12,602 - ------ - - ------ - - ------ - - ------ - - ------ - Loss from operations (1,901 ) (1,801 ) (1,788 ) (6,112 ) (9,403 ) Other expenses (income): Interest expense 2 1 1 4 1 Other expenses (income) 17 2 (16 ) (2 ) 5 Loss from operations before income taxes (1,920 ) (1,804 ) (1,773 ) (6,114 ) (9,409 ) Provision for income taxes — — — — — - ------ - - ------ - - ------ - - ------ - - ------ - Loss from continuing operations (1,920 ) (1,804 ) (1,773 ) (6,114 ) (9,409 ) - ------ - - ------ - - ------ - - ------ - - ------ - Net loss $ (1,920 ) $ (1,804 ) $ (1,773 ) $ (6,114 ) $ (9,409 ) - ------ - - ------ - - ------ - - ------ - - ------ - Net loss per share - basic and diluted $ (0.16 ) $ (0.15 ) $ (0.15 ) $ (0.51 ) $ (0.80 ) - ------ - - ------ - - ------ - - ------ - - ------ - Weighted average shares used in computing net loss per share: Basic and diluted 12,059 11,949 11,856 11,970 11,789

Condensed Consolidated Statements of Cash Flows (In thousands) Three months ended Nine months ended ---------------------------------- ---------------------- September June 30, September September 30, 30, 30, 2018 2018 2017 2018 2017 - ------ - - ------ - - ------ - - ------ - - ------ - Cash flows from operating activities: Net loss $ (1,920 ) $ (1,804 ) $ (1,773 ) $ (6,114 ) $ (9,409 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 105 143 166 399 514 Stock-based compensation 276 235 192 706 625 Stock-based compensation reversal — — — — (270 ) Provision for doubtful accounts receivable (4 ) 11 18 (15 ) 19 Provision for slow-moving and obsolete inventory (123 ) 78 (373 ) (532 ) (644 ) Provision for warranties 31 48 108 46 152 Loss on disposals of property and equipment 19 4 3 4 108 Changes in assets and liabilities: Accounts receivable 411 171 459 648 2,638 Inventories (572 ) (209 ) 1,495 (184 ) 3,334 Prepaid and other assets (212 ) (161 ) (39 ) (647 ) (161 ) Accounts payable (24 ) 73 (998 ) 1,447 (1,173 ) Accrued and other liabilities 470 (132 ) (792 ) 391 (433 ) Deferred revenue (3 ) (14 ) (2 ) 5 16 - ------ - - ------ - Total adjustments 374 247 237 2,268 4,725 Net cash used in operating activities (1,546 ) (1,557 ) (1,536 ) (3,846 ) (4,684 ) Cash flows from investing activities: Acquisitions of property and equipment — — (39 ) (57 ) (154 ) Proceeds from the sale of property and equipment — (4 ) 25 240 97 - ------ - - ------ - - ------ - Net cash (used in) provided by investing activities — (4 ) (14 ) 183 (57 ) Cash flows from financing activities: Proceeds from the exercise of stock options/ESPP — 21 — 21 105 Common stock withheld to satisfy income tax (21 ) (7 ) — (60 ) (49 ) withholding on vesting of restricted stock units - ------ - - ------ - - ------ - - ------ - - ------ - Net cash (used in) provided by financing activities (21 ) 14 — (39 ) 56 Effect of exchange rate changes on cash 2 (6 ) (2 ) (5 ) (9 ) Net decrease in cash and cash equivalents (1,565 ) (1,553 ) (1,552 ) (3,707 ) (4,694 ) Cash and cash equivalents at beginning of year 8,619 10,172 13,487 10,761 16,629 Cash and cash equivalents at end of period $ 7,054 $ 8,619 $ 11,935 $ 7,054 $ 11,935 - ------ - - ------ - - ------ - - ------ - - ------ - Classification of cash and cash equivalents: Cash and cash equivalents 6,712 8,277 11,593 6,712 11,593 Restricted cash held 342 342 342 342 342 Cash and cash equivalents at end of period $ 7,054 $ 8,619 $ 11,935 $ 7,054 $ 11,935 - ------ - - ------ - - ------ - - ------ - - ------ -

Sales by Products (In thousands) Three months ended Nine months ended ------------------------------------ ------------------ Septembe June 30, September 30, September 30, r 30, 2018 2018 2017 2018 2017 - ----- - -------- - ------------- - ------ - ------ Commercial products $ 2,292 $ 2,972 $ 3,947 $ 7,469 $ 12,204 Military maritime products 2,866 2,200 1,055 7,520 2,915 Total net sales $ 5,158 $ 5,172 $ 5,002 $ 14,989 $ 15,119 - ----- - -------- - ------------- - ------ - ------

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 nine months ended September 30, 2018 and 2017, include adjustments for our restructuring expenses, and for depreciation and stock compensation expenses that do not have a current period impact on cash flow.

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, and to assess cash flow performance of the operations of our business relative to our U.S. GAAP results and relative to other companies in the industry by isolating the effects of certain items which do not have a current period cash flow impact. 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.

(In thousands) Three months ended Nine months ended ---------------------------------- ---------------------- September June 30, September September 30, 30, 30, 2018 2018 2017 2018 2017 - ------ - - ------ - - ------ - - ------ - - ------ - Total operating expenses $ 3,182 $ 3,097 $ 2,925 $ 9,505 $ 12,602 Less: Restructuring (1 ) (3 ) 200 46 (1,534 ) Operating expenses, excluding restructuring $ 3,181 $ 3,094 $ 3,125 $ 9,551 $ 11,068 - ------ - - ------ - - ------ - - ------ - - ------ - Three months ended Nine months ended ---------------------------------- ---------------------- September June 30, September September 30, 30, 30, 2018 2018 2017 2018 2017 - ------ - - ------ - - ------ - - ------ - - ------ - Net loss $ (1,920 ) $ (1,804 ) $ (1,773 ) $ (6,114 ) $ (9,409 ) Restructuring (expenses) credits (1 ) (3 ) 200 46 (1,534 ) Net loss, excluding restructuring (1,919 ) (1,801 ) (1,973 ) (6,160 ) (7,875 ) Depreciation 105 143 166 399 514 Stock-based compensation 276 235 192 706 625 Severance and benefits 313 6 44 325 93 Adjusted EBITDA $ (1,225 ) $ (1,417 ) $ (1,571 ) $ (4,730 ) $ (6,643 ) - ------ - - ------ - - ------ - - ------ - - ------ -

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