Nexxus Lighting Reports Second Quarter 2010 Results

Nexxus Lighting, Inc. today reported its second quarter 2010 results. Highlights include:

• Revenue for the quarter increased 43%, or $1.1 million, as compared to the second quarter of 2009 and 18%, or $0.6 million, as compared to the first quarter of 2010
• Sales growth in Array™ and pool products offset decline in sales of legacy commercial products
• Array sales grew to $430,000 in the second quarter of 2010, compared to $197,000 in the second quarter of 2009 and roughly flat with first quarter of 2010 sales of $500,000
• Gross profit increased to $873,000 on higher sales volume, compared to $650,000 in the second quarter of 2009
• Operating loss of $1.9 million on higher selling and engineering expenses tied to the continued expansion of the Array business
• Introduced new Array PAR 38 LED lamp offering as an 18 watt replacement for 75 to 90 watt halogen lamps
• Expanded portfolio of intellectual property to 23 issued and 37 pending patents relating to the Array brand of LED light bulbs

Second Quarter 2010 Performance

Revenue

Total revenue for the three months ended June 30, 2010 increased 43%, or approximately $1,131,000, to $3,736,000 as compared to approximately $2,605,000 for the three months ended June 30, 2009.

Sales of our Array LED lamps were approximately $430,000 in the second quarter of 2010 compared to approximately $197,000 in the second quarter of 2009. Sales of our legacy commercial products were approximately $409,000 in the second quarter of 2010, a 31% decrease from approximately $594,000 for the same quarter in 2009. Sales of Lumificient products in the second quarter of 2010 and 2009 were approximately $897,000 and $838,000, respectively.

Overall, revenue from sales of commercial lighting products increased by approximately $107,000, or 7%, from approximately $1,629,000 in the second quarter of 2009 to approximately $1,736,000 in the second quarter of 2010. This increase primarily relates to increased sales of our new Array LED lamps.

Revenue from sales of pool and spa lighting products was approximately $2,000,000 in the second quarter of 2010, as compared to approximately $976,000 for the same period of 2009, an increase of approximately $1,024,000, or 105%. This revenue growth reflects an increase in market share as we expanded our pool and spa lighting product offering, including adding Melody Blanco, a white-light-only LED product. In addition, by the beginning of 2010, we completed moving production to additional domestic contract manufacturers allowing us to respond more timely to increased demand. In the second quarter of 2009, we had a larger backlog of orders that we were unable to ship until the third quarter of 2009. With the improvements made in operations and shipments, we did not experience the build up of backlog in 2010, which translated to higher sales in the period.

Sales of LED products continue to represent a growing percentage of our business, accounting for 84% and 74% of our revenue, while sales of fiber optic lighting products accounted for 9% and 20% of our revenue for the quarters ended June 30, 2010 and 2009, respectively.

“We are pleased with the Company’s overall sales growth in a challenging economy, as reflected in the fourth consecutive quarterly sales increase,” stated Mike Bauer, the Company’s President and Chief Executive Officer. “While sales of our Array products were up significantly year over year, they were roughly flat with the first quarter and below our target. We believe these sales levels reflect the current economic environment as well as the timing of integral LED lamp standards and the resulting delay and timing of utility incentive programs, which are tied to the effective date of these new standards. With the continued development and launch of best in class products, including our new PAR 38, we feel the Company is well positioned as these macro-economic elements begin to improve.”

“Despite uncertainty in some market segments, the opportunities and long-term growth trends in LED lighting remain intact,” confirmed Gary Langford, Nexxus’ Chief Financial Officer. “For the second half, our focus will remain on expanding our Array business while exploring opportunities to mitigate the challenges in our legacy businesses.”

Gross Profit

Gross profit for the quarter ended June 30, 2010 was approximately $873,000, or 23% of revenue, as compared to approximately $650,000, or 25% of revenue, for the comparable period of 2009. Direct gross margin for the second quarter of 2010, which is revenue less material cost, decreased to approximately 49% as compared to 51% in the same period of 2009. The decline in direct gross margins during the period reflects a shift in product mix, specifically lower sales of historically higher margin legacy commercial products and higher sales of lower margin pool products.

In the second quarter of 2010, production costs increased to approximately $942,000, or 25% of revenue, as compared to approximately $678,000, or 26% of revenue, in the second quarter of 2009. The increase of approximately $264,000 in production costs includes increases of approximately $63,000 in freight costs on the higher volume and approximately $60,000 in warranty expense primarily related to our pool and spa lighting products. We also continued to write-down legacy inventories in the second quarter of 2010 as reflected by the increase of approximately $209,000 in expenses for obsolete inventory, scrap and inventory reserves. Offsetting these costs were savings of approximately $92,000 in lower expense related to the release of capitalized labor, overhead and freight costs.

We continue to review our operations for opportunities to reduce costs, especially those related to our legacy commercial and pool and spa businesses. Our analysis may lead to the determination to sell, close, eliminate, rationalize or reduce operations and divisions and/or alter our sales, manufacturing and/or distribution structure. Should we decide to pursue any such changes, we may incur additional charges and losses in connection with such changes in the future, and such charges and losses may be material.

Operating Expenses

Selling, general and administrative (SG&A) expenses were approximately $2,431,000 for the quarter ended June 30, 2010 as compared to approximately $2,048,000 for the same period in 2009, an increase of approximately $383,000, or 19%. This increase is primarily the result of higher expense dedicated to the sales and marketing of our Array and Lumificient product offerings and increased commission expense as the result of higher pool product sales.

Research and development costs were approximately $299,000 during the three months ended June 30, 2010 as compared to approximately $130,000 during the same period in 2009. This increase of approximately $169,000 was primarily due to higher employee costs and project-related costs in the second quarter of 2010, as compared to the same period of 2009, as we increased our investment in resources to expand the Array product offering.

Net Loss

Net loss for the three months ended June 30, 2010 and 2009 was approximately $1,884,000 and $1,557,000, respectively. After including the effects of the dividends related to the preferred stock and warrants issued in November 2008, net loss attributable to common stockholders was approximately $1,884,000 and $1,880,000 for the three months ended June 30, 2010 and 2009, respectively. Basic and diluted loss per common share attributable to common stockholders was $0.12 and $0.22 for the three months ended June 30, 2010 and 2009, respectively.

Year to Date 2010 Performance

Revenue

Total revenue for the six months ended June 30, 2010 was approximately $6,898,000 as compared to approximately $5,642,000 for the six months ended June 30, 2009, an increase of approximately $1,256,000, or 22%.

Sales of our Array LED lamps were approximately $932,000 in the first six months of 2010 compared to approximately $290,000 in the same period of 2009. Sales of our legacy commercial products were approximately $897,000 in the first six months of 2010, a 38% decrease from approximately $1,444,000 for the same period in 2009. Sales of Lumificient products in the first six months of 2010 and 2009 were approximately $1,820,000 and $1,915,000, respectively.

Overall, revenue from sales of commercial lighting products remained flat at approximately $3,648,000 in the first six months of 2010 and 2009. Sales of our new Array LED lamps offset the decline in sales of our legacy commercial and Lumificient products which primarily resulted from significant decreases in commercial construction and much lower new signage activity across the US.

Revenue from sales of pool and spa lighting products was approximately $3,250,000 in the first half of 2010, as compared to approximately $1,993,000 for the same period of 2009, an increase of approximately $1,256,000, or 63%. This increase reflects a slight rebound in the pool market and higher penetration into this market in 2010.

Sales of LED products continued to represent a growing percentage of our business, accounting for 84% and 74% of our revenue, while sales of fiber optic lighting products accounted for 10% and 21% of our revenue for the six months ended June 30, 2010 and 2009, respectively. The balance of the revenue mix consisted primarily of sales of water feature products. We expect sales of our fiber optic lighting products will continue to decline and believe that sales of our LED lighting products will increase as a percentage of our total revenue and drive our growth in the future.

Gross Profit

Gross profit for the six months ended June 30, 2010 was approximately $1,584,000, or 23% of revenue, as compared to approximately $1,705,000, or 30% of revenue, for the comparable period of 2009. Direct gross margin for the first half of 2010, which is revenue less material cost, decreased to approximately 47% as compared to 52% in the same period of 2009. The decline in direct gross margins reflects a shift in sales away from historically higher margin legacy commercial products, a higher percentage of pool product sales, and margin erosion in the first quarter due to an increase in material costs for certain pool lighting products and the liquidation of certain legacy commercial products at lower prices.

Production costs increased to approximately $1,684,000, or 24% of revenue, in the first half of 2010 as compared to approximately $1,239,000, or 22% of revenue, in the first half of 2009. The increase of approximately $445,000 in production costs includes increases of approximately $133,000 in warranty expense primarily related to our pool lighting products and approximately $93,000 in freight costs in the six months ended June 30, 2010 as compared to the same period in 2009. The increase also reflects an increase of approximately $290,000 in expenses for obsolete inventory, scrap and inventory reserves in the first half of 2010.

Operating Expenses

Selling, general and administrative (SG&A) expenses were approximately $4,719,000 for the six months ended June 30, 2010 as compared to approximately $4,400,000 for the same period in 2009, an increase of approximately $318,000, or 7%. This increase is primarily the result of higher expense dedicated to the sales of our Array and Lumificient product offerings and increased commission expense due to higher Array and pool product sales.

In the first quarter of 2010, we recognized bad debt expense relating to a dispute with a customer. We shipped Array product to the customer in the fourth quarter of 2009 and the first quarter of 2010. A portion of the product has been installed in a hotel. The balance of the product shipped to the customer has not been installed, including excess product relating to the hotel project and product purchased for a university project. The customer is claiming a right to return all unused product without charge. Although we dispute the customer’s claim, and have filed a lawsuit to collect the unpaid balance, as a result of the uncertainty over the collection of the receivable of approximately $300,000, we have increased our allowance for doubtful accounts by approximately $85,000 with respect to the disputed receivable and we have deducted commission expense that we previously recognized upon shipment of the unused product.

Research and development costs were approximately $588,000 during the six months ended June 30, 2010 as compared to approximately $238,000 during the same period in 2009. This increase of approximately $350,000 was primarily due to higher employee costs and project-related costs in the first half of 2010, as compared to the same period of 2009, as we increased our investment in resources to expand the Array product offering.

Net Loss

Net loss for the six months ended June 30, 2010 and 2009 was approximately $4,350,000 and $2,959,000, respectively. After including the effects of the dividends related to the preferred stock and warrants issued in November 2008, net loss attributable to common stockholders was approximately $4,350,000 and $3,566,000 for the six months ended June 30, 2010 and 2009, respectively. Basic and diluted loss per common share attributable to common stockholders was $0.27 and $0.43 for the six months ended June 30, 2010 and 2009, respectively.

Research and Development Update

As of August 1, 2010, we are pleased to announce that we have 54 issued and 43 pending patents. Of these patents, we have 23 issued and 37 pending patents related to our Array brand of LED light bulbs. For the Array products, these figures compare to 19 issued and 27 pending patents as reported in our Annual Report for 2009.

Cash

As of June 30, 2010, the Company had cash and cash equivalents of $7,753,000 and long term debt of $2,203,000, net of unamortized debt discounts of approximately $269,000.

Nexxus Lighting, Inc. Life’s Brighter!™

For more information, please visit the new Nexxus Lighting web site at www.nexxuslighting.com

Certain of the above statements contained in this press release are forward-looking statements that involve a number of risks and uncertainties. Such forward-looking statements are within the meaning of that term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Reference is made to Nexxus Lighting’s filings under the Securities Exchange Act for factors that could cause actual results to differ materially. Nexxus Lighting undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those indicated in the forward-looking statements as a result of various factors. Readers are cautioned not to place undue reliance on these forward-looking statements.

Nexxus Lighting, Inc. Consolidated Balance Sheets
				(Unaudited)
				June 30,			December 31,
				2010			2009
ASSETS
Current Assets:
Cash and cash equivalents			$	7,752,707		$	15,167,496
Trade accounts receivable, less allowance for doubtful accounts of $209,478 and $150,633				2,300,256			1,888,417
Inventories, less reserve of $900,011 and $682,750				5,474,969			4,904,578
Prepaid expenses				210,855			195,434
Other assets				13,218			7,367
Total current assets				15,752,005			22,163,292
Property and equipment				5,934,332			5,765,665
Accumulated depreciation and amortization				(4,291,796)			(4,025,419)
Net property and equipment				1,642,536			1,740,246
Goodwill				2,402,200			2,396,289
Other intangible assets, less accumulated amortization of $660,731 and $557,289				3,052,113			3,049,194
Deposits on equipment				36,323			6,463
Other assets, net				61,471			197,560
			$	22,946,648		$	29,553,044
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable			$	3,491,528		$	2,500,858
Related party payable				85,598			—
Accrued compensation and benefits				334,765			303,736
Payable to related party under acquisition agreement				—			100,000
Current portion of deferred rent				73,976			58,065
Customer deposits				3,411			2,782
Other current liabilities				4,926			9,291
Total current liabilities				3,994,204			2,974,732
Convertible promissory notes to related parties, net of debt discount				2,203,375			2,153,191
Promissory notes, net of debt discount				—			1,978,135
Promissory notes to related parties, net of debt discount				—			1,438,644
Deferred rent, less current portion				67,161			113,733
Other liabilities				851			6,582
Total liabilities				6,265,591			8,665,017
Stockholders’ Equity:
Common stock, $.001 par value, 25,000,000 shares authorized, 16,245,503 and 16,240,503 issued and outstanding
				16,246			16,241
Additional paid-in capital				49,246,429			49,103,733
Accumulated deficit				(32,581,618)			(28,231,947)
Total stockholders’ equity				16,681,057			20,888,027
			$	22,946,648		$	29,553,044

Nexxus Lighting, Inc. Consolidated Statements of Operations (Unaudited)
			Three Months Ended								Six Months Ended
			June 30,								June 30,
				2010				2009				2010				2009
Revenue			$	3,735,938			$	2,605,044			$	6,897,997			$	5,641,726
Cost of sales				2,862,874				1,955,065				5,313,566				3,936,593
Gross profit				873,064				649,979				1,584,431				1,705,133
Operating Expenses:
Selling, general and administrative				2,431,283				2,048,494				4,718,517				4,400,244
Research and development				299,451				130,379				588,299				238,103
Total operating expenses				2,730,734				2,178,873				5,306,816				4,638,347
Operating Loss				(1,857,670	)			(1,528,894	)			(3,722,385	)			(2,933,214	)
Non-Operating Income (Expense):
Interest income				—				197				—				2,406
Interest expense				(26,943	)			(27,968	)			(186,422	)			(28,626	)
Debt extinguishment costs				—				—				(441,741	)			—
Other income				579				—				877				—
Total non-operating income, net				(26,364	)			(27,771	)			(627,286	)			(26,220	)
Net Loss			$	(1,884,034	)		$	(1,556,665	)		$	(4,349,671	)		$	(2,959,434	)
Preferred stock dividends:
Accretion of the preferred stock beneficial conversion feature and preferred stock discount				—				(144,835	)			—				(268,311	)
Accrual of preferred stock dividends				—				(178,065	)			—				(338,258	)
Net loss attributable to common stockholders			$	(1,884,034	)		$	(1,879,565	)		$	(4,349,671	)		$	(3,566,003	)
Basic and diluted loss per common share attributable to common shareholders			$	(0.12	)		$	(0.22	)		$	(0.27	)		$	(0.43	)
Basic and diluted weighted average shares outstanding				16,245,503				8,373,995				16,243,183				8,267,605

Nexxus Lighting, Inc. Consolidated Statements of Cash Flows (Unaudited)
			Six Months Ended
			June 30,
			2010				2009
Cash Flows from Operating Activities:
Net loss			$	(4,349,671	)		$	(2,959,434	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation				278,772				274,016
Amortization of intangible and other assets				139,438				133,920
Amortization of debt discount and debt issuance costs				127,753				15,031
Debt extinguishment costs				441,741				—
Amortization of deferred rent				(30,661	)			(25,637	)
Loss on disposal of property and equipment				9,116				1,790
Increase in inventory reserve				217,261				32,621
Stock-based compensation				177,755				219,841
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade accounts receivable, net				(411,839	)			623,608
Inventories				(787,652	)			(215,718	)
Prepaid expenses				(15,421	)			(37,157	)
Other assets				(5,851	)			18,867
Increase (decrease) in:
Accounts payable and related party payable				1,076,268				(864,654	)
Accrued compensation and benefits				31,029				(82,399	)
Customer deposits				629				(59,608	)
Other liabilities				(10,096	)			—
Total adjustments				1,238,242				34,521
Net cash used in operating activities				(3,111,429	)			(2,924,913	)
Cash Flows from Investing Activities:
Purchase of property and equipment				(226,638	)			(206,508	)
Proceeds from the sale of property and equipment				6,600				—
Acquisition costs of Lumificient Corporation, net of cash acquired				(105,911	)			(115,285	)
Acquisition costs of Advanced Lighting Systems, LLC, net of cash acquired				—				(107,539	)
Trademark and patent development costs				(142,357	)			(75,729	)
Net cash used in investing activities				(468,306	)			(505,061	)
Cash Flows from Financing Activities:
Proceeds from promissory notes				—				3,800,000
Payments on promissory notes				(3,800,000	)			(113,724	)
Proceeds from exercise of employee stock options and warrants, net				14,900				685,671
Fees related to follow-on equity offering				(49,954	)			—
Deferred financing costs				—				(63,353	)
Issuance cost of preferred stock and warrants				—				(16,661	)
Net cash (used in) provided by financing activities				(3,835,054	)			4,291,933
Net (Decrease) Increase in Cash and Cash Equivalents				(7,414,789	)			861,959
Cash and Cash Equivalents, beginning of period				15,167,496				2,948,632
Cash and Cash Equivalents, end of period			$	7,752,707			$	3,810,591
Supplemental Cash Flow Information:
Cash paid for interest			$	262,356			$	—
Non-cash Investing and Financing Activities:
Issuance of common stock to related party for settlement of lease and severance obligations			$	—			$	565,500
Fair value of warrants recorded as a debt discount			$	—			$	570,325
Issuance of common stock for achievement of Lumificient earnouts			$	—			$	297,242
Issuance of common stock to promissory notes placement agent			$	—			$	133,000
Accrual of dividends on preferred stock			$	—			$	338,258