Energy Focus (EFOI)

Company website 2020 Financial Report Stock Analysis

900000

Lighting Products

have been installed by EFOI across the US Navy fleet since 2007, saving more than 5 million gallons of fuel

80^%

Coverage

EFOI's products cover 80% of indoor lighting needs for commercial & industrial buildings

32.5^%

Growth

in EFOI's Net sales in 2020 compared to 2019

View Our Analysis

The Path to Drawdown: LEDs

Light-emitting diodes (LEDs) were invented as high-brightness, highly efficient light bulbs in 1994. LEDs work like solar panels in reverse, converting electrons to photons instead of the other way around. They use 90% less energy than incandescent bulbs, and half as much as compact fluorescents for the same amount of light. While other lighting technologies convert energy into heat (and wasting most of it), LEDs convert 80% of energy into creating light.

LEDs have many environmental advantages. Their efficiency in converting energy into light, rather than heat, helps reduce electricity consumption and air-conditioning needs. For people without access to ample energy, LEDs can be powered with small solar cells and can replace expensive kerosene lamps and their noxious fumes and emissions. When LEDs are used in streetlights, they can save up to 70% of energy and significantly reduce maintenance costs.

According to Project Drawdown’s models, if LEDs become ubiquitous in both the residential and commercial lighting market, they can help avoid between 10.2 - 10.8 gigatons of CO2 emissions in residences, and between 5.9 - 6.7 gigatons in commercial buildings. But to get there, the global market share of LEDs needs to scale rapidly:

<::marker> In 2018, LED lights comprised 3% of the total commercial lighting market and 2% of the residential lighting market
<::marker> By 2050, LEDs should account for 95% and 90% of the residential and commercial markets, respectively
<::marker> That’s 12.82% CAGR for residential LED, and 11.21% CAGR for commercial LED lighting between 2018 and 2050.

About

Energy Focus (stock ticker: EFOI) manufactures energy-efficient LED lighting solutions. Headquartered in Solon, Ohio, their customers include US and foreign navies, US federal, state, and local governments, healthcare and educational institutions, as well as Fortune 500 companies.

EFOI's Role in Drawdown

All of Energy Focus’ revenue comes from LED lighting and related lighting products. Although their total annual sales have seen a decline in recent years (11.5% year-on-year decrease between 2016 and 2020), they have a track record of constant product innovation.

Energy Focus launched (p. 27) their commercial tubular LEDs that’s flicker-free in 2010 and introduced their lighting products for the military in 2011. More recently, they developed an emergency backup battery integrated TLED and a new dimmable and color-tunable lighting and control platform, as well as UV-C disinfection devices that affordably continuously disinfect interior surfaces.

EFOI: What We Like

We commend Energy Focus for their willingness to commit to fundamental organizational and management restructuring (p. 27) starting in 2019 in the face of continuing decline in sales. After welcoming a new CEO and Chairman, they replaced the entire senior management team, significantly reduced non-critical expenses, minimized the amount of inventory that they were purchasing, dramatically changed the composition of their board of directors, and selectively added to the executive team and departmental leadership.

These efforts seem to have paid off. Between 2019 and 2020, Energy Focus’s total net sales have grown by 32.5%, in addition to mitigating losses and redundant expenses.

What We Want to See Improve

Sustainability Reports

We agree with Energy Focus that their LED products enhance energy efficiency and help their customers reach sustainability. But we need to see how Energy Focus’s own production, operation and distribution are impacting the environment and climate. For that, we urge them to publish ESG reports on an annual basis, and include key metrics like scope 1, 2 and 3 emissions and the amount of GHG emissions avoided.

Achieve Profitability

Energy Focus underwent (p. 4) several years of restructuring, organizational consolidation and streamlining, and during this time they experienced challenges from long and unpredictable sales cycles, delays in customer retrofit budgets and project starts, etc. Energy Focus is still incurring substantial losses (p. 13). We are eager for them to significantly expand sales and achieve profitability in the near future.

Diversify Customers

Energy Focus’s customer base is highly concentrated. Sales to their primary distributor for the US Navy and sales to shipbuilders for the US Navy account for 53% of Energy Focus’s total net sales. We’re concerned about the precarity of this situation, as decline in sales to the US Navy can severely impact Energy Focus’s viability, like it did in 2016-2017. We encourage them to diversify their customer base, both across industry verticals and across geographies.

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