Nexxus Lighting Reports First Quarter 2010 Results

Nexxus Lighting, Inc. (NASDAQ: NEXS) today reported its first quarter 2010 results. Highlights include:

• Revenue for the quarter increased 4% to $3.2 million compared to the first quarter of 2009
• Operating loss of $1.9 million on lower margins and higher research and development expenses
• Sales of Array™ LED replacement light bulbs exceeded $500,000 in the quarter versus $93,000 in same period of 2009
• Introduced Array Quantum LED R30 as industry’s first LED replacement light bulb to utilize quantum dots to improve color rendering and maximize efficiency
• Announces Mark Masterman, President of Pool Division, to assume added responsibility for Legacy commercial business
• Repaid $3.8 million of debt issued in June 2009 in February 2010

First Quarter 2010 Performance

Revenue

Total revenue for the three months ended March 31, 2010 was approximately $3,162,000 as compared to approximately $3,037,000 for the three months ended March 31, 2009, an increase of approximately $125,000.

Sales of our Array LED lamps were $501,000 in the first quarter of 2010 compared to approximately $93,000 in the first quarter of 2009. Sales of our legacy commercial products were approximately $488,000 in the first quarter of 2010, a 43% decrease from approximately $850,000 for the same quarter in 2009. Sales of Lumificient products in the first quarter of 2010 and 2009 were approximately $923,000 and $1,077,000, respectively.

Overall, revenue from sales of commercial lighting products decreased by $107,000, or 5%, from approximately $2,020,000 in the first quarter of 2009 to approximately $1,913,000 in the first quarter of 2010. The decrease in sales of our legacy commercial and Lumificient products is primarily the result of significant decreases in commercial construction and new signage activity across the US. This decrease was offset in part by increased sales of our new Array LED lamps.

Revenue from sales of pool and spa lighting products was approximately $1,249,000 in the first quarter of 2010, as compared to $1,017,000 for the same period of 2009, an increase of $232,000, or 23%. 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 83% and 75% of our revenue, while sales of fiber optic lighting products accounted for 11% and 22% of our revenue for the quarters ended March 31, 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.

"Nexxus started the year with momentum, and we were pleased to see our fourth consecutive quarterly increase in sales despite the impact of the dramatic slowdown in commercial construction on our legacy commercial lighting and sign lighting businesses,” stated Mike Bauer, Nexxus’ President and Chief Executive Officer. "Although sales of our new Array product were approximately $500,000 for the first quarter, the results did not meet our expectations. For 2010, we are very focused on increasing sales and our list of identified projects and key customers continues to grow. The response to the quality and performance of our Array product in the market and at several of the world’s largest lighting trade shows has been very positive. We are also very excited about our recent new product introductions and their potential impact on sales.”

"There is no doubt that the December 2009 publication of Energy Star program requirements for integral LED replacement lamps, and their subsequent amendment on March 22 of this year, has created some confusion in the market,” added Mr. Bauer. "This confusion has caused some utilities to reassess the timing of their incentive rebate programs and may have delayed certain projects. We are actively engaging customers and utilities to move forward as quickly as possible,” concluded Mr. Bauer.

Gross Profit

Gross profit for the quarter ended March 31, 2010 was approximately $711,000, or 22% of revenue, as compared to approximately $1,055,000, or 35% of revenue, for the comparable period of 2009. Direct gross margin for the first quarter of 2010, which is revenue less material cost, decreased to approximately 46% as compared to 53% in the same period of 2009. The decline in direct gross margins reflects an increase in material costs for our pool and spa lighting products, the liquidation of certain legacy commercial products at lower prices and a shift in sales away from historically higher margin legacy commercial products.

In the first quarter of 2010, production costs increased to approximately $742,000, or 23% of revenue, as compared to $561,000, or 18% of revenue, in the first quarter of 2009. The $181,000 increase in production costs includes increases of approximately $74,000 in warranty expense primarily related to our pool and spa lighting products and $29,000 in freight costs. The increase also reflects a $46,000 increase in expenses for obsolete inventory, scrap and inventory reserves and approximately $41,000 of higher expense from a release of capitalized labor, overhead and freight costs. Offsetting these costs were savings of approximately $20,000 from lower wages and contract labor.

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 $2,287,000 for the quarter ended March 31, 2010 as compared to approximately $2,352,000 for the same period in 2009, a decrease of approximately $65,000, or 3%. This reduction is primarily the result of savings from consolidating the operations of our subsidiary, ALS, into other Company operations in March 2009, offset by higher expenses dedicated to the sales and marketing of our Array product offering.

For the period ended March 31, 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, which is part of a nationally recognized chain, and payment is expected. 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 large university project. The customer believes it will not complete the university project and is claiming a right to return all unused product without charge. Although we dispute the customer’s claim, as a result of the uncertainty over the collection of the receivable, we increased our allowance for doubtful accounts with respect to the disputed receivable. We believe that our Array product may still be installed for the university project, however, we do not know the size of the project. In addition, if our Array product is selected for the university project, we expect that such product will be purchased by another customer for installation at the university.

Research and development costs were approximately $289,000 during the three months ended March 31, 2010 as compared to approximately $108,000 during the same period in 2009. This increase of approximately $181,000 was primarily due to higher employee costs and project-related costs in the first quarter of 2010, as compared to the same period of 2009, as we increased our investment in resources to expand the Array product offering, including the recent introductions of our new Array Quantum R30 replacement lamp, new Par 38 LED replacement lamp and GU24 base offering.

"Tighter margins and increased engineering expenses tied to new product development contributed to lower income from operations for the first quarter of 2010 compared to the first quarter of 2009. Production costs associated with the write-down of legacy commercial inventory and warranty costs, along with the rise in some material costs and a shift toward weaker product mix, produced lower gross margins. At the same time, savings from the consolidation of the operations of our ALS subsidiary with other Company operations in the first quarter of 2009 have been offset by higher resources dedicated to ramping Array sales. The Company also increased its investment in new product development, resulting in increased engineering expense in the first quarter of 2010 compared to the same period last year,” stated Gary Langford, the Company’s Chief Financial Officer.

Operating loss for the first quarter of 2010 was approximately $1.9 million as compared to a loss of approximately $1.4 million in the same period of 2009.

Net Loss

Net loss for the three months ended March 31, 2010 and 2009 was approximately $2,466,000 and $1,403,000, 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 $2,466,000 and $1,686,000 for the three months ended March 31, 2010 and 2009, respectively. Basic and diluted loss per common share attributable to common stockholders was $0.15 and $0.21 for the three months ended March 31, 2010 and 2009, respectively.

Organizational Update

In conjunction with today’s report, Nexxus is announcing a realignment of its management reporting structure. Mark Masterman, President of Nexxus’ Pool & Spa Division, will assume added responsibility for the Company’s Legacy commercial business. This change, which reflects our business strategy, will allow the Company to increase its focus on the Array business.

"Mark has done a tremendous job restructuring the Pool division’s product offering and market strategy during incredibly challenging conditions,” added Mr. Bauer. "Mark is a seasoned veteran and perfectly positioned to help implement the necessary changes to our Legacy commercial business,” concluded Mr. Bauer.

Cash and Recent Financing Activities

As of March 31, 2010, the Company had cash and cash equivalents of $8,989,000 and long term debt of $2,178,000, net of unamortized debt discounts of approximately $294,000.

In February 2010, we reduced our long term debt by repaying all outstanding borrowings under $3,800,000 in principal amount of promissory notes issued in June 2009, along with associated interest in the aggregate amount of approximately $262,000. The Company’s remaining long term debt consists of promissory notes issued in exchange for our preferred stock in December 2009. These notes have a principal amount of $2.4 million, bear interest at 1% per annum, mature three years from the date of issuance and are convertible into shares of common stock at a fixed conversion price of $5.33.

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.